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Start » strategy, ready to move on how to create an exit plan for your business.
Exit plans are necessary to secure a business owner’s financial future, but many don’t think to establish one until they’re ready to leave.
An exit strategy is an important consideration for business owners, but it’s often overlooked until significant changes are necessary. Without planning an exit strategy that informs business direction, entrepreneurs risk limiting their future options. To ensure the best for your business, plan your exit strategy before it’s time to leave.
What is an exit strategy?
An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.
A fully formed exit strategy takes all business stakeholders, finances and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business and provide a foundation for future goals and new direction.
If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.
[Read more: What Is a Business Valuation and How Do You Calculate It? ]
Benefits of an exit strategy
Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.
Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:
- Making business decisions with direction . With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes.
- Remaining committed to the value of your business . Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best selling situation for your business.
- Making your business more attractive to buyers . Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and goals.
- Guaranteeing a smooth transition . Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions will be clear and expected.
- Seeing through business — and personal — goals after exit . Executing an exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like bankruptcy.
Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.
Weighing your options: closing vs. selling
There are two strategies to consider for your exit plan.
Sell to a new owner
Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.
In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because:
- The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
- The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
- The transition for your employees and customers will be a smooth one since the buyer likely already has a stake in the business.
However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to compromise on value and sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.
Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.
The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.
[Read more: 5 Things to Know When Selling Your Small Business ]
Liquidate and close the business
It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.
Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry and then closing up shop.
The benefit of this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.
The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.
Whichever way you decide to liquidate, before closing your business for good, these important steps must be taken:
- File your business dissolution documents.
- Cancel all business expenses that you no longer need, like registrations, licenses and your business name.
- Make sure your employee payment during closing is in compliance with federal and state labor laws.
- File final taxes for your business and keep tax records for the legally advised amount of time, typically three to seven years.
Steps to developing your exit plan
To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Prepare your finances . The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally. Having a sound understanding of expenses, assets and business performance will help you seek out and negotiate for an offer that’s aligned with your business’s real value.
- Consider your options . Once you have a complete picture of your finances, consider several different exit strategies to determine your best option. What you choose depends on how you envision your life after your exit — and how your business fits into it (or doesn’t). If you have trouble making a decision, it may be helpful to speak with your business lawyer or a financial professional.
- Speak with your investors . Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid. A detailed understanding of your finances will be useful for this, since investors will look for evidence to support your plans.
- Choose new leadership . Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans. If you already have documented operations in practice in your business strategy, transitioning new responsibilities to others will be less challenging.
- Tell your employees . When your succession plans are in place, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent.
- Inform your customers . Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.
The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.
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Resources: M&A Encyclopedia
Comprehensive articles on every step of the process of buying or selling a business from the most exhaustive encyclopedia of M&A articles in the industry.
Business Exit Plan & Strategy Checklist | A Complete Guide
It’s not enough to merely hand over the keys at the closing. You need a strategy. An exit strategy.
An exit strategy, as the term implies, is a plan to assist you in exiting your business. All exit plans will vary, but they all contain common elements.
The three common elements that all business exit strategies should contain are:
- A valuation of your company. The process of valuing your company involves three steps, the first being an assessment of the current value of your business. Once this value is calculated, you should plan how to both preserve and increase that value.
- Your exit options. After you have determined a range of values for your company and developed plans for preserving and increasing this value, you can begin exploring your potential exit options. These can be broken down into inside, outside, and involuntary exit options.
- Your team. Finally, you should form a team to help you prepare and execute your exit plan. Your team can consist of an M&A advisor, attorney, accountant, financial planner, and business coach.
If you are considering selling your business in the near future, planning for the sale is imperative if you want to maximize the price and ensure a successful transaction. This article will give you a solid understanding of these elements and how you can put them together to orchestrate a smooth exit from your business.
Table of Contents
- Measure the Value
Preserve the Value
Increase the value, inside exit options, outside exit options, involuntary exit options, team members, the annual audit, business exit plan strategy component #1: valuation.
Your exit strategy should begin with a valuation, or appraisal, of your company. The process of valuing your company involves three steps, the first being an assessment of the current value of your business. Once this value is calculated, you should then plan how to both preserve and increase the value of your business.
Let’s explore each of these components — assess, preserve, increase — in more depth.
Assess the Value
The first step in any exit plan is to assess the current value of your business.
Here are questions to address before beginning a valuation of your company:
- Who will value your company?
- What methods will that person use to value your company?
- What form will the valuation take?
Who: Ideally, whoever values your company should have real-world experience buying and selling companies , whether through business brokerage, M&A, or investment banking experience. They should also have experience selling companies comparable to yours in size and complexity. Specific industry experience related to your business is helpful, but not essential, in our opinion. There are loads of professionals out there who possess the academic qualifications to appraise your business but who have never sold a company in their lives. These individuals can include accountants or CPAs, your financial advisor, or business appraisers. It is essential that your appraiser have real-world M&A experience. Without hands-on experience buying and selling companies comparable to yours, an appraiser will be unprepared to address the myriad nuances of the report or field the dozens of questions that will arise after preparing the valuation.
Action Step: Ask whoever is valuing your business how many companies they have sold and what percentage of their professional practice is devoted to buying and selling businesses versus other activities.
What Methods: Most business appraisers perform business valuations for legal purposes such as divorce, bankruptcy, tax planning, and so forth. These types of appraisals differ from an appraisal prepared for the purpose of selling your business. The methods used are different , and the values will altogether be different as well. By hiring someone who has real-world experience selling businesses, as opposed to theoretical knowledge regarding buying and selling businesses, you will work with someone who will know how to perform an appraisal that will stand the test of buyers in the real world.
Form: Your M&A business valuation can take one of two forms:
- Verbal Opinion of Value: This typically involves the professional spending several hours reviewing your financial statements and business, then verbally communicating an opinion of their assessment to you.
- Written Report: A written report can take the form of either a “calculation of value” or a “full report.” A calculation of value cannot be used for legal purposes such as divorce, tax planning, or bankruptcy, but for the purpose of selling a business, either type is acceptable.
Is a verbal or written report preferable? It depends. A verbal opinion of value can be quite useful if you are the sole owner and you do not need to have anyone else review the valuation.
The limitations of a verbal opinion of value are:
- If there are multiple owners, there may be confusion or disagreement regarding an essential element of the valuation. If a disagreement does arise, supporting documentation for each side will be necessary to resolve the disagreement.
- You will not have a detailed written report to share with other professionals on your team, such as attorneys , your accountant, financial advisor, and insurance advisor.
- The lack of such a detailed report makes it difficult to seek a second opinion, as the new appraiser will have to start from scratch, adding time and money to your process.
For the reasons above, we often recommend a written report, particularly if you are not planning to sell your business immediately.
We have been involved in situations in which CPA firms have valued a business but had little documentation (one to two pages in many cases) to substantiate the basis of the valuation.
In one example, the CPA firm’s measure of cash flow was not even defined; it was simply listed as “‘cash flow.” This is a misnomer as there are few agreements regarding the technical definition of this term. As a result, any assumption we might have made would have led to a 20% to 25% error at minimum in the valuation of the company. By having a written report in which the appraiser’s assumptions are documented, it is simple to have these assumptions reviewed or discussed.
Note: When hiring someone to value your company, you are paying for a professional’s opinion but keep in mind that this opinion may differ from a prospective buyer’s opinion. Some companies have a narrow range of value (perhaps 10% to 20%), while other companies’ valuations can vary wildly based on who the buyer is, often by up to 100% to 200%. By having a valuation performed, you will be able to understand the wide range of values that your company may attain. As an example, business appraisers’ valuations often contain a final, exact figure, such as $2,638,290. Such precision is misleading in a valuation for the purpose of a sale. We prefer valuations that result in a more realistic price range, such as $2,200,000 to $2,800,000. An experienced M&A professional can explain where you will likely fall within that range and why.
Once you have established the range of values for your company, you should develop a plan to “preserve” this value. Note that preserving value is different from increasing value. Preserving value primarily involves preventing a loss in value.
Your plan should contain clear strategies to prevent catastrophic losses in the following categories:
- Litigation: Litigation can destroy the value of your company. You and your team should prepare a plan to mitigate the damaging effects of litigation. Have your attorney perform a legal audit of your company to identify any concerns or discrepancies that need to be addressed.
- Losses you can mitigate through insurance: Meet with your CPA, attorney, financial advisor, and insurance advisor to discuss potential losses that can be minimized through intelligent insurance planning. Examples include your permanent disability, a fire at your business, a flood, or other natural disasters, and the like.
- Taxes: You should also meet with your CPA, attorney, financial advisor, and tax planner to mitigate potential tax liabilities.
Important: The particulars of your plan to preserve the value of your company also depend on your exit options, which we will discuss below. Many elements of your exit plan are interdependent. This interdependency increases the complexity of the planning process and underscores the importance of a team when planning your exit.
Only after you have taken steps to preserve the value of your company should you begin actively taking steps to increase the value of your company.
There is no simple method or formula for increasing the value of any business. This step must be customized for your company.
This plan begins with an in-depth analysis of your company, its risk factors, and its growth opportunities. It is also crucial to determine who the likely buyer of your business will be . Your broker or M&A advisor will be able to advise you regarding what buyers in the marketplace are looking for.
Here are some steps you can take to increase the value of your business:
- Avoid excessive customer concentration
- Avoid excessive employee dependency
- Avoid excessive supplier dependency
- Increase recurring revenue
- Increase the size of your repeat-customer base
- Document and streamline operations
- Build and incentivize your management team
- Physically tidy up the business
- Replace worn or old equipment
- Pay off equipment leases
- Reduce employee turnover
- Differentiate your products or services
- Document your intellectual property
- Create additional product or service lines
- Develop repeatable processes that allow your business to scale more quickly
- Increase EBITDA or SDE
- Build barriers to entry
Note: A professional advisor can help you ascertain and prioritize the best actions for your unique situation to increase the value of your business. Unfortunately, we have seen owners of businesses spend three months to a year on initiatives to increase the value of their business, only to discover that the initiatives they worked on were unlikely to yield any value to a buyer.
