Exit Planning Strategy: The Essential Components

Businesses need a strategic exit plan for long-term sustainability. Since selling a business is a complex process, owners need time to prepare for that eventual transition. In addition, to present the business as an attractive proposition, owners want to improve overall sales figures, increase efficiency by streamlining processes, and introduce or update technology.

Business owners need time to consider their exit options and think, plan, and deploy solutions to issues that arise as the exit planning process starts. An exit plan focuses on two main objectives:

  • Maximizing the company’s value before the exit
  • Achieving the owner’s business and personal goals as a part of the exit.

According to Chris Snider, CEO of research and consultancy firm the Exit Planning Institute, When business owners plan for their eventual exit, it “allows [them] to drive value to the business while positioning you to harvest that value at some point. In [their] future.” An exit plan allows the owners to prepare for the future and successfully navigate “a worst-case scenario” such as health issues, marital disputes, unfavorable business and market conditions, and burnout.

Exit planning also secures business owners’ post-exit financial goals. The more extended business owners wait to plan their exit, the more they jeopardize the financial legacy they have worked so hard to build. An exit plan allows the owners to take control of their business’s future and their own. It sets the perfect stage for them to leave their business on their terms when the time is right and for the company’s maximum value.

An exit plan includes all the mandatory and vital steps before and after the business owner creates it. It is a proven template for increasing your business valuation, maximizing the chances of sale or ownership transfer on your terms, helping maintain control over the exit process, and achieving the desired outcome.

Now let’s take a look at the seven most essential components of an exit plan:

Clearly Describing Goals

“The beginning is the most important part of the work” – Plato

All business owners have goals they want to achieve. So, the first step is to define and distill them to make sure they are realistic, concrete, and achievable. This is the most critical component of your exit strategy. Goals can be categorized as:

Basic Business Goals

These address the need for financial security and independence post-exit. To define these goals, they must answer:

  • How much money do I need to exit the business successfully?
  • How do I determine what I need for my future?

Pinning this number as annual income, pre-tax, adjusted for inflation is important. Without detailed planning and execution, business owners won’t be able to sustain their current lifestyle.

Universal Goals

These goals are common to all business owners. Begin by answering:

  • How much money do I need for the rest of my life and my spouse’s life?
  • When, exactly, do I want to exit the business? (This goal evaluates emotional readiness to exit the business.)
  • Who will be the company’s new owner(s)? Which type of business successor will enable me to reach my exit goals?

Value-Based Goals

These goals are based on sentiments, attitudes, and feelings. They are less tangible and relate to the following aspects of the owners’ life.

  • Business legacy
  • Employee welfare
  • Maintaining the culture of the company
  • Minimizing taxes.

To articulate these goals, ask the following questions:

  • What is my vision for the business without my presence?
  • What is my vision for myself after I leave the business?
  • Which particular aspect of the goal is essential for my vision?

Deciding the Exit Transaction Type that Suits You

There are different types of exits, and each one serves other goals and needs, so choosing the right exit strategy is essential. The exit strategy selected must align with all the objectives stated above.

Different exit strategies include:

Management buy-out. In this transaction, the company’s management team acquires the business’ assets and takes over the business’ operations. The management team usually pools their resources to purchase all or part of the business. The funding comprises personal resources, private equity financiers, and seller financing.

Succession planning. Succession planning entails passing on key leadership positions to an employee or a group of employees who may or may not be related to the owner. This exit transaction ensures business continuity even after company principals move on to a new opportunity, retire, or pass away.

Company liquidation. This exit strategy refers to the process of closing a business and distributing its assets to investors and claimants based on the priority of the claims. After liquidating the company, the owner is also able to pay himself.

Merger and acquisition. In this type of transaction, two companies consolidate as one. This typically involves either merging with a similar company or being acquired by a larger company.

Assessing Business Value to Establish a Baseline Value

All business owners wish to get the best price and exit terms for their business. To achieve this, creating an exit strategy that includes all the steps and actions that will help optimize the future business value is essential.

The business’s baseline value acts as a reference point to measure and analyze its current performance in terms of market position, competition, and value. A third-party valuation determines baseline value, and also helps set the scope of requirements that the business must meet to generate value in the future.

By establishing a baseline value, owners can:

  • Assess the performance of value-creation initiatives
  • See trends in performance by comparing the time and cost that should have been spent thus far to the time and cost already spent thus far.
  • Improve their accuracy in forecasting market trends, business performance, and other unforeseen events.

Related: Do I Really Need a Business Valuation Before Selling?

Routinely Conduct Gap Analyses

Once you deploy all the value creation initiatives, the next component of your exit strategy to focus on is to periodically conduct a gap analysis to get a clear and detailed overview of the gap between the business’s current selling price and the desired sale price. Periodic gap analyses enable business owners to devise new strategies or tweak existing systems to close the gap between current and desired outcomes.

Gap analysis helps business owners in the following ways:

  • Identify the areas of improvement such as customer satisfaction, employee engagement, quality control measures, profitability, etc.
  • Find out all the weak aspects of the business to fix them.
  • Learn how and where to prioritize resources.
  • Conduct a reality check to find which assumptions are not working for the business and you.
  • Find whether all the business objectives have been met or not. If not, find out why.

Identifying Ways to Optimize Business Value

Business owners must seek new ways to enhance efficiency, optimize resources, and reduce waste. This is not a one-time event but an ongoing practice that increases the business value. When owners focus on this exit planning component, they can identify loopholes and implement new processes to make them more efficient.

The business optimization process comprises:

  • Measuring employee productivity, performance, and efficiency
  • Assessing and identifying areas of improvement
  • Measuring the results and comparing them with past findings
  • Introducing new techniques, systems, and methods that will eventually reduce the total turnaround time of projects
  • Improved performance and reduced costs
  • Elimination or automation of time-consuming, repetitive tasks
  • Renewed focus on customer satisfaction that helps to increase business sales.

Like the KaizenTM philosophy of continuous improvement, business optimization is not meant to be applied to a one-off project or department. It is an ongoing effort that focuses on improving the culture, employee satisfaction, and the value the business generates for its clients and customers. When owners focus on business optimization as an integral aspect of value creation, they continue to become more and more efficient, remain viable, and stay on top of the competition.

Keeping a Flexible Approach

Owners often delay creating an exit plan and deciding their exit strategy because they believe that making one will seal their futures. They think that all their future business moves will be constrained, and they will lose their say in their business.

However, this is far from true. The best exit strategies adapt or change according to existing business and market conditions. Thus, they adapt exit planning components that allow flexibility as the market changes, grows, or evolves.

An adaptable approach is also necessary for attaining personal goals. Since the owner’s personal goals align with the business’s goals, periodic reviews and adjustments according to the situation are essential.

Timing of Exit

The process of exiting a business comprises multiple steps and considerations and evolves with time. The proper exit strategy needs and deserves the business owner’s time and effort for planning and deployment. Business owners should also be open to making the right decision when the time arrives.

Failing to take advantage of an opportunity will put their futures and legacies on hold or subject them to chance. Owners cannot position their business without devoting sufficient time to prepare the exit plan. This affects their ability to attract potential buyers who will offer them the best price and deal terms. They may also miss out on an opportunity to make the most of the market conditions that could invariably increase business value and the number of buyers.

Quantive’s Business Performance Group helps business owners determine whether their current business value matches their exit needs. Business owners who successfully achieve an exit are proactive about exit planning and deal structuring. Contact our BPG team today.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



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