Often in life, we wait until a change in circumstances to make a big decision. Exit planning is an example of something so many entrepreneurs put off. In business, our focus is firmly on the here and now decisions: marketing, HR, inventory, cash flow, etc. It doesn’t feel like there is the time or the impetus to create an exit strategy, especially if you don’t plan to sell soon.
But, you can’t be complacent about exiting your business. A study by Securian Financial revealed that 72% of small business owners have no exit strategy at all. The reality is it can take years to execute a successful exit, so the endgame needs to be in your mind from the start.
The earlier you establish your exit strategy, the clearer the vision for you and your company becomes. If you don’t believe preparing is a priority for your business right now, these 10 reasons will open your eyes to the benefits of creating your exit plan early for the present and future of your business.
1. It will change how you guide your company’s future
Outlining your exit strategy, above all else, gives you a blueprint for the future. It gives you a goal to aim for, acts as a measure of your success and crystallizes your vision for life beyond the business.
It also helps you visualize your company with the next person at the helm. Whether you intend to pass your business onto your children, sell to a buyer your M&A team has identified, or liquidate your assets and close the doors, your exit strategy will guide the direction of your company.
2. You will know how to handle unsolicited offers
An exit plan will help you respond to unsolicited offers. Did you know that, according to research by the National Center for the Middle Market, 45% of all sales are opportunistic for the buyers? It can be a big risk to accept an offer in this manner. But having an exit strategy in place means you can recognize if this type offer matches your financial needs.
3. You will understand your company’s value
It may feel like an obvious question, but do you know how much your business is worth? And is that enough to secure your future?
Determining this is more complicated than you would expect. You’ll need to create a detailed record of your recast financials spanning three to five years, identify your intangible assets, and gauge the condition of the market. You will also need to approach optimal buyers, those that will pay a premium for your company based on a strategic fit with theirs.
A thorough evaluation will inform you of your company’s value, but only by combining this with the ambitions laid out in your exit strategy will you understand if you’re on track with your financial goals, or if changes are required to realize your expectations/needs.
4. You will know when you intend to sell
Likewise, your exit strategy will help you determine an end point for your business. That could be one year’s time, five years, or ten years, but regardless, it gives you a timeline to work within, allowing you to concentrate on preparing your business to be buyer ready.
Plus, if circumstances change in the meantime, you can update your exit plan and make strategic business decisions that will ultimately enhance your company’s value.
5. Your business will become more appealing to buyers
Having an exit strategy actually makes your business more attractive to buyers. It shows them that you have a clear vision for your own and your company’s future—that you’ve planned well in advance for this and grown your business with a definitive goal.
So, it’s not about securing your financial future, but adding your appeal to prospective buyers. It also shows you are a committed seller. Far too often sellers who don’t really have a plan, back out of transactions at the eleventh hour, wasting a buyer’s most precious resource: time!
6. It will help you mentally prepare to exit
Many business owners won’t remember a time before the demands of their company took over. It can be a real challenge to manage the emotions of exiting a business you guided and nurtured to where it is today.
By working on an exit strategy early, you can identify the goals you wish to satisfy in your company and logically determine the conditions for your exit. This can act as a life preserver of logic when you’re facing a tidal wave of emotion. Your business may be prepared for your exit, but are you?
7. You’ll be able to capitalize on an active market
Timing plays a big role in maximizing your business sale. Currently we’re enjoying a strong seller’s market and most analysts are expecting this growth to continue well into 2019. Having an exit strategy in place means you can capitalize on times like these when the market is strong and active. Otherwise, you could waste valuable time getting your affairs in order, meaning you miss an optimal time to sell for the maximum value.
8. You’ll be prepared for the paperwork of exiting
The process of exiting a company comes with a laundry list of paperwork, from offering memorandums and confidentiality agreements to letters of intent and finally due diligence. Working with professionals to create your exit strategy means you are better prepared for this inevitability, saving you plenty of time, money, and frustration when the time comes to depart.
9. You’ll be ready for negotiations
When you sell your company, buyers will be looking to achieve the highest return on their investment—it comes with the territory. With a clear idea of the goals set out in your exit strategy (as well as knowing the business enterprise value of your company), you’ll come to the negotiation table more prepared and assured about what you hope to achieve. This helps maintain the balance of power, ensuring it doesn’t tilt out of your favor.
10. It gives you control for life after business
The fact is that you, like every other business owner, will exit your business one day, one way or another. Those who wait until they have to exit, rather than planning for this process, risk leaving money on the table and jeopardizing the financial legacy they’ve worked so hard to secure. By planning early and creating your exit strategy, you take control of the future for you and your business. It sets the stage to depart on your terms, at the right time, for the maximum value.
It’s never too early to plan your exit strategy
An exit strategy sets the wheels in motion for the journey beyond your business. Planning early gives you greater insights into your company, a plan for the future, and a means to add value between now and the day you decide to depart.
Keep in mind here are two kinds of business owners:
- Those who PLAN to exit
- Those who HAVE to exit
It’s far better to be in the former group than the latter!