Business Exit Strategy Component #2: Exit Options
After you have determined a range of values for your company and developed plans for preserving and increasing this value, you can begin exploring your potential exit options.
Note: These steps are interdependent. You can’t determine your exit options until you have a baseline valuation for your company, but you can’t prepare a valuation for your business until you have explored your exit options. A professional can help you determine the best order to explore these steps, or if the two components should be explored simultaneously. This is why real-world experience is critical.
All exit options can be broadly categorized into three groups:
- Inside: Buyer comes from within your company or family
- Outside: Buyer comes from outside of your company or family
- Involuntary: Includes involuntary situations such as death, divorce, or disability
Inside options include:
- Selling to your children or other family members
- Selling to your business to your employees
- Selling to a co-owner
Inside exits require a professional who has experience dealing with family businesses, as they often involve emotional elements that must be navigated and addressed discreetly, gracefully, and without bias. Inside exit options also greatly benefit from tax planning because if the money used to buy the company is generated from the business, it may be taxed twice. Lastly, inside exits also tend to realize a much lower valuation than outside exits. Due to these complexities, most business owners avoid inside exits and choose outside options. Fortunately, most M&A advisors specialize in outside exit options.
Outside exit options include:
- Selling to a private individual
- Selling to another company or competitor
- Selling to a financial buyer, such as a private equity group
Outside exits tend to realize the most value. This is also the area where business brokers, M&A advisors, and investment bankers specialize.
Involuntary exits can result from death, disability, or divorce. Your plan should anticipate such occurrences, however unlikely they may seem, and include steps to avoid or mitigate potential adverse effects.
Business Exit Strategy Component #3: Team
Finally, you should form a team to help you plan and execute your exit plan. Many of these steps are interdependent — they are not always performed sequentially, and some steps may be performed at the same time. Forming a team will help you navigate the options and the sequence.
Your team should involve the following:
- M&A Advisor/Investment Banker/Business Broker: If you are considering an outside exit.
- Estate planning
- Financial planning
- Tax planning, employee incentives, and benefits
- Family business
- Accountant/CPA: Your accountant should have experience in many of the same areas as your attorney, along with audit experience and retirement planning. Again, it is unlikely that your CPA possesses all of the skills you need. If further expertise is needed, the CPA should be able to access the skills you need, either through colleagues at their firm or by referral to another accountant.
- Financial Planner/Insurance Advisor: This team member is critical. We were once in the late stages of a sale when the owner suddenly realized that, after deducting taxes, his estimated proceeds from the sale would not be enough to retire on. An experienced financial planner can help with matters like these. They should have estate and business continuity planning experience, as well as experience with benefits and retirement plans.
- Business Coach: A business consultant or coach may be necessary to help implement many of the changes needed to increase the value of your business, such as building infrastructure and establishing a strong, cohesive management team. Doing this often requires someone who can point out your blind spots. A coach can help you take these important steps.
Where to find professionals for your team
The best way to find professionals for your team is through referrals from trusted friends and colleagues who have personally worked with the professional in question. Don’t ignore your intuition, however. It’s important that you and your team members have good chemistry.
We recommend that you assemble your professional advisors for an annual meeting to perform an audit of your business. The goal of this audit is to prevent and discover problems early on and resolve them. As the saying goes, “An ounce of prevention is worth a pound of cure.”
Your advisors are a valuable source of information. This annual meeting is an opportunity to ensure that they’re all on the same page and that there are no conflicts among your legal, financial, operational, and other plans. An in-person or virtual group meeting enables you to accomplish this quickly and efficiently.
A sample agenda might include a review of the following:
- Your operating documents
- New forms of liability your business has assumed
- Any increase in value in your business and changes that need to be made, such as increases in insurance or tax planning
- Capital needs
- Insurance requirements and audit, and review of existing coverages to ensure these are adequate
- Tax planning — both personal and corporate
- Estate planning — includes an assessment of your net worth and business value, and any needed adjustments
- Personal financial planning
If you are contemplating selling your business, creating an exit plan will answer these critical questions:
- How much is my business worth? To whom?
- How much can I get for my business? In what market?
- How much do I need to make from the sale of my business to meet my goals?
Taking the strategic steps discussed in this article — assembling a stellar professional team and optimizing the team’s collective experience — will get you well on your way toward successfully selling your business and turning confidently toward your next adventure.
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- Succession Planning
Business Transition Planning: Designing an Exit Plan
Exiting your business without a well thought-out succession plan is like entering a Formula One race without knowledge of the track. You may cross the succession finish line, but without thorough planning, you likely won’t take the checkered flag.
A well-designed exit plan can facilitate a number of goals — in some cases well in advance of the transition itself. A detailed plan can help:
- maximize the value of your business;
- defer, reduce, or avoid federal income and transfer tax;
- control the timing of your exit;
- reduce exposure to litigation risk post-transfer;
- cultivate opportunities for key management;
- create incentives for employees;
- develop an effective retirement plan;
- keep the business within the family;
- avoid family conflict; and
- fulfill your philanthropic goals.
As with many things in life, it is not uncommon to begin succession planning on one path and end the process on another path. Strategic exit planning can position you and your business for an optimal transition — whether you have a clear goal, are at a crossroads in your business, or you have not yet begun thinking about a succession.
Begin with the Destination
The first step in exit planning is to articulate, understand, and prioritize your goals. The next step is to clarify what it is you seek to accomplish through the business succession planning process. These steps can help you develop your transition plan.
Exiting Your Business
There are three common methods of exiting a business: a sale to a third-party buyer, a transfer to employees, and a transfer to family members. Each of these methods involves different considerations and may yield different benefits.
Maximizing Business Valuation
The most common form of business transition is a sale to a third party. One key factor in this type of sale is positioning the business to obtain the highest valuation. A potential buyer will go through a due diligence process that involves examining the business, including its operations, history, property, employees, financials, documentation and legal matters. Working with a team of advisors to understand the factors a buyer may consider and how to address and improve those factors within your company can help to drive the value of your business higher. The following are examples of value drivers a buyer will likely consider:
- stable and predictable cash flows;
- a strong customer base that is well established, reliable, and diverse;
- documented growth potential;
- barriers to entry into industry, for example, patents, copyrights, trade secrets, and licenses;
- goodwill, for instance, a company built on a strong reputation and with brand-name recognition;
- diverse product and service offerings;
- human capital, especially the level of experience and institutional knowledge of the employees; and
- appropriate company policies and procedures.
Having a strong, well-established management team may be an especially desired value driver. Buyers may want to see that there are agreements in place to retain key employees. This can come in the form of employment agreements, non-compete agreements, or compensation arrangements that provide employees with incentives to remain with the company following the transition in ownership.
Controlling Exit Timing
Having a well thought out business succession plan can provide a greater level of control over your continued involvement in the business and the timing of your exit. The succession plan can also gauge your flexibility in terms of other priorities you may have, including retirement, philanthropy and unrelated personal interests.
For example, if your goal is to remove yourself from active management and employment in the business immediately upon completion of the transfer, having a strong management team in place can help facilitate your exit. Otherwise, a third-party buyer may require you to remain involved with the company for a period of time under an employment contract or independent contractor agreement.
Steps such as organizing the business financials, locating and updating relevant organizational documents, and conducting necessary maintenance on equipment and property can mean the difference between exiting the company in a timeframe close to your choosing or having to push your exit back a number of years.
Alternatively, if you transfer the business to family or employees, you may want to reserve the right to step back into the business. Such a provision in the sale agreement is often referred to as a buy-back right. Including such a right may provide a comfort level which allows you to transition out of the business when you want, knowing you could return to an ownership position if needed. Buy-back rights can help to protect the seller’s financial interest in the ongoing success of the business.
Reducing Post-Sale Litigation Risk
Business owners often accept a level of risk in order to pursue financial rewards. It comes with the territory if your goal is to build, grow, and operate a business. Your risk appetite post-sale, however, may be quite different than pre-sale.
How you transition out of business ownership can greatly affect your post-sale litigation risk. This could be a key consideration in determining whether to structure the sale of your business as a stock sale or an asset sale. In a stock sale, the buyer steps into the shoes of the previous owner, allowing the seller to walk away from potential claims and obligations. While an equity sale may be your preference, the buyer may insist upon an asset sale for a variety of reasons, including the industry, potential liabilities and warranty claims. In any event, a clear understanding of the agreement including the covenants, representations, and warranties and their respective applications and limitations is critical to minimizing the risk of adverse claims.
You may wish to transition the business to the employees who have helped you grow the business to what it is today. This may be accomplished through a sale to a group of key management or through selling the business to an Employee Stock Ownership Plan (ESOP).
Creating Opportunities for Key Management
One advantage of a key management buyout is that the buyers will be intimately familiar with business operations and financials, which can make the due diligence process less onerous. They would presumably also remain in their current roles. This would provide a level of stability for customers, suppliers, and other employees and increase the likelihood of continuing business success.
Key management is unlikely to have the funds necessary to acquire the business in a cash sale. Typically such a sale will require the management group to finance the buyout by taking on debt. The terms of the sale will also most likely involve an installment sale with payments paid out over a period of years, underscoring the need to work toward the future success of the business. As noted above, this could affect the timing of your exit.
