An exit strategy is a road map that entrepreneurs ultimately follow to ensure that their company’s financial future is secure and their own personal and financial goals are met. When successfully executed, a well-planned exit strategy can optimize the sweat equity the business owner invested in the company, leverage the company’s past successes and provide a number of additional benefits for the entrepreneur, as well as heirs and employees.
These benefits may include minimized tax burden, preservation of the company’s cultural identity and founder’s legacy, enduring financial success and business growth, reduced time to exit and the ability to act quickly when unforeseen circumstances arise.
Too often, business owners (or heirs) will decide quickly to sell all or part of a company due to death, disability, divorce, family issues, industry changes or market forces, which can jeopardize their and their company’s future. If an owner does not have an exit strategy in place or has not given much thought to possible exit scenarios, their view of the company’s present and future value may be inconsistent with market value. This can be problematic when the aforementioned unforeseen circumstances occur.
To optimize an exit strategy, business owners need to think through their personal and corporate goals and create a plan that includes the following essential components:
1. Define the desired outcome. One of the most important components of any exit strategy is a clear description of what business owners hope to achieve (for themselves, their heirs and their businesses) when they extricate themselves from their companies. As with any business goal, owners need to define their goals before they can determine the best strategy.
Once goals are clearly defined, business owners and supporting players can work together to develop a strategy that will reach the desired goals and position the company for future growth. Supporting players include company leadership, key employees, M&A advisors and other legal and financial experts.
2. Focus on optimizing value. To secure the best price and/or deal terms for a company, the exit strategy should include tactics that optimize company value. These tactics should include working with M&A advisors who understand your industry and are familiar with the investors and buyers who are active in your industry. They should also be knowledgeable in the prevailing valuation metrics for the industry.
Experienced bankers will seek out strategic buyers who could realize unique benefits from acquiring the business. Such a buyer may be looking for an acquisition that would enable them to expand into new markets, improve their reputation and market share by purchasing a well-known brand, or offer new products/services to existing customers.
However, business owners shouldn’t put all of their eggs in one basket. To optimize value, their team should consider both strategic and financial buyers. This strategy creates a competitive environment, which typically results in enhanced valuation and better deal terms.
3. Target exit date. Many business owners already have a time frame in mind as to when they are planning to exit their companies, especially if they are eyeing retirement or a new venture. With a target date in mind, it’s easier to develop an exit plan and coordinate the roll out of the plan with key supporting players. Keep in mind, selling a company typically takes a year or more, so plan accordingly.
While many of these concepts become more relevant as an owner ages, younger entrepreneurs should be aware of the alternatives and likely players. Therefore while exit planning variables are always important, exit date targeting may be less relevant. This is certainly true in order to be prepared for unforeseen circumstances that may force an earlier exit than originally planned. If you are a younger owner or own a business that is in its earlier stages, an annual assessment of exit planning variables is always a good idea.
4. Sufficient time to execute the plan. Those who plan ahead fare better than those who do not. Entrepreneurs should avoid ending up in a position where they haven’t prepared themselves, or their businesses, for their departure, but are forced to move quickly due to unforeseen circumstances (as noted above).
Without sufficient time to plan and prepare, the business may not be optimized to attract those buyers who are willing to offer the highest valuation or most desirable deal terms. Consequently, the business owner (or his or her heirs) may be forced to accept a deal that is less favorable. Further, insufficient planning can prevent an owner from capitalizing on ideal market conditions, which can greatly impact the value of a business and/or the number of interested potential buyers.
5. Flexibility. Some entrepreneurs shy away from creating an exit strategy because they’re happy with the status quo. They believe that once their plan is developed, it’s written in stone and cannot be changed. As a result, they often avoid developing a plan at all.
In fact, most successful exit strategies evolve over time as companies transition and grow, or as a result of changes in the market, industry niche or business owner’s goals. Entrepreneurs should remain flexible and regularly monitor and update their exit strategies as needed.
Start Planning for Your Exit Now
If you haven’t established an exit plan or revisited an existing exit strategy recently, schedule time with your trusted advisors to get the conversation started. Make it a priority to formulate a plan that will protect you, your heirs and your business in case of emergency, and fine-tune that plan over time. In doing so, you end up with the road map that allows you to achieve those larger goals and desired outcomes once your departure date arrives.
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