An exit plan for business addresses all of the legal, tax, financial, personal, business, and value problems during the transition of ownership of a private business. While you're exit planning, your main focuses should be to maximize the value of your business before you leave your company and make sure that you're financially stable enough to be able to leave your business. Are you looking to learn more about exit planning for your business and how you should go about preparing for the process? Keep reading to learn everything you need to know!
What Is a Business Exit Plan?
As the owner of a company, a business exit strategy is a process of what will occur after you leave your business. The entire strategy will highlight how the transition will occur in detail.
Just as you've developed business plans to make sure that your business grows and maintains its success, an exit plan guides you through the transference of ownership.
Building an exit plan doesn't mean that you aren't committed to your business. It also doesn't mean that your business has to turn in a disaster or a failure. Developing a business exit plan allows you to have a plan in place for when you've decided that it's time for you to step away from your company or if something were to happen to you.
Keep in mind that your exit plan will change over your time, so make sure that you're keeping it updated as your business grows.
Reasons for Leaving
Why would someone want to create a business exit strategy?
Leaving at the right time can sometimes be the best decision for your business. If in the future, you don't feel like investing the time (or you don't have the time to invest) into your company, your business is better off with a new leader.
There are several reasons why an owner should create a business exit plan. Some of these reasons include:
- Another more lucrative business venture
- Health problems
- Needing to raise money
- Change of passion or interest
- An unexpected offer from someone who wants to buy your company
- Wanting to spend more time with family
Business Exit Strategy and Liquidity
There are different types of exit plans that you can develop. One of the options that business owners have are variations of liquidity.
Liquidity provides business owners the largest amount of cash flow in a short period, depending upon how the structure of the acquisition. Plus, the overall appeal of this exit plan may not be beneficial if the market isn't in favorable conditions.
Succession Planning vs. Exit Planning
As exit planning becomes a field that's quickly popularizing for business owners, understanding the difference between a succession plan and an exit plan can become confusing. Succession planning and exit planning aren't the same things, but here's what the difference is:
…is the process of recognizing successors within a company. During succession planning, identifying these successors will provide them with the chance to refine their experience and skills to be a replacement for the current leader of an organization.
The entire process of succession planning depends solely on transferring the leadership (or management) of a company, from one generation to the next. Succession planning is one of the steps of the entire exit planning process.
Exit planning is an analysis of all of the different factors that could impact the owner of a business. It's a process that requires three phases as the owner contemplates changing the ownership of their company to another person.
Through the process of exit planning, the business owner recognizes each potential issue that is important to their current and future business. It's a tool that's used to plan in case of a divorce, illness, burnout, or death.
Different Type of Business Exits
Building the best exit plan for your company should be built around what's best for you, as the owner, and for the health of your company. It's always important to make sure that your exit strategy is well-planned for the future.
If you're a new business owner, building an exit strategy may be something that you easily overlook, as you focus primarily on the success and growth of your company. However, it's always beneficial to be realistic from the start of your company.
Exit plans aren't about coming up with strategies to handle worst-case-scenario situations. They're about easing yourself out of a business plan whenever you feel the need to do so.
Here are the different type of business exit strategies you could use for your business:
Many entrepreneurs are interested in employing their family over a long period. It is important for you as the business owner to make plans to transfer the ownership of the company to their child or any other relative.
At first, this may seem like the ideal way to exit your business, as you have the capability of grooming the relative that you're interested in being your successor over time. However, make sure that the relationship that you have with that family member will be able to handle the stress that comes with owning a business.
While it's not ideal to file for bankruptcy protection, this step could be something that you go towards as a last resort. Filing for bankruptcy could be an option that you lean on if you never developed an exit strategy and are being forced to leave your company.
Keep in mind that you'll most likely have your company's assets seized, and you may have some trouble with your credit, filing for bankruptcy isn't the end of the world, and you'll be relieved of any debts that your business occurs if things take a turn for the worse.
Initial Public Offering
Also referred to as IPO, Initial Public Offering gives you the ability to sell your business to the public.
This option isn't for all businesses, as the conditions for a business need to be perfect for this exit plan option to be viable. Even if you're one of the leading companies in your industry, the industry that you're in may not be something that appeals to the public.
This could devalue your company. Statistically, only an estimated 7,000 companies out of the millions of businesses in the United States are public.
However, if your company has all the right conditions set, Initial Public Offerings can be extremely profitable.
If you're concerned about making sure that your employees are taken care of after you've exited your company, consider this special business acquisition.
Acquihire is a strategy that companies use to buy out a business to gain access to their employees. A company will do this when the employees of a company are highly skilled or very valuable.
While this may not protect the name that your company has built for itself, it does make sure that your employees don't have to worry about their job security.
Just make sure that you keep your employees' needs in mind while you're negotiating!
Sell to an Investor
If you aren't a sole proprietor, your exit plan could include selling your portion of the company to your business partner or someone invested in your company. Depending on who you're selling your stake to, this could keep things running smoothly in your company.
The people that are already working for your company most likely know how to manage the business. Managers and other high-ranking employees may want the chance to own the company they're working for!
The result of an employee buyout can equal a smooth transition, plus, it could even help to increase the dedication that customers have to your company's legacy.
Employee buyouts are a great exit option to go with if you're looking to have some form of involvement in your company still. Since the employees of your company know you, the new owner of your business may encourage you to act as an advisor after you transfer ownership.
Liquidation is one of the most finalized exit plans for your business. During a liquidation, you sell all of your company's assets.
Don't think of liquidation as if you are defeated. Instead, choose to be free of the worry that's coming with exiting your business. Keep in mind that if there's any debts or payouts to any shareholders that are needed, you'll need to use the money you get from liquidation to pay this all off.
Liquidation is a wonderful exit strategy to go with if you're looking to make sure that you don't have to worry about your company. However, if you want to keep your company going without you being there, it's important to take a look at other options available to you.
A merger is when your company is purchased by or merges with another company that has similar goals to yours. Merging with another company could mean that you have the option to walk away from your business completely or there could be some flexibility with your involvement. However, this depends on the company merging with your company.
One of the best things about mergers is that you're able to negotiate the price your company is selling for, while if you chose the route of IPO, the value of your business would be dependent upon the relevancy of your industry.
How Do You Go About Planning for an Exit?
Many business owners hire professionals to help them make an exit plan. While you're making your exit plan, you should ask yourself the following questions:
- What are your financial goals?
- Do you want to spend the rest of your life dedicated to your business?
Starting your exit plan means that you should figure out your business goals, your personal goals, and figuring out how financially prepared you are to reach those goals.
After you've discovered those two things, you also need to be able to decide what exit strategies align the best with your current readiness and the goals you have for your personal life, as well as your business.
Once you've decided upon those goals, it is important to learn the total value of your company to learn what your exit options may truly be. Refining your goals is essential to make sure that you're making an appropriate exit plan for your business.
If you've decided that you're exiting the company soon, you need to decide upon a strategy and make sure that you stick to it. However, if you've made your exit plan ahead of time, it's always a great idea to get yourself set up for several options. Thankfully, there are several options for you to choose from as your business continues to grow over time.
The Ultimate Goal
Exit planning doesn't mean that you're preparing for your business to fail. Before you make any final decisions, be sure to speak with a financial advisor to make sure that your exit strategy fits with the needs of your business and your personal needs.
Whichever exit plan you and your financial advisors select, make sure that you're actively working towards it. Planning your strategy ahead of time will give you the option to choose what's best for your goals while also maximize returns!
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