Why having the right exit strategy is always a good plan

Many business owners don’t think about exiting their businesses when they’re just starting out, but it’s never too early to start planning for an eventual exit. Whatever stage your business is in, this checklist can help you start your plan.

Tags: Planning, Retirement, Be prepared
Published: October 24, 2018

For some business owners, a plan to leave or sell their business seems unnecessary or far in the future. There’s enough to worry about just running your business day to day. But an exit plan is crucial for all owners.

Ideally, entrepreneurs should have an exit strategy in mind from day one. That initial strategy will change over the years, but revisiting it over time will help you refine your vision for your future and the future of your business. Plus, having a plan in place can afford you peace of mind, help you define your long-term goals and/or serve as a backup plan in an emergency.

 

To get started with your plan, follow these steps.

 

If you’re just starting out:

  • Pick a rough exit date. Having a goal post allows you to create milestones for when you might need to take steps toward selling or transitioning. Keep in mind you can always adjust your time frame.
  • Outline your standard procedures in writing. Be clear about how you operate day to day and your strategic vision for the business. Potential buyers will want to know exactly how your business completes tasks. And, if you are incapacitated for any reason, your documents can guide whoever fills in for you.
  • Consider different exit strategies. Will you simply close up shop? Pass your business on to a family member or employee? Sell all or part of the company? Stay on part time and let someone else lead? Decide on your ideal plan, but also identify alternate options.
  • Decide on a number. You might have an idea in mind of how much you hope to make from your business. This might be the amount it would take to repay any initial investors. Or it might be your target goal for retirement. It could also be a stop-loss to protect you if business is bad. While these numbers should evolve through the years, having concrete benchmarks can help you evaluate offers or update timelines.

 

When you’re in growth mode:

  • Choose your structure carefully. The different tax obligations of various business structures could impact your exit strategy. For instance, you might choose a structure that facilitates passing the business to an heir or a structure that might be attractive to potential buyers.
  • Be mindful of your business’s total value. It’s easy to get lost in growth targets or short-term earnings, but if you want to sell your business at some point, it’s important to think long term and look at overall value. Consider equipment upgrades, property renovations and net assets as well as liquidity and debt.
  • Track your industry. The value of your business can vary based on shifts in the overall market or within your particularly industry. If your sector is experiencing a boom and business is steady, you might consider exiting sooner, or vice versa. This is when having target numbers in mind can help you evaluate your choices.
  • Keep up your financial records. While this is a must for any business, having excellent books including historical performance, expenses, revenue projections and cash flow is even more important if you’re planning to hand your business off to someone else. When it comes to attracting potential buyers, good books are critical.

 

If you can see the finish line:

  • Identify a team of professional advisors. Whether you’re planning to sell, divest or hand off your business, you don’t have to do it alone. Business brokers, accountants, attorneys and other financial professionals can help organize a liquidation or sale, as well as help manage the resulting windfall.
  • Do a formal valuation and identify prospective buyers. The sale process can take anywhere between six months and two years, according to SCORE, a nonprofit association for entrepreneurs. Work back from your exit date and start coordinating early. Even if you don’t plan to sell, knowing the value of your company, as well as other major players in the marketplace, can help.
  • Start scaling back. If you want your business to continue on without you, or with less management from you, start gradually reducing your role. This could be as simple as taking a prolonged vacation to test how the business performs without your lead. Small steps help you evaluate whether you’ll be happy handing over your business before you make a final decision.

 

Planning is key at every phase when running a business.  Let U.S. Bank help you plan every step of the way.