Creating Employee Incentives
You may wish for all employees to benefit rather than just a few key employees. If this is the case, an ESOP may be a viable alternative. An ESOP is a qualified retirement plan uniquely designed to invest primarily in the stock of the sponsoring company. The plan is also permitted to borrow funds, enabling it to acquire the stock. As participants in the ESOP, employees of the business benefit from the growth in company stock, providing a financial incentive linked to company success.
Selling a business to an ESOP may provide a number of tax advantages and provides a means for liquidating the business expeditiously. An ESOP is also a potential alternative for owners who do not intend to transfer the business to family members and have limited options for selling to a third party.
Keeping the Business in the Family
If your goal is to keep the business in the family, gifting (rather than selling) all or a portion of the business may be an option. Two key factors in making this decision are the federal gift tax (currently levied at a rate of 40%) and your own personal cash flow needs after the transition. The Tax Cuts and Jobs Act of 2017 increased the gift and estate tax exclusion amount and adjusts that amount each year for inflation. For 2023 the gift tax exclusion amount is $12.92 million ($25.84 million for a married couple). Under current law, the exclusion amount is scheduled to be approximately halved in 2026, also indexed for inflation. This temporary increase in the gift tax exclusion amount provides a window of opportunity to make lifetime gifts of a family business interest while potentially avoiding gift tax.
Factors such as the desire, experience, and aptitude of the family members to run the business should also be considered as early in the process as possible.
Bringing children or other family members into the business gradually so they can learn the ropes and prepare themselves for leadership is a best practice. One strategy to accomplish this is to transfer nonvoting interests in the business first, while retaining voting interests and control until the younger generation gains experience and proves itself. Such transfers reduce exposure to estate tax by effectively transferring the future appreciation of the business to the next generation.
Developing an Effective Retirement Plan
It is important to work with your financial advisors to determine how much of the business you can afford to gift without jeopardizing your desired post-exit lifestyle. Providing for the financial needs of the business owner is a fundamental component of good planning.
Avoiding Family Conflict
Parents may consider transferring equal ownership to all their children, regardless of their involvement in the business. But the potential for conflict among active and non-active children can be substantial. For example, if there is a year when the business needs to retain profits to pursue a business opportunity, the children who are not active in the business but have grown accustomed to receiving dividends may be at odds with their siblings who are active in the business. It may be better to avoid giving ownership interests to children who are not actively participating in the business.
A potential solution when multiple children are involved, some active and some not, is to separate the real property from the business. This would allow the business owner to gift or sell the real property to the non-active child and gift or sell the business to the active child. Prior to the gift or sale, the business could enter into a long-term lease agreement to avoid conflict between siblings after the transfers.
If your intention is to retain ownership of the business and pass it on to your children at death, consider passing the business to children who are active in the business and equalizing non-active children with other assets. One simple way to accomplish equalization is to purchase life insurance and designate the children not active in the business as the beneficiaries.
Fulfilling Your Philanthropic Goals
When a business owner starts down the path of succession planning, it is important to do so in a comprehensive manner that considers financial goals beyond transitioning out of the business. In some cases, your exit strategy may accomplish multiple objectives. There may be opportunities to achieve your business succession goals and philanthropic goals all in one transaction.
Instead of selling the business directly to the buyer, the ownership interest may be contributed to a specially designed split interest charitable trust that provides income to the donor and a remainder interest to a named charitable organization. This will provide the business owner/donor with an income stream, a charitable income tax deduction, and the deferral of capital gain. The buyer can purchase the business interest from the trust. At the termination of the trust, the remainder in the trust will be transferred to charitable organizations designated by the donor. This strategy is not available to S corporations  and is most appropriate for those who need the income and have a charitable intent. In order to obtain the tax benefits mentioned, there may be no preexisting obligation for the trust to sell the business interest to the buyer.
Business succession planning can be a complicated and involved process. Achieving your business, family, and personal goals requires balancing various priorities that might be in conflict.
However, through deliberate planning that incorporates your unique goals, needs, and characteristics, you can achieve your optimal result.
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Business Exit Strategy: Definition, Examples, Best Types
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
What Is a Business Exit Strategy?
A business exit strategy is an entrepreneur's strategic plan to sell his or her ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate his stake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy (or "exit plan") enables the entrepreneur to limit losses. An exit strategy may also be used by an investor such as a venture capitalist in order to plan for a cash-out of an investment.
Business exit strategies should not be confused with trading exit strategies used in securities markets.
- A business exit strategy is a plan that a founder or owner of a business makes to sell their company, or share in a company, to other investors or other firms.
- Initial public offerings (IPOs), strategic acquisitions, and management buyouts are among the more common exit strategies an owner might pursue.
- If the business is making money, an exit strategy lets the owner of the business cut their stake or completely get out of the business while making a profit.
- If the business is struggling, implementing an exit strategy or "exit plan" can allow the entrepreneur to limit losses.
Understanding Business Exit Strategy
Ideally, an entrepreneur will develop an exit strategy in their initial business plan before actually going into business. The choice of exit plan can influence business development decisions. Common types of exit strategies include initial public offerings (IPO) , strategic acquisitions , and management buyouts (MBO) . Which exit strategy an entrepreneur chooses depends on many factors, such as how much control or involvement (if any) they want to retain in the business, whether they want the company to be run in the same way after their departure, or whether they're willing to see it shift, provided they are paid well to sign off.
A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean the founder is giving up control. IPOs are often seen as the holy grail of exit strategies since they often bring along the greatest prestige and highest payoff. On the other hand, bankruptcy is seen as the least desirable way to exit a business.
A key aspect of an exit strategy is business valuation , and there are specialists that can help business owners (and buyers) examine a company's financials to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.
Business Exit Strategy and Liquidity
Different business exit strategies also offer business owners different levels of liquidity . Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well; for example, an IPO may not be the best exit strategy during a recession, and a management buyout may not be attractive to a buyer when interest rates are high.
While an IPO will almost always be a lucrative prospect for company founders and seed investors, these shares can be extremely volatile and risky for ordinary investors who will be buying their shares from the early investors.
Business Exit Strategy: Which Is Best?
The best type of exit strategy also depends on business type and size. A partner in a medical office might benefit by selling to one of the other existing partners, while a sole proprietor’s ideal exit strategy might simply be to make as much money as possible, then close down the business. If the company has multiple founders, or if there are substantial shareholders in addition to the founders, these other parties’ interests must be factored into the choice of an exit strategy as well.
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Exit Strategies - All You Need to Know about Business Exit Planning
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
The question, “What is your exit plan?” tends to draw blank expressions when asked to business owners.
A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.
Business owners need to think about exit planning before searching for potential buyers. The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.
By working with a team of professional advisors, accountants, lawyers, and brokers, you can ensure the right documents are in place for a business exit whenever the time comes.
In this article, we talk about creating a business exit plan and how to make one for your business.
What is a Business Exit Strategy?
A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners don’t always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.
Investor exit strategy
An investor exit strategy is similar to that of a business exit strategy. However, investors look for a financial return on their exit from a company, so bequeathing is never one of the options considered. An investor will often have a list of potential acquirers in mind, as well as a timeframe, as soon as their investment is made. In this type of scenario, there is often an exit multiple in mind (i.e. a multiple of EBITDA or a multiple of the original investment made in the business).
Venture capital exit strategy
Another business exit strategy option is a venture capital exit strategy. As our article on venture capital outlines, if a company is venture funded then consider that your investor will have a pre-planned exit. As an early stage company, this is a natural part of taking investments. Usually, with a VC investment, the aim is for an exit after five years, either through an industry sale or an IPO, where they can liquidate their original equity investment.
Motives for Developing Exit Strategies
Technically, it is important for equity owners to have a broad outline of what an exit would look like. For example, the image below represents various motives ranging from financial gain to mitigating environmental risk.
Some of the common motives for business exit include the following:
Retirement - Arguably the most common reason of all motives is retirement. Business owners will inevitably retire at some stage, and it’s best that they have an exit strategy in place before doing so.
Investment return - A business exit strategy as part of a wider investment strategy - for example, the VC company planning to go to IPO after five years - makes the exit valuation part a component of the initial investment in the business.
Loss limit -A business exit is ultimately a kind of real option for a business. If the business is hemorrhaging money, the best option may be to exit immediately - ‘cutting your losses’ on the business, a sit was.
Force majeure - Like the examples of Covid-19 and Russia’s invasion of Ukraine, sometimes an investor or owner doesn’t really have a choice: The circumstances dictate that they have to exit.
Types of Exit Strategies
Sale to a strategic buyer
Strategic buyers are usually in the same industry as the company whose owner is looking to exit. And in other cases, the buyer can be in an adjacent market looking to compliment their products in an existing market, or expansion of their products into a market.
Sale to a financial buyer
Financial buyers are solely looking for a financial return from their investment in a business and the exit is the primary means of achieving this return. Examples include venture capital and private equity investors.
Initial Public Offering (IPO)
This form of exit, far more common with startups than mature companies, enables company owners to exit by selling their equity to investors in public equity markets.
Management buyout (MBO)
An exit through MBO would occur when the owner sells the company to its current management team, whose familiarity with the business technically should make them the best candidates to achieve value from an acquisition.
Leveraged buyout (LBO)
A leveraged buyout occurs when a buyer takes a loan or debt to purchase another company. The buyer also uses a combination of their assets and the acquired company's assets as collateral. Financial models can be used for multiple scenarios and simulations of when an LBO is an effective choice.
Liquidation can be used by a business owner to exit if they feel like the liquidation would yield cash faster or that the individual assets (i.e. property, plant, and equipment) of the business were more liquid than the business as a going entity.
Exit Strategy for Startups
Startups looking for VC investment can include an exit strategy as part of their initial pitch. It is not mandatory. Sometimes this can work when well, for example, when a startup founder is well versed in the industry and has a credible 5-year forecast.
