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 well 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 reimagining 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, allows clearer focus on goals, and ensures your business can run smoothly in your absence.
“Many owners are deeply interwoven with their business from a financial perspective, and it can become difficult to untangle the two,” explained Andrew Van Alstyne, Financial Planner and Investment Manager at Fiduciary Financial Advisors. “The best way to work through this is by having a plan in place years before you are looking to sell.”
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.
Exit planning strategies: selling versus closing
There are two main strategies to consider for your exit plan: selling your business or closing it.
Selling to a new owner
Depending on your goals and circumstances, you can sell your business to an external buyer—such as a larger company, a competitor, or an investor—or an internal buyer, like a family member or a key employee.
[Read more: Want to Sell Your Business? Here’s What to Do First]
Selling to an external buyer
External sales typically result in higher financial returns and a swifter exit, especially if your business is in a strong position and strategically aligned with your buyer’s goals. However, mergers and acquisitions also present challenges like cultural shifts, operational changes, and potential layoffs. For this reason, some business owners will stay on in the short term to ensure a smoother transition.
Transitioning ownership to an internal party
Owners may opt to sell their business to a key employee, family member, or other internal party so they can be more involved in the transition and potentially maintain an advisory position post-sale.
One potential downside is that personal relationships may complicate negotiations, especially with family members or other loved ones. Another consideration is that internal parties often lack the buying power of external investors. A seller financing agreement can help, allowing 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.
A fully formed exit strategy takes all business stakeholders, finances, and operations into account and details all actions necessary to sell or close.
Closing the business
If selling or transitioning ownership isn’t an option, closing your business may be the best way to settle debts. This is done through liquidation (selling company assets such as real estate, inventory, and equipment) to pay back investors or other claimants.
You can liquidate the business gradually, selling off assets over time while drawing income from the company. The benefit of this method is that, in the short term, 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, proceeds will depend on how fast you can sell and whether buyers will pay full market value. Additionally, large asset sales within one tax year can trigger higher tax liabilities. Finally, 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 following steps:
1. Consider your options
Before diving into the finer details, consider various 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).
Amy Wirtz, Certified Exit Planner and Senior Consultant with The Family Business Consulting Group, recommended starting by asking whether the business can survive without you.
“If it can, the next [question] is: If it sells, will it … support the … people [who] own it?” Wirtz continued. “After you pay all the fees and taxes, does that give you enough money to live off of? If not, how do we make it more valuable at the time of transition?”
Answering these questions can help you determine whether selling outright, developing a succession plan, or liquidating the business is the right approach for you.
2. Prepare your finances and explore sale structures
The next step is to get an accurate account of your business and personal finances through a detailed review of your expenses, assets, and business performance. A financial professional can help you explore different sale structures—like an installment sale, keeping a minority share, or an annuity sale—for the best outcomes.
3. Choose new leadership
If your exit plan involves succession, finding the right leadership is crucial. Beyond skills and experience, look for strong cultural alignment and an understanding of the business’s broader goals and vision.
“Business owners need to consider the cultural fit of potential successors, [as their] values and vision could potentially be misaligned with the company’s mission and strategy,” said Mark Valentino, Head of Business Banking at Citizens. “Avoid these barriers by engaging in meaningful, careful communication, and extensive planning.”
Once you’ve established your successors, identify the responsibilities that need to be reassigned and who will be responsible for each. If you already have documented operations in practice in your business strategy, this will be less challenging.
4. Communicate your plan
Once you’ve established your plan, it’s time to share the news with your stakeholders, employees, and customers.
Start by approaching 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.
Next, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent, and provide support throughout the transition, especially with new leaders.
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.
“Change often leads to uncertainty, which can make employees, customers, and stakeholders nervous about the future,” explained Dr. Michael Barbera, Chief Behavioral Officer at Clicksuasion Labs. “To prevent unnecessary concern, business owners should focus on maintaining consistency in practices, policies, and communication.”
Overall, the best exit strategy for your business is the one that best fits your goals and expectations — something that may change over time.
Jacqueline Medina contributed to this article.
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