Exit Planning: How to Develop a Plan

Unless you are a first-generation business owner, there’s a good chance you made a solid business plan early on in your business. You did your market analysis and develop strategies to plan and grow your business.

If you have already done that, then you’re on the right track. But one thing you are less likely to have done is to plan an exit strategy for your business. You should do it ASAP if you haven’t already. Most people plan on how to start a business, but not a successful business exit.

Why Prepare an Exit Strategy?

An entrepreneur exits a business for numerous reasons: uncertainty about future market developments, business failure, lifestyle change, death, disability, or exhaustion. No one is prepared for a catastrophe, but life is unpredictable. The same is true in business, which makes it necessary to have an exit strategy in your business plan.

Entrepreneurs love the art of starting. Assuming you’re a tech start-up, you will likely find that the fun is gone when you hit 50 employees or a few million in revenue. The work evolves from creating a work of art to using a cookie cutter. If you’re looking for venture capital or an angel investor, an exit strategy is a must. Even with a small business, it’s a good idea to plan and feel how you will transfer ownership of the company or make a return on your investment. So, just like you had a plan to start your business, you should also have an exit strategy to turn your business into cash in case you lose interest or run into issues later.

Challenges of a Company Sale Process

The process of selling a company comes with many challenges. The sale of a company is a one-time event for many entrepreneurs. Not only does it represent a high-dollar transaction, but it’s also the culmination of a life’s work and involves jobs of many, the location or the company name, and intense emotions. A cool head and patience help. Experience shows that the following situations occur more frequently when entrepreneurs rush into things without good planning:

• Many entrepreneurs do not set the personal goals they want to achieve by selling the company.
• The financial, legal, and emotional consequences are often ignored or initially put on hold.
• Many entrepreneurs don’t realize the time and effort involved in successfully selling a company.
• In many cases, the company’s value is overestimated.

The personal and emotional connection to their own companies means that many owners find it difficult to view those points critically. Numerous factors must be considered, from the definition of goals to the company valuation and the purchase transaction.

How to Develop an Exit Plan

The following checklist for the sale of a company offers valuable tips on how to transfer your company into good hands by developing the best exit plan.

Understand the Company’s Current Value

Many owners overestimate their companies’ values. Company valuation is one of the essential factors in the entire process and is calculated through different methods. It is therefore prudent to get objective support from impartial experts like Quantive for the assessment process.

Evaluation is a complex exercise. The proper valuation includes material values (e.g., real estate, land, or machines) and intangible values (e.g., market position, workforce know-how). Calculations of company value also include the company’s sales and earnings and development, business orientation, industry, and location.

Proper evaluation often reveals a significant difference between the desired price and that offered by the buyer.

To retire, most owners need their businesses to be worth more than they are today, but how much more? By when? What does your company need to look like to achieve those goals? Value Scout helps you pinpoint the future business value you’ll need to retire and model different scenarios to get there.

Understand Personal Financial Requirements to Sell

Wondering how much to save for your retirement? Several factors influence that amount: your lifestyle, your plans, your age, your investments, etc. You must prepare yourself for the personal consequences of transferring ownership of your business and ask yourself the right questions about your financial motivations:

• What do you want to do in retirement?
• How much do you need to maintain your current lifestyle?
• What are your passions?
• Do you want to escape to the countryside?
• Do you intend to sell your house to move into a condo?
• Will your mortgage be paid off?

The answers to questions like these have financial consequences. Be as specific as possible to estimate the cost of living in retirement. Then you will be able to assess the income you will need for retirement.

Understand the Financial, Legal, and Emotional Consequences

Selling the company, handing it over to family members, external succession planning, or liquidating the company trigger financial, legal, and emotional ramifications. Here are a few tips here to help keep you out of trouble.

Financial consequences. If you are looking for an external successor for your company, get a consultant who will support you in the company evaluation. It is vital to substantiate the company’s valuation with data and facts during the negotiation process.

Legal consequences. A company sale process involves transferring the company to new ownership. Think about when the handover should occur, what will happen to your location, the employees, etc. These and other considerations need to be addressed, clarified, and recorded in writing during the negotiation phase.

Emotional consequences. Selling a company is a highly emotional and complex process. Most likely, you have developed an emotional bond with your company. Letting go isn’t easy after you’ve put so much passion into building your business. However, you can also take positive emotions with you from this sale. After the sale, you can devote yourself to new professional challenges or invest newly freed time in hobbies, family, and friends. These positive emotions don’t always come, and that’s perfectly fine. Talk to someone you trust (lawyer, strategy consultant, M&A consultant, etc.) about this and share your uncertainty.

Enlist Professional Support and Guidance

Your personal and emotional connection to the company ensures you view individual points differently from outsiders. In addition, you naturally have a unique and emotional connection to the company and therefore view individual points differently from outsiders. A specialized consultant helps you get a new perspective on the company.

To get the best support during the company sales process, seek experienced M&A consultants, M&A lawyers, and tax consultants specializing in medium-sized companies. These professionals will:

• Increase your chances of success as a salesperson.
• Have the necessary objectivity as well as experience and specialist knowledge.
• Have an extensive network and connections to prospects.
• Help ensure anonymity and protect confidentiality.
• Lead the company valuation and create the documents suitable for investors to expedite the search for a buyer, negotiations, and creation of the purchase contract.

Develop a Strategy to Close the Gap Between the Current Value and Your Goals

Beyond the complexity of the sales process and the high emotional load it entails, the entrepreneur must ensure that they maximize the value of the business into which they have invested so much time and energy. Planning and preparing for a transition is the right thing to do, and you need to take the time to get it right.

Analyze your company carefully so that you do not overlook essential aspects that make your company more attractive to a buyer. Remember the value of customer data, self-developed products and processes, well-maintained systems, secret recipes, user-specific software programs, and qualified employees. These are so-called intangible assets that most pricing models don’t consider but can significantly increase your company’s value.

Execute! Strategy Is Vanity, but Execution Is Everything

Get advice. An experienced external advisor can help you make the necessary preparations, including expert assessment.

Boost your profits. Don’t expect to receive a high bid if your business is only breaking even. You also won’t want to take too much money out of your business. High retained earnings (the portion of net income that has not been distributed to shareholders) tell buyers that the business has been profitable and is in good health.

Increase sales and decrease expenses. Look for ways to increase the efficiency of your processes, reduce costs, and control inventory without compromising your business. Revise your marketing plan and drive sales by entering new markets or offering new products and services, for example. Build up a diverse clientele that, ideally, will provide you with constant income.

Keep investing and making improvements. One of the biggest mistakes business owners makes after deciding to sell is slowing down. When you stop investing in new equipment, maintenance, and process improvements, you put the future value of your company at risk.

Develop repeatable processes and empower your employees. Train your employees, motivate them, and empower them. Pay close attention to the management team. Resolve any internal conflicts and keep staff turnover low. A robust and professional workforce adds value to the business, especially if it has few tangible assets.

Stand out. Selling a business is a marketing challenge in itself. You need to present to potential buyers what sets your products and services apart from competitors. Ask some of your long-time customers to explain why they do business with you and what keeps them coming back.

Whether or not you are preparing a sale, these tips will help you maximize your business’s strength, efficiency, and value.

Plan Early

Planning for transition should begin at least 18 to 24 months before your intended departure date. Planning for the transition takes time, as you have to consider complex issues like assessing the value of the business, tax and legal considerations, family issues, and coaching your successor. The earlier you start, the more time you’ll have to take an objective look at your business and prepare for your transition.