Startup exit strategies depend on a few different factors:
How have IPOs for startups performed in the past 12-18 months? If public markets are showing enthusiasm for companies like the one being pitched, it makes it easier to show how an exit can occur.
Similar to IPOs, companies can use comparable transactions (industry or private equity sales) to show investors their route to an exit. The comparable firms should be operating in the same or close to the same competitive space.
How to Put Together a Business Exit Plan
Remember that the purpose of the plan is to make the new business owner transition as straightforward as possible.
Although the steps which follow are general, nobody knows a business better than its owner, so take whatever steps are necessary to make your business as marketable to potential buyers as possible.
These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Personal finances, family situations, and other career options are beyond the scope of this article.
Rather, the intention of the points below is to ensure that a business will be ready to sell in the fastest possible time at a fair price.
Business exit plan
- Know the business
- Ensure that finances are in order
- Pay off creditors
- Remove yourself from the business
- Create a set of standard operating procedures
- Establish (and train) the management team
- Draw up a list of potential buyers
1. Know the business
This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes ‘everything to every man.’
This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.
2. Ensure that finances are in order
This should be a priority regardless of any future business plans.
But if you intend to sell your business at short notice, it's best to have a clean, well-maintained set of financial statements going back at least three years.
3. Pay off creditors
The less debt that a business holds on its balance sheet, the more attractive it will be to potential buyers.
A common theme among small business owners in the US is thousands of dollars of credit card debt. This can be a red flag to many buyers and should be paid off as soon as possible.
4. Remove yourself from the business
How important are you to the day-to-day operations? If your business would lose more than 10% of its revenue were you to leave, the answer is “too important.”
If revenues are tied to the owner, buyers are not going to want to buy the business if the owner is going to leave right after.
Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.
5. Create a set of standard operating procedures
Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs), ideally in written form, that would allow any owner to maintain the business in working order merely by following a set of instructions.
6. Establish (and train) the management team
Are the existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ‘no’.
They may need more training, or you may need a different set of managers. In either case, having a capable team in place will be valuable whether you decide to exit your business or not.
7. Draw up a list of potential buyers
A list of buyers should be made and refreshed on a reasonably regular basis. Ideally, you would know their criteria for buying a business, but this is not always practical.
Keeping a long list of buyers means that you can reach out to them at short notice if it is required at some point in the future.
This list is likely to include at least some of your managers or suppliers.
Importance of Exit Strategy
Many owners make the mistake of thinking that a business exit plan means the same thing as a ‘retirement plan’, believing that they can start thinking about putting one together as soon as they hit 55 years of age.
This is an error. Not because your departure is impending, but because it doesn’t give you the flexibility.
Instead of looking at a business exit plan as a retirement plan, rethink it as a divestment option.
An alternative way of thinking about this is, what happens to the business owner that doesn’t have an exit strategy? Think of the value destruction that occurs to the business if something unexpected happens and the owner has to make an unplanned sale, at a discount, in unattractive market circumstances, or even at a time of personal loss.
Instead of thinking about the business exit as something that will happen in the future, rethink it as something that could happen at any moment.
Exercising critical thinking to write a business exit strategy can be exciting as well as enlightening. Thinking of an exit as an end state is not the best approach since this limits businesses to a strict definition. Rather, consider how the process can be supportive of a business' growth strategy. Take these top three considerations:
- Financial considerations: If the exit strategy has a target revenue number in 5 years then how will the business get there? What financial dashboards are needed to properly run the company? How will expenses be managed so a business does not outspend against earnings?
- Supply chain considerations: What products will need to be in your catalog to maximize margins? What inventory turns ratio are you aiming for on a monthly basis?
- People considerations: Who do I hire to grow the company exponentially? What benefits do I offer to attract the best talent but don't cause complications at the exit? How do I write the force majeure so I protect the company and employees?
A business's primary goal is long-term value generation to its customers, itself, and its stakeholders. Having a thoughtful exit strategy shows the maturity of a business's Leadership towards longevity and value creation. There are many facets of the journey from owner motivation to financial strategies.
At DealRoom we help the owners of businesses of all sizes prepare for this eventuality. Our Professional Services team is ready to help businesses think through these details. It is important that an exit strategy be a journey throughout the growth stages.
Talk to us about how our tools can be an asset for you in your exit plan.
Build your exit plan with our Program Exit Criteria Template!
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What is Exit Business Planning? How To Develop an Exit Plan For a Small Business
Business Exit Planning is part of every successful business plan. Exit planning guides you on how you can leave your business. You do not want to bear the loss when you close your business.
What Is Business Exit Planning?
Importance of having an exit plan, merger & acquisition (m&a), initial public offering (ipo), management buyout, selling to a partner or investor, how to develop an exit plan.
It answers the question of what you will do after ending your business operations.
It helps you make a graceful exit without risking your investment. Strong exit planning will help you to convince investors that their investment is in safe hands.
No matter if you are running a successful business or handling failure, an exit plan will be part of your business strategy.
Want to learn more about exit planning? keep reading.
This guide will clarify everything from smart exit strategies to how to develop an exit plan.
Make Your Business Exit Smooth and Rewarding
Use WiseBusinessPlans Business Exit Strategy Cosultation and get the most out of exiting business.
” An exit planning allows an entrepreneur to sell his business to maximize the value of Company “
An exit strategy differs from business to business. It depends on the size of the company or what type of involvement you want in your business.
If an entrepreneur wants to sell a 100% share of his company, an exit planning strategy should remove all his involvement from the company.
If you have a company that is not making a profit; It is suggested to make an exit plan to get rid of the business. The exit plan for the non-profitable company should try to minimize loss.
If your company is generating good profit, an exit plan should maximize the profit.
A good exit plan gives maximum value to the entrepreneur when he sells his company.
Are you still unclear about why you should have an exit plan? Go through these points for having a clear idea about the importance of exit planning.
- An exit plan allows investors to be on the safe side when unexpected circumstances seize them.
- Changes in the market and economy can be a reason for selling a company. However, selling your company needs preparation. A strong exit plan will make you prepared for that time.
- You might not have started your company for selling, but if you receive an attractive offer from a potential buyer, this could be a topic of discussion. You are making a good profit and know the value of your company. At that point, an exit plan helps you decide whether you should sell your company or not.
- Illness and bad health can push you to get out of the business. Having an exit plan will prepare you for that time.
- An exit plan will urge you to focus on your targeted goal. It helps you end your business operations at the right time. You can work on your exit plan along with the business plan. An exit plan assists you to make a graceful exit from your business. Exit planning helps you to understand the value of your assets.
- You do not want to be on the losing side when you shut down a company. It is recommended to make your exit planning clear at the beginning of the business.
7 Smart Business Exit Strategies
There is no right or wrong exit plan. Whenever you are ready for an exit, choose the strategy that will work for you.
There are many factors that you must take into consideration when choosing a strategy. Such as :
- Time: what is the right time to sell your business?
- Money: How much money do you need to fulfill your financial needs?
- Business involvement: how much business involvement do you need after an exit?
These three factors will help you choose an exit strategy smartly.
Let’s discuss the smart strategies to exit your business.
- Mergers & acquisition
- Initial Public Offering
- Management buyout
- Sell to someone you know
- A merger means when two companies consolidate and become one. Ex: Exxon & Mobil
- The acquisition means when a company purchases another company. Ex: Google & Android
Merger & Acquisition is referred to as M&A. The process of merger & Acquisition is different.
In a merger, two companies join hands for better benefits and rapid growth. All their resources, brand name, tax, liabilities everything become one. In a merger, money is not exchanged from both sides.
The acquisition is different from merging. In acquisition, a company purchases another company. Ownership will be changed. Everything will be transferred to the new owner. In acquisition, money is exchanged. A company can purchase a portion of the share or the whole company.
M&A benefits both companies. You can merge or sell your company to another big company.
Larger companies often hunt small companies to be purchased. They want to eliminate the competition and increase their geographic footprint.
In the digital world, Google and Android merged for better benefits. Google was a large IT company. However, Android was a start-up and struggling to make a name in the market.
Android was taken by Google for $50 million. After the acquisition, Android made a noticeable share in the mobile phone market.
- More room for business price negotiation
- You can set your own terms
- If there is significant demand for your business, you can increase the price and get a better deal
- A time-consuming process with a lot of corporate politics involved
- Costly with hefty attorney fees
- You may not get merged or acquired in the first run
Merger And Acquisition M&A Business Plan
When it comes to M&A transactions, leaving the details to Wisebusinessplans can save you time, money, and effort. To reach your business goals, our consultants can write a business plan for you. A well-prepared M&A Business Plan will allow you to get back to work quickly.
IPO is an exit strategy that allows companies, and private Investors in companies sell their Share to public Ex Alibaba IPO raised $21.8 billion on Sep 2014
Private investors hold equity in companies. They can sell their private equity (PE) to the public when they need cash.
Companies also use this strategy to raise funds. Take Alibaba for example. Since its IPO in 2014, they have significantly increased its products and services portfolio and its revenue has increased
- IPO can be very lucrative in the right settings
- Intense, ongoing scrutiny from shareholders and regulators Strict reporting for the company performance is necessary
Exit Business Strategies to Get You What You Want
Use WiseBusinessPlans Business Exit Strategy Cosultation and get the most out of exiting business.
A management buyout is referred to as MBO. In this strategy, the current management of the company can purchase a portion of the shares or the whole company if they can pool the resources.
This exit method benefits both seller and buyer. MBO selling process can be done quickly as the management team is already familiar with the business and its potential.
The current management will assume more senior roles in the new company.
As they are already running the company, an MBO will increase their loyalty towards the company and you may also be able to retain a position like an advisor, etc.
