An exit strategy is an important consideration for business owners, but it’s often overlooked until significant changes are necessary. Without planning an exit strategy that informs business direction, entrepreneurs risk limiting their future options. To ensure the best for your business, plan your exit strategy before it’s time to leave.
What is an exit strategy?
An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.
A fully formed exit strategy takes all business stakeholders, finances and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business and provide a foundation for future goals and new direction.
If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.
[Read more: What Is a Business Valuation and How Do You Calculate It?]
Benefits of an exit strategy
Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.
Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:
- Making business decisions with direction. With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes.
- Remaining committed to the value of your business. Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best selling situation for your business.
- Making your business more attractive to buyers. Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and goals.
- Guaranteeing a smooth transition. Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions will be clear and expected.
- Seeing through business — and personal — goals after exit. Executing an exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like bankruptcy.
Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.
Weighing your options: closing vs. selling
There are two strategies to consider for your exit plan.
Sell to a new owner
Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.
In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because:
- The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
- The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
- The transition for your employees and customers will be a smooth one since the buyer likely already has a stake in the business.
However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to compromise on value and sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.
Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.
The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.
[Read more: 5 Things to Know When Selling Your Small Business]
Liquidate and close the business
It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.
Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry and then closing up shop.
The benefit of this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.
The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.
Whichever way you decide to liquidate, before closing your business for good, these important steps must be taken:
- File your business dissolution documents.
- Cancel all business expenses that you no longer need, like registrations, licenses and your business name.
- Make sure your employee payment during closing is in compliance with federal and state labor laws.
- File final taxes for your business and keep tax records for the legally advised amount of time, typically three to seven years.
Steps to developing your exit plan
Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.
To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Prepare your finances. The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally. Having a sound understanding of expenses, assets and business performance will help you seek out and negotiate for an offer that’s aligned with your business’s real value.
- Consider your options. Once you have a complete picture of your finances, consider several different exit strategies to determine your best option. What you choose depends on how you envision your life after your exit — and how your business fits into it (or doesn’t). If you have trouble making a decision, it may be helpful to speak with your business lawyer or a financial professional.
- Speak with your investors. Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid. A detailed understanding of your finances will be useful for this, since investors will look for evidence to support your plans.
- Choose new leadership. Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans. If you already have documented operations in practice in your business strategy, transitioning new responsibilities to others will be less challenging.
- Tell your employees. When your succession plans are in place, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent.
- Inform your customers. Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.
The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.
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