Business Exit Strategy Planning Guide

This guide is designed to be helpful in planning a small business exit strategy.  A great starting place with key questions, steps and considerations.  It doesn’t replace expert advice that requires degrees, certifications and experience.  I’m not a business broker (yet), business lawyer, financial planner nor accountant.  Enjoy and please feel free to contact me with questions or suggestions for additions/improvement.  Hope you find this helpful.

Key Questions to Answer for Business Owners:

1. What are your personal and financial goals post-exit?
   • Understanding the owner's aspirations—be it retirement, starting a new venture, or other pursuits—helps tailor the exit strategy to align with their personal objectives. Allow for inflation, travel.  How much money do they need/want after sale and taxes?  How much will the company have to grow to create the valuation you want?  Will the business profit have to increase to cover owner financing?  What timeline are you thinking?  Immediately?  1 year?  2-5 years?
2. What is your business currently worth?
   • An accurate valuation is crucial. Encourage owners to obtain a professional appraisal to set realistic expectations and get informed on potential deal structures. There are several ways to value a business.  I highly recommend finding and using a reputable, experienced business broker for this.  To get started and gain basic knowledge, you might want to read this article:  How to Value a Small Business.
3. Who is your intended successor or buyer?
   • Determining whether the business will be sold to external buyers, internal management, family members, or employees influences the planning process and transition dynamics. Do you want to simply liquidate the business or shut it down?
4. What are your financial needs after exiting?
   • Assessing future financial requirements ensures that the exit strategy provides sufficient proceeds to support the owner's desired lifestyle.
5. Is there a succession plan in place?
   • A well-defined succession plan ensures business continuity and can enhance the business's value to potential buyers. Have you thought about what could go wrong and what contingencies could be put in place?  A high-level SWOT analysis is a good start [Strengths, Weaknesses, Opportunities, Threats].  Consider family issues, health, economic downturns, loss of key employees, client attrition, etc…

Major Steps to Creating a Solid Exit Strategy:

1. Early Planning and Goal Setting:
   • Initiate exit planning well in advance, ideally 2 to 5 years before the intended exit, to allow ample time for implementation and adjustments. Consider personal, financial and professional objectives and set time-based measurable goals.
2. LIFT Analysis
   • L = Legal. Consider contracts, bylaws, articles of incorporation, entity documents/reports …
   • I = Insurance. Do you and the business have the proper coverage?
   • F = Finance. Consider gross income, profit, cash flow, debt, fixed costs, variable costs, depreciation, etc.
   • T = Taxes. Do you have the proper business entity?  Are you taking full advantage of write-offs with proper rationale and documentation.  Are you balancing profit with tax reduction?
   • Collaborate with tax and legal professionals to structure the exit in a tax-efficient manner and address any legal considerations.
3. Business Valuation:
   • Conduct a thorough valuation to understand the company's worth and identify areas for value enhancement. Strongly recommend using a reputable expert with this.
4. Enhance Business Value:
   • If the valuation is not what you expect or want, what would it take to get the business to that level (hint – a business coach could help tremendously here)? Focus on strengthening key value drivers such as increasing profitability, growing a loyal customer base, value pricing, marketing, cutting costs, consistent cash flow, recurring revenue, a competent management team, and robust operational processes.  For more information on how to increase the valuation of your business, please read this article:  How to Increase the Value of Your Small Business.
5. Develop a Succession Plan:
   • Identify and prepare a successor, whether internal or external, to ensure a smooth transition and maintain business continuity. Perform a gap analysis to see who you need to hire, how team members can develop through focused training, clear roles and responsibilities.  Revenue model the future business with a simple proforma so you can grow responsibly.  Create a strategic time-based action plan with phases and milestones.  Who will do what by when, identify critical path items (X has to be done before Y can begin).  What can be done in parallel?
   • Communication Plan. Who needs to be communicated to and when?  Who might have concerns that need to be addressed?  For example, employees might be afraid of change and could use comforting, explaining to avoid turnover or distress.  Who needs to know what’s in it for them so they buy in to the plan?
6. Implement the Exit Plan:
   • Execute the strategy, monitor progress, and remain flexible to make necessary adjustments in response to changing circumstances. It is critical to communicate the plan to all key stakeholders prior to implementation and continuously update them.  Continuously review the progress of the exit strategy and adjust as necessary to align with any changes in goals or market conditions.

Common Pitfalls to Avoid:

• Delayed Planning:
  • Procrastination can limit options, rush decisions and reduce business value. Start planning early.
• Overestimating Business Value:
  • Unrealistic valuations due to emotional attachments or unrealistic expectations can hinder sale prospects. Ensure valuations are grounded in market realities.
• Neglecting Successor Development:
  • Failing to prepare a capable successor, processes and team can jeopardize the business's future. Invest in leadership development, knowledge transfer, solidifying profits and streamlining processes.
• Inadequate Financial Planning:
  • Not aligning the exit strategy with personal financial goals can lead to post-exit financial strain.
• Lack of Contingency Planning:
  • Owners sometimes neglect to have a plan B in case of unforeseen obstacles arising during the exit process.
• Rushing the Process:
  • Trying to exit too quickly can lead to missed opportunities or leaving money on the table!