- You will have the peace of mind that your business is in good hands
- MBO is generally a smooth process
- You can still keep working in the company as an advisor
- Management may not be interested in buying the company or they may not have the resources Big management changes will produce short-term problems
You can sell your stakes in the company to your business partner or an investor. However, this applies to you when you are not a sole proprietor.
The partner or investor buying your share is called ‘friendly buyer’. Mostly, this person is from your circle of friends or family or someone you trust.
- Smooth transition, no visible changes in company operations or revenues
- Not as lucrative as other exit business strategies
Liquidation means closing your business by selling all your assets to get cash.
Business Liquidation is often considered a quick strategy to get out of business. If your business is going well, you can sell off your assets at a good price and can maintain cash flow.
Liquidation is a clear-cut strategy to end your business journey. However, if you have creditors, the money will go to pay off the debt first before you pocket anything.
Before liquidation, make sure to do these things for a smooth transition.
- Make payments to the employees.
- Clear your taxes, and keep a record of them in case you need them in the future.
- End all your business expenses such as registrations and licenses.
- File the business abolition document.
- A liquidation ends your business in toto.
- Liquidation is a faster way to exit your business.
- You may not get the right price for your business
- Creates bad rapport for you in the business community overall
Acquihire is when someone buys your company with the sole purpose to acquire your team.
An acquihire benefits skilled employees of your company as it provides them with growth opportunities and you can be sure that they will be taken care of.
- You can get a higher price for your business from an interested party
- Company employees get the opportunity for long-term growth
- Not many team buyers in the market
- Costly process
Filing for bankruptcy is your last resort in exiting your business. A bankruptcy is filed when you cannot pay your debts or liabilities and the court sells your business assets and give creditors pennies for a dollar.
Bankruptcy comes with bad consequences for your credit report. It might become hard for you to start a new business after bankruptcy unless you are Donald Trump.
Settles your debts and liabilities
Makes it hard for you to get credit in the future
A good exit plan provides you maximum value when you sell your company. Before starting to develop, you need to ask a few questions to yourself.
- Do you want involvement in your business?
- What are your financial goals?
- Do you have to pay the creditors or investors back?
These three questions will clarify things. Answering these questions will help you find the right exit strategies for your business.
If you do not want any involvement in the business, all shares could be sold. You can liquidate the company, and remove your involvement.
Objectives of your Exit Business Strategy
To get maximum value for a company, you should set your exit business strategy objectives.
These objectives will help you understand your requirements. You want maximum return on investment, and knowing your goals will support you to sell your company for a good profit.
Make Business Finance Report
Prepare your finance report for a better understanding of your company’s account and assets.
A clear finance report will enable you to understand your business performance and value. Having a clear idea of finances will help in negotiations with buyers.
As you are going to sell your business, it is recommended to have clear finances. Pay off the creditors if you have any. Less debt will attract more buyers.
The market situation should be taken into consideration while making an exit plan. If the market condition is good, there must be a lot of potential buyers and you can sell your company at a higher rate.
Adopt the Right Strategy and Timeline
There are many strategies to adopt, you need to choose the one that will work for you. Select the time when you are prepared for the transition.
If you do not want to sell a 100% share of the company, it is advised to adopt an IPO strategy. Through this strategy, you can stay connected with your business. IPO helps you to sell a portion of your shares.
Likewise, choose a time when you are prepared to sell your company.
Business evaluation is another crucial step. Business evaluation gives you an idea about the value of your business. After making the finance report, you can easily examine your company.
You can not put your business for sale without a proper idea about the value.
Bonus Tip : Know the worth of your small business by using our business evaluation calculator .
Speak with your Investors
Once you are clear on what you want to do with your business, take your investors and stakeholders in confidence.
Tell them how the investors’ share will be repaid. You’ll need your business finance report to convince investors of your claims.
Choose new Leadership
Starting with choosing new leadership for your business as you continue with the exit business plan.
You can transfer responsibilities to new leadership smoothly if your business operations are already documented.
Tell your Employees
Your employees have an emotional attachment to the company. Tell them about your business exit plan. Face them with empathy and be transparent in your answers. This will make them feel valued and increase their loyalty to the business.
Inform your Customers
Announce the changes in your business to your customers. Introduce them to the new business owners to keep their confidence.
In case of liquidation or bankruptcy, educate your customers about alternative businesses that offer the same or similar products or services as you did.
What Is the Best Exit Plan?
The best exit plan is the one that gives you maximum profit. A plan that is according to your expectations and goal is best for your business.
The best strategy is the one that keeps on updating as per your need.
In the beginning, you may want to merge your company with another corporation for better results. Later on, one of your close relatives wants to buy your company. His offer might be tempting. You change your mind and are ready to sell.
The best plan is always an updated plan. You can make their exit plans themselves according to their goals. Consult a professional if you feel stuck in the process.
Still Not Sure? Get Professional Help with Exit Business Planning
Contact WiseBusinessPlans Business Exit Strategy Cosultation and make a graceful business exit.
Exit business planning refers to the strategic process of developing a plan for the eventual transition or exit from a small business. It involves setting goals, evaluating options, and implementing strategies to maximize the value and ensure a smooth transition when the business owner decides to exit.
Developing an exit plan is important because it allows business owners to proactively prepare for their eventual exit, whether it’s through selling the business, passing it on to a successor, or closing it down. It helps maximize the business’s value, minimize potential risks, and ensure a smooth transition for all stakeholders involved.
An exit plan typically includes determining the desired exit timeline, identifying potential buyers or successors, valuing the business, addressing legal and financial considerations, and creating a comprehensive succession or transition strategy.
Developing an exit plan involves assessing your business’s current state, setting clear goals for your exit, seeking professional guidance from accountants or business consultants, considering tax implications, and creating a detailed plan outlining the steps and timeline for your exit.
It is advisable to start developing an exit plan as early as possible, ideally when starting or acquiring a business. However, even if you haven’t done so yet, it’s never too late to start. The earlier you begin the planning process, the more time you have to implement strategies that can increase the value and ensure a successful exit when the time comes.
I exited from my first business and didn’t know these strategies before. I suffered from huge financial damage. As I know now, I will definitely keep all this in my mind.
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Exit Strategies: a Business Owner’s guide to exit strategy options
As a business owner, there will come a point when you’ll want to step back from your day to day business and eventually exit. Understanding the types of exit strategies available and the most suitable one for you is a crucial part of exit and succession planning.
A business exit strategy is a strategic plan that business owners use to leave or sell the business. The type of exit strategy you choose will depend on your personal and business circumstances.
In this blog, we’ll cover the types of exit strategies that are open to you when you are succession planning and we’ll explore which circumstances could suit you and your business.
What is an exit strategy?
Let’s start with the basics around what exactly we mean by an ‘exit strategy’. An exit strategy is a plan for how you will leave, exit or transfer ownership of your business. The purpose of an exit strategy is to plan the transition from the point of view of you the owner, your family, your management team and your employees. The objective is to plan for a smooth transition and exit, limit losses or maximise personal profit when you as an individual, or you and your business partners, exit the business.
For successful, healthy businesses, common types of exit strategies include selling your business to buyers who want to make a strategic acquisition or third party sale, a management buyout (MBO), passing the business onto a family member, or an initial public offering (IPO). If a business is in difficulty, then options such as liquidation or filing for bankruptcy may be appropriate.
Importance of an exit plan
All too often we see business owners leave planning their business exit strategies until the last minute, when they’ve made the decision to leave the business. What these business owners will not have appreciated is that there is a lot more work, thought and time needed for business exit planning than they expected.
There are so many benefits to planning your exit strategy early, with much of the process not only creating benefits on exit but also providing benefits whilst still running the business. Planning for exit encourages a business owner to set goals, make plans, protect and manage assets effectively, which in turn provides further stability for long-term growth. When you have a specific objective or goal in mind, an exit strategy can help maximise the value in your business.
The benefits of a comprehensive exit plan can include:
- Developing your business in preparation for exit.
- Determining, increasing and achieving maximum business value.
- Deciding on the right type of exit to achieve your goals.
- Finding and attracting the right investors or buyers.
- Building and incentivising the right team.
- Protecting your assets.
- Saving money through proactive tax planning.
- Smooth the transition.
- Minimise stress.
- Achieving the exit you want.
Thinking about the future of your business? One of our partners at Barnes Roffe Leytonstone, Adam Dodds , has been invited to talk alongside Chris Daems of Cervello Financial Planning at the ‘What Happens Next’ seminar in the CEME Campus, Rainham, on the 19th April 2023. Find out our top tips on gaining financial independence, increasing business value and preparing for your exit strategy, amongst other beneficial financial and business advice. Click here to attend our seminar for free: What Happens Next with Chris Daems and Adam Dodds
Business exit strategy options
There are a number of common exit strategies that you can consider. Each come with their own advantages and disadvantages and will depend on your own objectives and circumstances.
Passing your business onto family members can be an effective way to ensure its future, continuity and legacy. However, sometimes, family succession can be complicated if there are multiple family members and it can also be emotive.
Advantages of family succession
- You are creating a family legacy.
- Family members may be more loyal to the business.
- Family wealth is maintained.
- You can mentor and prepare your successor before you exit.
- You may have more opportunity to retain some involvement.
- It can be less disruptive and provide more continuity.
Disadvantages of family succession
- Succession with multiple family members can lead to diluted management and a weaker business.
- There may be no suitable family members to take over.
- The process can be more emotional and may cause family issues.
- Your successor(s) may have different goals.
It’s important to be honest with yourself and your family. Consider other options if family succession won’t work.
Trade sale or third-party sale
Selling your business to a trade buyer or to private investors such as a Private Equity (PE) investor can include the sale of shares or the sale of trade and assets/liabilities. A third party sale means that you can withdraw from full time activity in the business, often after a handover period to allow a transition to let the new team take it forward.
