It’s no secret that a strong business plan is vital to the success of a business. When creating a business plan, most people consider capital, workforce, inventory, cash flow, and profit. But, these factors aren’t enough. A well thought out exit plan is also vital.
Many business owners are ready to turn over the daily responsibilities of running and managing their business, but only a few make the necessary preparations to ensure their business will be left in good hands while securing a legacy as well as financial freedom. This type of readiness comes from the creation of a robust exit plan.
What Exactly is Exit Planning?
An exit plan is an extensive road map that provides solutions to all of the personal, business, financial, value creation, and tax issues involved in transitioning a business.
An exit plan should be documented in writing and must give business owners a specific strategy to help them depart from their business. This will include how and when they choose to maximize their business and personal objectives.
Key factors why exit planning is essential
Many question the importance of having an exit plan in making up a good business. A business plan is a guide for business owners to successfully operate and run the business so that it grows and eventually succeeds. But that’s just it.
Once the business plan is implemented, your business will run as it is and will operate without an end goal. However, if you have an exit plan, you’ll direct your business to a guided path, not only to success but also to your personal gain once you decide to exit in the business.
Here are some factors why drafting an exit plan is essential:
- blueprint to success
- allows you to plan and create strategic decision-making
- increases your business’ value
- provides flexibility
- manages unsolicited offers efficiently
- determines when it’s time to sell
What makes up a good exit plan?
When business owners come up with a decision to create an exit plan, it doesn’t happen overnight. It requires thorough planning, brainstorming, documentation, and analysis.
The planning stage is tedious because an effective exit plan will take years of planning, and requires at least five years of hard work before completion.
To create a good exit plan, there are the primary factors that you should consider. Remember, it should be specific, feasible, and realistic.
- Define your primary goals. Stating your primary business goals will help you in laying out a good exit plan. You can include goals, such as the financial value you want to reach before you exit or whether you are looking for profit only or leave a legacy.
- Set a time frame. It is important to state when you plan to exit from your business as it will set everything in motion. Be clear on this since it will be the guiding factor for your exit plan.
- Determine your intentions for the business. What do you want for the business when you exit? Do you want to see it continue, or do you prefer to sell it? Your intentions for the business will help you choose the best exit strategy to apply.
Exit strategies you need to consider
The intention you have for your business will help you determine what your exit strategy will be.
There are four exit strategies, and each of them offers different benefits that your business can gain.
- Acquisition (third-party sale)
- Pass to the family (succession)
- Sell to an inside buyer (management buyout)
All four exit strategies are highly dependent on what you want to do with your business. You can choose to apply one strategy to your business if you think it’s the best action. Even liquidation, which might seem like a negative strategy, can be the best choice if your situation calls for it.
A good team can help draft your exit plan
You cannot draft a well-detailed exit plan alone, no matter how much you know about your business. You still need a good team to plan everything. Typically, a business owner has to employ its core team, which consists of a legal business lawyer, a Certified Public Accountant (CPA) who highly specializes in tax, and an exit planner/advisor.
On the other hand, large-scale businesses need to employ a support team consisting of an investment broker, deal lawyer, and a valuation specialist. You need to take in mind that your exit plan will define which of these people you need the most. People in the core team are highly valuable and need to be secured first hand.
When should a business start their exit planning?
After learning how vital exit planning is, one question remains: when?
If you ask a couple of exit planners, you’ll receive various answers to your questions. Others will suggest getting your exit plan drafted as early as possible, or the moment you establish your business.
In simple words, it means NOW!
Some suggest giving yourself and your business at least 2-3 years before you start laying out your exit plan. Financial institutions also recommend to start your exit planning years before the date you propose to exit from the business, say, in five years.
What matters most is never to delay and don’t dismiss the idea of drafting your exit plan, as there is a cost in postponing things regarding business.
A study conducted by UBS showed that 48% of small businesses don’t have formal exit plans which could result in financial loss and liquidation of assets. An exit plan aims to prevent this from happening.
Many business owners tend to only focus on how to operate their business, neglecting the idea to plan for a business exit. Exit planning is a valuable component in a business plan, and a well-detailed one is vital for business owners who want a practical guide for their business’ fruitful end. However, it is worth noting that an exit plan is time-consuming. Therefore, it shouldn’t be rushed. If so, it will be under duress and can lead to failure.
Lauren Cordell is a full-time writer with vast expertise on topics related to business and finance. Her blog revolves around helping new business owners find their way to success. She dedicates herself to spreading the right knowledge when it comes to business management and financial literacy.