What is exit planning and why is it important?
Exit planning is the process of preparing your business for a successful transition of ownership, whether it is to sell it, pass it on to family members, or transfer it to employees. Exit planning is important because it can help you maximize the value of your business, minimize taxes, and achieve your personal and financial goals.
According to Forbes, only around 20%-30% of businesses that go to market are successfully sold, and most sales involve concessions from the owner. Moreover, most business owners have their net worth tied to their companies, which means they may not have enough money to fund their retirement or lifestyle after exiting. Therefore, exit planning is essential for any business owner who wants to secure their future and leave a legacy.
When should you start exit planning and what are the steps involved?
Ideally, you should start exit planning as soon as you start your business, or at least five years before you intend to exit. This will give you enough time to build sustainable growth and value in your business, and to explore various exit options and strategies.
According to David Tobin, a Forbes Business Council member and an M&A advisor, exit planning typically involves four phases:
- Soul-searching: This is where you clarify your goals, desires, and intentions for your exit. You need to answer questions such as: When do you want to exit? Who do you want to sell to? How much money do you need? What are your personal and professional aspirations after exiting?
- Valuation: This is where you determine the current and potential value of your business, and identify the key drivers and detractors of value. You need to conduct a thorough analysis of your financial performance, market position, competitive advantages, growth opportunities, risks, and challenges.
- Value enhancement: This is where you implement actions and initiatives to improve your business value and attractiveness to potential buyers. You need to focus on areas such as increasing profitability, diversifying revenue streams, strengthening customer relationships, enhancing operational efficiency, developing talent, and creating systems and processes.
- Exit strategy: This is where you choose the best exit option for your situation, and prepare for a smooth transition. You need to consider factors such as deal structure, timing, tax implications, legal issues, due diligence, negotiation, and post-exit arrangements.
What are some common blind spots in exit planning and how can you avoid them?
Even with a long enough runway and a well-thought-out plan, you may still encounter some challenges and obstacles in your exit planning process. Here are some common blind spots that you should watch out for and avoid:
- Your ideal buyer: You may have a preference or assumption about who will buy your business, but you should not limit yourself to one type of buyer. There are different types of buyers in the market, such as strategic buyers (who want to acquire your business for its synergies or competitive advantages), financial buyers (who want to invest in your business for its returns or growth potential), management buyers (who are your current or former employees who want to take over the business), or family buyers (who are your relatives who want to continue the family legacy). Each type of buyer has different motivations, expectations, and valuation methods. You should explore all the possible options and find the best fit for your goals and situation.
- Your emotional attachment: You may have a strong emotional bond with your business, as it is the result of your hard work, passion, and vision. However, one of the blind spots in exit planning is the toll it can take on your emotions and personal finances. You may experience feelings of loss, anxiety, guilt, or regret when exiting your business. You may also face challenges in adjusting to a new lifestyle or identity after exiting. Therefore, you should prepare yourself mentally and emotionally for the exit process. You should also seek professional advice on how to manage your personal finances after exiting.
- Your team involvement: You may be tempted to keep your exit plan secret from your team members until the last minute. However, this can backfire on you if they feel betrayed or resentful when they find out. Your team members are vital assets for your business value and continuity. They can also be potential buyers or influencers in the deal process. Therefore, you should involve them in your exit plan early on. You should communicate clearly and honestly with them about your intentions and expectations. You should also reward them for their loyalty and performance, and provide them with training and support for the transition.
Exit planning is not a one-time event but an ongoing process that requires careful planning and execution. By avoiding these common blind spots in exit planning, you can increase your chances of achieving a successful exit that meets your personal and financial objectives.