Advantages of a third-party sale
- If managed and marketed correctly, you may get a higher price for your business.
- You can exit your business completely, after a handover or earn-out period.
- You may be offered a reduced but important role in the new business.
- You could retain shares if the sale enhances the market position and share value of the business.
- Familiarity of your sector may make the process of selling quicker and easier.
- If the buyer is known to customers and suppliers, the transition to the new business is less disruptive.
Disadvantages of a third-party sale
- The business may not operate efficiently during the sale process, having a negative short-term effect on trading.
- There may be a potential negative impact on team performance, morale and attendance.
- Customers may not like the potential buyer and leave, jeopardising the long-term future of the business.
- The sale may have a negative effect on company value depending on how the market sees the move.
- If the sale doesn’t go ahead, your company information has potentially been seen and used by a competitor.
Getting your business sale right is important. Only with thorough preparation can you maximise the value of your business and make it attractive to potential buyers.
Many owners accept ‘cold call’, or ‘flattering’ offers for their businesses without doing proper research or marketing their business to achieve a better price. In order to maximise value, you should consider potential buyers that might have a strategic advantage in acquiring your business.
Management buyouts (MBO)
Often a management buyout can be an ideal solution for the exiting business owner, especially if the management team are dealing with most of the day-to-day running of the business. You know and trust them, they know the company and can continue your legacy. But an MBO can have its own pitfalls. How do you know that an MBO is right for you and the future of your business?
Advantages of an MBO
- The likelihood of a successful completion can be far higher than in trade sales.
- Continuity of management.
- Management information won’t be disclosed to external parties and can remain confidential.
- Often the negotiations on the value of the business can be easier.
- The sale process can often be faster.
- You may be able to have more control and retain a minority stake in the business.
Disadvantages of an MBO
- The management team may struggle to raise sufficient external funding for the deal.
- The valuation may be lower than a trade sale as the management team won’t benefit from synergies and economies of scale that a trade buyer may.
- The management team may struggle with the range of different skills required to lead and run the whole business.
- The team may not have sufficient personal wealth to part fund the purchase.
- A lack of available funding may mean a higher level of deferred consideration is required, which increases your risk and all your money won’t be received on day one.
- If an MBO does not proceed, it may damage your relationship with your management team which may have a detrimental effect on the future of the business.
Employee Ownership Trusts (EOT)
The use of Employee Ownership Trusts as an exit strategy has increased significantly in recent years, particularly following the changes by the government to tax legislation in connection with Business Asset Disposal Relief (BADR).
Advantages of an EOT
- The Employees are a “readymade buyer.”
- Capital gains tax free (i.e. exiting shareholders will receive proceeds in full with no tax deductions).
- Often the negotiations on the value of the business can be easier and sale process can be faster.
- You may be able to retain a minority stake in the business.
Disadvantages of an EOT
- The management team may prefer an MBO and could be demotivated.
- You may struggle to raise sufficient external funding for the deal.
- Lack of available funding or slow cash generation may mean a higher level of deferred consideration is required, which increases your risk.
Initial Public Offering (IPO)
An Initial Public Offering (IPO), is the process that companies go through when they decide to ‘go public’. They help companies raise money and investments through the selling of stock in the public market.
Advantages of an IPO
- Access to wealthy public investors who can help to raise capital.
- The IPO process also makes potential acquisition deals easier.
- Companies that decide to go public usually observe an increase in publicity because this process exposes them to specialist investors, for example hedge funds, pension funds, and of course the public.
- Once your company goes public it will attract a higher calibre of employee talent.
Disadvantages of an IPO
- IPOs are expensive to undertake as there is more planning and compliance needed, and other advisors involved.
- Maintaining a public company is also more expensive.
- Public companies have additional legal, accounting, corporate governance, and marketing costs.
- Allowing anyone to purchase a company’s shares can be distracting to management, as more corporate reporting and accountability is required.
Ordinarily a company liquidation is associated with a company facing financial distress. However, it can be considered as an exit solution if there isn’t an option to sell the company.
Liquidation is the process of closing the company down and distributing its assets. It is a formal procedure where a limited company is closed down by an appointed licensed insolvency practitioner.
The company’s assets are sold (liquidated) and the revenue earnt from the sale of assets is redistributed amongst creditors and/or shareholders.
There may come a time when a company has come to the end of its life and the directors and shareholders wish to close the business. A liquidation facilitates the release of company assets and cash value without needing to find a buyer.
Tax planning considerations of exit strategies
The tax you pay on exit can have huge implications on how much money you exit with. Typically, the negotiations on exit are mainly around the business value, but considering the tax implications and structure are very important to understand your net proceeds in order to plan for life after exit. One of the key areas for planning your exit strategy well in advance is tax planning . All of the options above have different tax consequences, which could ultimately lead to additional costs or reduce the money you earn as you exit the business. If you plan, you can keep a significant proportion of your business sale proceeds. If exit planning doesn’t take place early enough, then a large amount of the proceeds may have to be paid to HMRC.
The main tax areas that you need to consider are:
- Capital Gains Tax
- Corporation Tax
- Business Asset Disposal Relief
- Inheritance Tax
After years of hard work and building your business, handing over the reins and leaving your business can be a daunting stage to go through. Whether you’re selling, passing onto family or considering an IPO, you need to make your plans in plenty of time.
Beware of trying to handle the entire process yourself. Exiting your business in the best way for you and your business and maximising your return on exit can be a long and distracting process. If you try and do it yourself, it could have a negative impact on your business performance and even your mental and physical wellbeing. Use professional advisors such as Barnes Roffe to support you from the very beginning of the process.
Barnes Roffe support business owners from all sectors throughout the whole exit planning process including:
- Succession planning advice and support
- Creating your exit strategy
- Advice on increasing business value
- Tax planning
- Family succession planning
- Business valuation
- Business sale
- Management buyout support
- Employee Ownership Trust
- Trusts and IHT planning
If you would like more help and advice with planning your exit strategy, then contact us today.
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Business Exit Planning: 6 Steps for a Successful Transaction
by Eric Menke | Jul 8, 2020 | Exit Planning , Financial Strategy
Even though no two companies are exactly alike, the steps for exit planning are the same. I will walk you through each of the steps below. And, having bought and sold dozens of companies, both for myself and on behalf of clients, there are three fundamental concepts I’d encourage you to keep in mind.
1. Timing is everything.
Some owners look to sell their company when times get tough, but that decision may cost them. When exogenous forces affect the economy, such as Covid-19, it’s difficult for buyers to see if a business’s decline is due to external factors or intrinsic issues. This uncertainty forces most serious buyers to either step away or present lowball offers. If possible, address your challenges and build your business into a better position before pursuing an exit.
2. Buyers are more sophisticated than ever before.
In the past, it may have been possible to hide issues with your business from potential buyers. This is virtually impossible today. Modern buyers have extensive expertise and a legion of third-party experts they rely on.
3. Buyers want to buy ramp.
Ramp, in this case, refers to the future growth prospects of a business. A company with an upward trajectory commands a much higher price. As difficult as it is to step away from a growing company, I’ve done so many times. I’ve never regretted it and I’d advise you to do the same. Get your company in a strong position and sell when there’s still ramp on the table.
Now, let’s take a look at the steps involved.
The 6 Steps of Business Exit Planning
1. strategic planning (6-12 months).
The first and most crucial step of business exit planning is to define your goals, evaluate potential exit strategies, and prepare your business for a transition. This process can take anywhere from six to twelve months, depending on the scale of changes required.
The most common types of exit strategies are as follows:
- Acquisition An acquisition is when you decide to sell your business to a competitor or strategic buyer. They will either merge your company with another or grow it independently.
- Transitioning the Business The business owner eases out of everyday operations by handing over day-to-day responsibilities to a trusted business partner, employee, or family member. This involves a succession plan and a focus on business continuity.
- Initial Public Offering (IPO) Listing your company on the stock market is an optimistic undertaking for those with a long-term exit plan. The purpose is to gain a significant cash infusion to fund growth initiatives and build value.
- Liquidation This is when a business sells everything to pay off its creditors. It divides whatever remains (if anything) among its stakeholders. The decision to liquidate your business is typically a “last resort” approach employed by owners without a business exit strategy who must sell quickly.
Keep in mind that there may be additional things to consider, such as:
- Minimizing the individual and corporate tax burden of the exchange. This may involve choosing to sell stocks vs. assets. Or, it could involve setting up tax-free exchanges or deciding between a C-Corp, S-Corp, or LLC/Partnership.
- The future of your management team after the sale.
- The legacy you leave behind (company values, culture, succession).
Regardless of the exit strategy you choose, it’s crucial to consider the story your company will present to potential buyers (or stockholders). And you may find it helpful to seek the advice of an independent expert, such as a fractional CFO , who can help you prepare for the eventual sale .
Buyers, as mentioned before, want to buy ramp. Companies with operational issues, declining sales, or that are perceived to have peaked receive offers in the range of 4X EBITDA (earnings before interest, taxes, depreciation, and amortization). On the other hand, a business with little-to-no-issues, strong growth opportunities, and high-quality management can command a premium of 7X EBITA – a difference of over 40%, which could equate to millions of dollars.
Preparing a company for sale – whether through cutting costs, exploring new markets, or creating new products – will take at least a year to produce meaningful results. When you start seeing positive results and believe the timing is right, you can begin the formal sales process.
2. Preparation and Packaging (2-3 Months)
Once you’ve clarified your goals and your business is in a strong position, it’s time to move on to the next step of business exit planning: hiring an investment banker to conduct the sale and/or an advisor to help navigate it. If a fractional CFO or other independent expert helped you prepare your business, they can help you choose your banker, stand in during key management meetings, and interface with potential buyers.
