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What Is Business Exit Planning and Who Needs to Do It?

If you’re considering selling your business — even years down the road — it’s imperative to come up with a business exit strategy. The more time you spend planning your exit strategy, the more you will set your business up for success after your departure, and the more likely you are to increase the profits you’ll receive.

In this article, you’ll learn what business exit planning is, the steps (and time frame) involved with the process, and how to determine if an exit strategy is right for you.

What Is Business Exit Planning?

In a nutshell, business exit planning is the strategic roadmap you create to sell your company, reduce your ownership shares, or leave your management team

A true “exit planning” process occurs when a trusted advisor meets with the business owner and runs through all of the possible exit scenarios. Many (although not all) advisors who specialize in exit planning are certified by one of two groups: 

  1. Exit Planning Institute (EPI)
  2. Business Enterprise Institute (BEI)

These two organizations train professional service providers — often CPAs and financial planners — on a full exit planning process for business owners

These advisors will sit down with business owners and try to understand the owner’s goals for their exit. Perhaps they want something along the lines of succession planning, as they intend to pass along the company to their family members but want to maintain a stake in the business ownership group. Or maybe they have specific financial goals and are looking for a full liquidation of assets. 

Below are several types of exit strategies that are likely to be discussed:

  • Sale to an outside buyer: Outside financial buyers can include individuals, private equity groups, or strategic buyers, such as a larger competitor.
  • Sale to an inside buyer: Potential buyers can include family members, existing partners, or employees. 
  • Initial public offering (IPO): The business will go public and stakeholders will now have ownership shares. This is typically only an option for larger-scale startups with annual sales of $200M or more. Most businesses are far too small to have this as an option.
  • Estate planning: You will give shares of your company to your family through an estate plan.
  • Management buyout: You will give up your management role in the company and exit day-to-day operations. The management team will buy you out over time, with or without the help of company profits.
  • Employee stock ownership plan (ESOP): You will sell your ownership stake in the company over time to a trust held by the employees’ retirement account. 
  • Employee cooperative: You will sell your ownership stake in the company to employees, who own shares equally. 

The state of your business and your goals for the sale will primarily determine which is the best exit strategy for you. For instance, the best fit for an ESOP exit strategy is a company with at least 50 employees and $10M+ in annual sales. The company will also likely have a transparent corporate culture, such as one that uses open-book management.

However, a successful exit will depend very much on your unique business. No two companies are the same, and business structures and cash flow can vary. 

What Are the Steps and Timeline Involved With Exit Planning?

Business exit planning: two professionals talking

If you are even considering setting up an exit plan, the first step is to contact a qualified advisor. This person will work to understand your timeline, your financial situation, and your goals. 

Your advisor will run through a few different scenarios and attach a value to each exit strategy. The business valuation method is different for each strategy. At that point, you’ll discuss which is the best option given the circumstances. 

From there, it remains to be seen what will happen next. After determining your business value, you may decide that you still have work to do and that you are not in a healthy place to sell. On the other hand, you might realize that you’re in a good place and should begin implementing your exit strategy. Your team of advisors can begin working to find a buyer if that is what your strategy calls for. 

It’s worth noting that implementing these strategies can take time. Believe it or not, family succession plans — having the next generation take over — and ESOPs can take up to 10 years to complete. 

The quickest exit strategy is usually to sell to an outsider. It can also be the most lucrative but can cost the most in terms of both fees and taxes. 

A trusted advisor can run through various scenarios to determine the impact each would have on your business. The most important thing is that you gather an abundance of information so that you can make an informed decision. The earlier you’re able to start this process, the better off you will likely be in the long run. 

Who Is Exit Planning For and When Should Planning Begin?

Even if you don’t plan on selling your business now — perhaps the timing isn’t right or you’re not done growing — it’s a good idea to do a bit of homework regarding your exit strategy. You never know when your priorities or goals will change. When it comes to exiting a business, it’s better to be over-prepared than scrambling. 

Discussing your exit strategy with a qualified advisor can serve as a form of an internal audit. It allows you to see what you need to do to improve your business moving forward, and it can help eliminate the valuation gap if you move to sell. 

Planning also allows for business continuity when the exit occurs. Hopefully, you will have worked through many of the pain points and inevitable questions ahead of time, therefore allowing a smooth transition from one ownership group to the other. Lastly, these internal audits can help you to come up with contingency plans to help protect the company you’ve worked so hard to grow. 

A full business exit planning process can be a particularly good exercise for larger small businesses — such as those with $25M or more in annual sales — with owners who have already built significant wealth from owning the business. Generally speaking, most businesses in the lower-middle market — those with $5 million to $25 million in annual sales — have maybe one or two exit options that will work for them, not six or seven. 

When it comes to exit planning, it’s all about finding a good fit. Owners need to be realistic about what will work given their business and situation. A lot of business owners may want to do an ESOP, or a management buyout, only to later discover that it’s not the best option for their situation. This is why owners need to start exit planning early.

Ideally, exit planning would start no less than five years before you plan to leave. In a perfect world, you will have the groundwork completely in place two years before you plan to exit. This should allow a seamless transition, no matter which direction you take. 

Also, remember that some options like ESOPs can take up to 10 years to complete. This is why it’s crucial to continually think about your business exit strategy plans, even if your departure is not on the immediate horizon. 

Ultimately, the key is to figure out which exit options are available to you and be realistic about the process. Every business owner owes it to themselves and their company to enumerate their most important goals for the exit (financial and otherwise) and start working on a business valuation. Those are the first two steps. And every business owner can do this.

Start Planning Your Business Exit Strategy Today

As a business owner, you may not think that business exit planning is necessary right now. However, it’s never too early to do so. There are many different exit strategies available, each depending on factors ranging from your personal situation and goals to your company’s cash flow. The earlier you discover which options are available to you, the easier it is to plan future business strategies. 

If you’re looking for a team of experts to guide you through the process of selling, Allan Taylor & Company specializes in valuing and selling businesses in the lower-middle market, working on M&As nationwide. 

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