As a small business owner, your focus is on growing your business and ensuring its success. It’s easy to get caught up in the day-to-day priorities, especially when you wear lots of hats and have so much of your self invested in your business. But planning—strategic planning for short- and long-term goals as well as estate planning—are also crucial to your company’s continued success as well as your legacy.
Part of planning for the long-term with your business is creating a purposeful and strategic roadmap for what will happen when you leave. If you are choosing a successor, this involves succession planning. But there are many ways to structure how you will eventually leave your business, and you can maximize your profits by establishing a comprehensive exit strategy now, so that it is in place for when you need it.
What is an exit strategy?
Perhaps the best way to start a discussion of exit strategies is to describe what it is not. The word “exit” tends to have a negative connotation, but it is important to understand that an exit strategy is not something you put in place because your business has failed, nor is it the equivalent of giving up. Rather, an exit strategy is a plan for shepherding the business you worked so hard to build into its next phase. It details how this transition will occur, whether or not and to what degree you will still be involved in the business afterwards, and how you and those you care about can reap the benefits of your years in business.
Why do you need an exit strategy?
The short answer is that you need an exit strategy because, at some point, you will exit your business, and it is better to arrive at that point prepared than not prepared.
Why will you exit your business? This can occur for any number of reasons, but here are a few of the most common:
- You may eventually want to retire. At some point, you may wish to work less, take a vacation, spend more time with family, or pursue other interests.
- You may want to cash in. If you have built a successful business, selling it or pursuing some other path like a merger may be an extremely profitable move for you.
- You may face health issues—yours or a loved one’s. Circumstances may arise that compromise your ability to work full-time in running your business, either due to your own health, or the need to take care of an ailing family member.
- You may want a new adventure. People change. Interests evolve. New opportunities present themselves. Having an exit plan in place positions you to be open to pursuing new ventures if the desire and chance arise.
What are the key components to a successful exit strategy?
A successful exit strategy can result in not only financial gain for you and your family, but the peace of mind of knowing that your business transitioned into its next phase in a way that aligns with your vision and values. Creating an effective exit strategy involves a good deal of planning, and should involve the following steps:
- Engage in self-reflection: Take some time to ask yourself important questions about what matters to you, and what you most want to get out of your exit strategy. Is it important to you to know that your business will be handed over to a family member? Do you still wish to be involved after you hand over leadership? Is your priority to raise as much capital as possible to pay off investors and provide financial stability for your family? Do you have a legacy you want to protect?
Knowing these answers ahead of time will give you a guidepost for creating and implementing all of the other steps in your plan.
- Establish your team: Having the right people involved in helping you make decisions and formulate your plan is crucial to its success. Consider first the people whose opinions matter most to you in the business—family members working with you, trusted managers or long-standing employees whose loyalty and commitment to your vision has helped make it a reality. Include as well the experts and advisors who will help you understand the financial, tax, and legal implications of the decisions you’ll be making.
- Choose your strategy: Once you know what matters most to you, you can choose the exit strategy that best meets your goals. There are many ways that you can choose to exit your business, from selling it to a family member, selling it on the open market, taking the company public, or liquidating. In our next article, we will go into detail on the pros and cons of these and other options.
- Conduct a valuation of your company: Whether you are selling your business, leaving it to a family member, or following some other course, you’ll need to know how much your company is actually worth. This information is vital to accurately navigating legal and financial matters, from sales negotiations to taxes. Be sure to enlist a qualified and objective third party to conduct your business valuation.
- Create your action steps and timetable: This will be different for every business, and will also depend on the exit strategy you are choosing. For many businesses, however, a large part of planning for your exit is tying up any loose ends and getting all of your accounts in order. This many include collecting on any outstanding accounts, settling any debts, and creating standard operating procedures and/or employee manuals to codify what you have developed over the years, etc.
Done correctly, an exit strategy can provide financial security for you and ensure the continuation of your business in a way that honors your vision. The best time to start planning for your exit is before you need to leave, and the best way to start planning is by having a conversation with your CPA firm and legal counsel. Working collaboratively, they can help you translate what matters most to you into a practical and profitable plan that helps you achieve the goals you had in mind when you started your business.
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