It is essential to hire specialists that understand your industry and have sold your type of business before — for one specific reason. They will know how to connect you to the right buyers, serious buyers who are an ideal fit for your business.
Your advisor and banker will guide you through the process of selling your business. During this step, they will work with you and your team to develop and package your story. They will create key deliverables such as information memorandums and management presentations that demonstrate your company’s value. Then, when the time is right, they will reach out to their connections on your behalf to bring suitable, high-caliber buyers to you.
3. Targeting, Marketing, and Structuring (1-2 Months)
The benefits of an investment banker manifest when they begin reaching out to buyers. A well-run sales process says a lot about a business and will translate to higher offers.
I would caution you to avoid inexperienced investment bankers with minimal industry connections and expertise. They typically take a one-size-fits-all sales approach, which involves email blasting thousands of potential buyers, a “mass auction” of sorts. This approach diminishes the caliber of buyers that respond and wastes precious time. The quantity over quality mantra of these bankers also means they won’t bother to get to know your business intimately, making them poor representatives for your company.
Ultimately, the goal of this stage is to identify a few promising buyers to move forward with. This involves getting them to sign NDA agreements, assessing whether they are a good fit for your company, and beginning to structure the deal.
4. Term Sheet and Due Diligence (1-2 Months)
At this point in the process, the pool of buyers will be down to just a few serious contenders, who will send something called a Letter of Intent (LOI). A LOI is a formal declaration of the buyer’s desire to proceed with the purchase.
After you accept the LOI buyers will conduct their due diligence to get as complete an understanding of your company as possible. They will typically pull in third-party specialists to help crunch numbers, understand the risks, build contingency plans, and hold management meetings.
Having a stellar internal management team and investment banker will pay dividends during this step because they will represent your company in the best light by anticipating and providing answers to your buyers’ questions. Assuming there are no hidden surprises, and their findings are satisfactory, the remaining buyers proceed to the final step of the sales process.
5. Negotiation and Legalities (1 Month)
At this stage, buyers will start presenting their offers.
There are two high-level pieces to an offer: price and terms . The price is self-explanatory – it is how much the buyer is willing to pay. Terms, on the other hand, are more complicated. The terms dictate how the buyer will pay and the criteria for completing the sale.
Remember, this is a negotiation where you are seeking a win-win for both parties. Buyers typically don’t offer good prices and good terms, so business owners must be flexible. If a business owner enters negotiations with the expectation of getting everything they want, the likelihood of closing the deal is low.
This is important. When a company fails to close a deal, it creates a pall over the company that diminishes its value in future deals. Buyers often undervalue businesses that failed a sales process. They become skeptical because they don’t know if the deal folded due to issues uncovered during due diligence, a cantankerous owner, or some other concern. So, it’s best to get this right the first time.
For example, imagine a business owner who is looking to sell his business and retire. He plays a pivotal role in his company’s operation. To prevent the company from struggling in his absence, the buyer sets terms that require the owner to stay with the company for a few more years. These terms run counter to the owner’s goals, but he knows he needs to be flexible. He agrees to delay his future retirement, in exchange for a higher sales price.
Once an agreement has been reached, your banker’s team will help complete the deal. They will make it legally bulletproof and finalize any remaining conditions.
6. Navigate the Transition (6-12 Months)
When the deal has closed, your business exit planning efforts have paid off and the company handover begins. A successful transition can take anywhere from 6 to 12 months to complete. And it requires intense planning to pull it off with minimal issues. The former business owner may remain involved with the company for years after the transition, depending on the terms of the sale.
During this step, the buyer will solidify the role of the acquired business. Did they purchase the company to run on their own? Is it part of a buy-and-build strategy? Or, will they merge the company with one that already exists? It all depends on their original goals.
Regardless of the buyer’s intent, they will also evaluate and potentially change the following items:
- Key Systems There may be a need to update, replace, or consolidate systems and software depending on the buyer’s requirements. These changes will affect all aspects of the company, from HR and accounting to manufacturing and product development.
- Existing Management & Employees Depending on the terms of the deal, the newly acquired company will either keep members of the management team or begin replacing them. For some strategic buyers, it’s common to replace members of senior management and lay off significant portions of the workforce.
- Reporting Processes Much like how systems and software are evaluated, so too are reporting processes. If the buyer decides to bring new software onboard, they may also need to adjust reports to accommodate changes, track new metrics, and potentially execute differently.
Business Exit Planning: Key Takeaways
The decision to exit a business should be carefully planned, considered, and executed. To maximize value and minimize disruption, business owners should seek the advice of professionals who specialize in their field. If you are considering selling your business during periods of economic turmoil, look for professionals who have weathered such events in the past such as the Great Recession (2008-2009) or the Dot Com Crisis (the late 1990s).
Remember that buyers want to buy ramp and are more sophisticated than ever. An ideal business should be profitable and have strong growth potential. If the timing isn’t right due to market conditions, the state of your business, or even the current pool of buyers, consider waiting until conditions get better.
If you have questions about how to develop an exit plan, The CEO’s Right Hand can help. Our fractional CFOs have decades of experience in buying and selling businesses across multiple industries. Get in touch with us to speak to one of our CFOs.
Eric Menke shares over 25 years of investor, advisor and management experience with specific expertise in channel strategies, brand repositioning, logistics, industrial manufacturing and product innovation.
Prior to founding Growth Capital Management, Mr. Menke was one of the founding partners of Champlain Capital, a $148 million private equity fund focused on making private equity and growth capital investments in companies in the lower middle-market. In that role, Mr. Menke made numerous investments in the industrial, consumer products, and retail services sectors. Prior to founding Champlain Capital, Mr. Menke pursued and consummated acquisitions of small market companies on a deal-by-deal basis. Mr. Menke began his career at the investment banking firm of Kidder Peabody & company.
As Advisor of The CEO’s Right Hand firm, Eric provides strategic advisory services in change management, financial performance, mergers and acquisitions (including preparing companies for sale), marketing, business restructuring, and human resources, with an emphasis on managing risks and cost, to assist organizations in improving productivity, overall performance, and accelerate their growth.
Mr. Menke was awarded a Masters of Business Administration from the Kellogg Graduate school of Business at Northwestern University. He graduated, cum laude, with a Bachelor of Arts from the University of Southern California.
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What Is an Exit Plan, and Why Do I Need One?
Surveys indicate that most agency owners believe an Exit Plan is important, but still don’t have one. If that describes you, this White Paper will help you understand what an Exit Plan is and how you can fill this risky gap.
Click here for your complimentary copy: TL What Is An Exit Plan White Paper
In our 2018 National Survey on Building and Monetizing Marketing, Advertising, PR, Digital and Related Agencies , TobinLeff learned that nearly 100% of agency owners believe that an Exit Plan is an important element for their future financial security, but only 15% actually have a written Exit Plan in place. Why the big disconnect?
There can be multiple explanations for this troubling gap – expense, lack of time, not knowing where to turn to get an Exit Plan done, and so on. However, from our experience at TobinLeff, we believe that the most important explanation may be the most basic one of all: while the idea of an Exit Plan seems to make sense, most agency owners don’t really know what an Exit Plan is. They just know that it sounds like a good idea.
At the 30,000 foot level:
- An Exit Plan is clarity
- An Exit Plan is a strategic roadmap
- An Exit Plan is peace of mind
Those three things, alone, speak to how important an Exit Plan is. Now let’s get a bit more down-to-earth. When we help our clients craft Exit Plans at TobinLeff, we view it as a process of Discovery, Internal Analysis, Education, and Strategy.
The Exit Plan begins with you. After building your business, the next hardest challenge you face as an owner is how to get out of it successfully. Remember, your exit will likely be the most important transaction you will ever make with your agency. Doesn’t it seem like a little proactive planning is in order?
As I said, the Plan begins with you. What are your personal goals and priorities for your exit:
- Maximize wealth to live on in retirement?
- Generate an investment to roll into another business?
- Preserve your legacy?
- Offer staff (or family, or partners) the opportunity to follow in your footsteps?
- Restructure into a lifestyle business that you can hold onto without it holding onto you?
- Or any of countless others?
What is your timeline ? Do you want nothing more than to walk out the door tomorrow and never look back, or is an exit something over a distant horizon?
If you want to keep the agency in-house such as through a Management Buy-out, do you have the people in place to step up? This is an important question that goes well beyond technical skillsets. While you may have the most talented staff in the world, that doesn’t necessarily mean they can fill your shoes. As you well know, owning a business is vastly different from working for one. Often, even the folks who think they want to take on that challenge find their feet getting cold when faced with the harsh realities – and risks – of putting their own names and assets on the line. And, equally often, you, as their boss, aren’t in the best position to assess their suitability as owners.
What is your market position? In other words, what are your capabilities, what types of clients do you serve, what is your geographical reach… in short, what is your business model and how do you do business?
Exit Plan Discovery Phase Action Steps
1. Talk. Lots and lots of talk.
a. This is the time to gather general information. Conversation leads to clarification of goals and possible elimination of some options. Desired timelines are solidified. b. If appropriate, confidential employee interviews to assess suitability for an internal deal. The timing of this step varies based on circumstances. For owners who are concerned that having a discussion that suggests they are thinking about exiting might be destabilizing, this step would be pushed later in the process. Likewise, if an internal deal is not being considered as an option, or if an outside person needs to be brought in first to become an internal acquirer, these interviews may be delayed or foregone altogether. Whenever it occurs, these are almost always conversations better conducted by an objective, outside third party.
INTERNAL ANALYSIS PHASE
This is where you turn a hard eye inward and look at the numbers and at what is special (or maybe a little bit weak) in your own shop.
The starting question every owner has is: What is my agency worth? And the answer is, it depends.
Begin with your most recent three years of historical financials . Recast them to normalize your own compensation to a market rate, reverse any one-time out-of-the-ordinary and any personal expenses, and come up with an adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) amount. Then apply an appropriate market-driven multiplier to that number, add or subtract excess working capital, and Voila! – now you know exactly what your company is worth. Except, of course, you don’t.
Valuation (a subject for another future TobinLeff White Paper ) is as much art as it is science. The process described in the previous paragraph will result in a valuation range for a sale to a strategic buyer, but many other factors come into play in determining your agency value. For example, internal deals often are driven more by what cash flow will fund than by an underlying statement of value, and sales to financial buyers tend to be based on a forward-looking Discounted Future Cash Flow rather than a multiple of historic EBITDA. And, of course, all of these are impacted by the uniquenesses of your agency, which leads to the question of…
Value Drivers . At TobinLeff, we’ve developed a tool that assesses an agency’s distinctive characteristics over 59 criteria spread across 16 major categories. We call these Value Drivers , and they cover a range of quantitative and qualitative ratings across topics ranging from financial strength to brand to dependency on owners to client concentration risk and 12 others. Looking at these matrices or at whatever version of this tool you might develop on your own enables you to identify what attributes you will be able to leverage most effectively in any exit negotiations, and what attributes you may need to focus on enhancing.
Exit Plan Analysis Phase Action Steps
a. Gather data b. Recast and normalize financial reports c. Apply appropriate range of valuation techniques to arrive at alternate valuation estimates
2. Value Drivers
a. Assess where you fall across spectrum from Very Strong to Very Weak for 59 Value Driver criteria b. Obtain an overall agency Value Drivers Ranking to inform valuation, strategy, and future deal terms
Now that all of the groundwork has been laid, it’s time to do something with it… and this is where the Exit Plan really starts to get interesting.
This phase involves taking the information that’s been gathered and understanding the options it reveals. Where do your goals and priorities, your timeline, your staff’s interests and aptitudes, your financial performance, and your Value Drivers intersect, and what exit routes does that intersection lead to?
The first step, of course, is understanding the potential exit paths and their respective pros and cons. Not all exit strategies are practical for every agency, and no strategy is the perfect solution. The key is to understand the possibilities and then target the one(s) that make the most sense for you.
POTENTIAL EXIT STRATEGIES TO UNDERSTAND AND CONSIDER
- Sell to a strategic buyer
- Sell to a financial buyer
- Sell to a PE firm or investment group
- Structure a Management Buy-Out
- Sell to partners
- Acquire companies whose leadership can be part of an MBO
- Merge with the intention of a future sale
- Transition to family members
- Form an ESOP
- Retain control and transition management to others
Exit Plan Education Phase Action Steps
- Understand the basic structure of various exit strategies such as external sales to strategic buyers, external sales to financial buyers, management buy-outs, etc.
- Understand which exit strategies are possibilities for your agency and which are impractical choices
- Understand potential firm valuation ranges now and in the future for the feasible exit strategies
- Understand the timeline from launch to completion of feasible strategies
- Identify a Plan A exit strategy, as well as a Plan B in case Plan A runs into roadblocks
- If an internal deal is still on the table and key participant interviews have not yet been conducted, consider doing interviews now to evaluate the feasibility of an internal deal approach
Once you’ve figured out the exit path you hope to follow, it’s time to think about the best steps to maximize your chances of success and your financial return once you get to its end.
In the best case scenario, everything is already positioned perfectly for you to begin to implement your strategy on the day you’re ready to go. Unfortunately, best case scenarios are rarely real case scenarios.
The strategic section of your Exit Plan should address what you need to do to remove obstacles that prevent you from bringing your Plan to fruition, as well as what steps to take to enhance the results you will enjoy when you do.
For example, if you’re set on selling to internal management but don’t have anyone on staff who’s good at driving new business, you should build in time to hire or acquire those (or other) capabilities.
If you are determined to reach a certain multiple on your valuation but your top line revenue isn’t enough to command that number, you may need to consider buying another agency to get over the threshold.
If your senior staff is critical to your value regardless of your preferred exit strategy, it may be time to implement new retention programs such as a phantom stock plan.
These are just a few of the countless issues to consider when crafting an Exit Plan. During the Strategy Phase, you should think through these so that your management of your agency going forward is proactively structured to enhance your ultimate exit goals.
Exit Plan Strategy Phase Action Steps
1. Review the results of your financial and Value Drivers analyses for strategic planning purposes
a. Compare key financial indicators to industry benchmarks to identify operational changes necessary to build future value b. Identify weak areas in Value Drivers analysis that are most critical to strategic agency planning for strengthening future value c. Review strength areas in Value Drivers analysis to ensure they are not at risk of deterioration
2. Develop exit implementation timeline
a. Determine date by which you want to be fully exited from business b. Work backwards from full exit date to set progress dates in order to hit goal
i. Note: Keep in mind that most exit strategies take as much as one year from the start date to implement, and subsequently require your continued involvement with the agency for anywhere from one to three additional years or more
3. Begin cultivation of acquisition prospects
a. If an external sale is part of the Plan, begin now to identify your M&A advisor and to network and build a list of names of potential future acquirers
SOME FINAL THOUGHTS
Your exit is simply too important – and too difficult – to leave to chance. Like any business challenge, the more you plan for it and the more intentional and proactive you are in preparing for it, the more successful it will be. Simply knowing that you want to exit someday is not enough. You need to know how you want to exit and have a plan in place to get you there.
In summary, the key elements of an Exit Plan are:
- Your exit goals and objectives
- Exit date target
- Understanding the value of your business
- Value Drivers analysis
- Financial benchmarks analysis and valuation estimate
- Key employees interview results (optional)
- Identification of primary and secondary exit structures (e.g., Plan A and Plan B)
- Strategies for maximizing exit success
- Implementation timeline
Can you do this on your own or by working with your attorney or accountant? Yes. Is that the ideal approach? We don’t think so. Like marketing or law or accounting, exit planning is its own discipline with its own experts. It’s not enough simply to know the mechanics of putting a deal together. For you to truly maximize your results from the most important transaction of your career, it’s critical to have someone who understands your industry’s marketplace, who has implemented exits for marketing and related agencies, and who has dealt with and overcome the obstacles that are most likely to arise. For analyzing your value and potential sale multiples, knowing how you compare to industry performance benchmarks, understanding what type of buyer would find you interesting and who wouldn’t, etc., it’s beyond helpful to have an advisor who deals with these types of questions every day.
However you decide to develop your Exit Plan, the time to begin is now. As mentioned above, the exit process can take as long as 4-6 years once you decide to move forward. The sooner you begin to plan for that process, the more likely it is that you will be pleased with the results.
If you are part of the 85% of agency owners that our Survey showed believe in an Exit Plan but don’t yet have one, contact us today. You can give us a call at 412/515-0120, ext. 102, or email me at [email protected] to talk about how we can help you find clarity, craft a strategic roadmap, and enjoy peace of mind when you’re thinking about your post-exit future.
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4 Simple Steps to Start Your Business Exit Plan
You know why you need an exit strategy for your business. You know you should start sooner rather than later - well before your planned retirement date. But how do you actually get started? These steps will help you begin putting your plan together.
Set your goal
Your personal goals for retirement guide your budget, which may impact the funds you need to net from your business. Thinking about what you'll do with your days after retirement also helps you mentally prepare for this major transition to your routine.
Your business exit goals also matter. For instance, do you hope to transfer the business to a family member or key employee, or is your main objective to get the best price possible, regardless of buyer? Do you have an ideal timeline for exiting - as soon as possible, as long as it takes, or somewhere in between?
Consider your personal financial resources
Review the financial resources you'll rely on for retirement income - such as retirement accounts, investments, Social Security benefits, pensions and annuities. Compare that income to expected expenses based on your retirement goals. This can show you whether your assets are likely to fully fund your desired retirement or whether you'll have a funding gap.
Fill any funding gap
If you do end up with a funding or value gap between your expected retirement assets and expenses, there are many ways to fill it, including the ideas below.
- Revamp your personal financial habits. You might revise your retirement vision, reduce debt before retiring or reduce spending now so you can save more. You could also increase your retirement income by leveraging income producing assets or taking on part-time work in retirement.
- Maximize and grow business value. This may lead to a higher sale price, netting more funds for your retirement. You can approach this task in multiple ways, such as analyzing cash flow, or enhancing working capital efficiency, inventory turnover and cash collection cycles. You may also want to start paying for personal expenses that have run through the business (like a company car). This may increase earnings before interest, taxes, depreciation and amortization (EBITDA), helping to more accurately reflect the earnings potential of the business. In addition, consider establishing a corporate management structure that, over time, will make the business less dependent on you as the owner. This may make it more attractive to outside buyers. Finally, you might choose to push out your retirement date, allowing more time to grow the business value in hopes of a higher sales price.
Evaluate exit strategies
It's important to understand all available exit options, and the pros and cons of each strategy. Your personal and business objectives should always be a major guiding factor when helping choose the exit option that is right for you.
The financial resources needed can also dictate the exit option you ultimately choose to execute, depending on how reliant your retirement funding is on the proceeds of your business. Your business may not net the same proceeds regardless of how you exit.
For instance, if you gift your business to a family member or charity, its worth will likely be based on fair market value as determined by a professional evaluator. A gifting strategy may net little to no liquidity, making them more appropriate if you have adequate retirement assets to fund your retirement goals.
The highest sales prices are generally associated with third-party sales or private equity group recapitalization, making these good options if you need to maximize proceeds to support your retirement. With these options, the worth of your business is essentially whatever the buyer or investor is willing to pay. However, netting the highest sales price may not always result in the highest net proceeds. You should work with a CPA and tax attorney to review your individual tax situation, and what the net proceeds may be for each exit option you are considering.
Help to get started
By considering these steps well before your target exit date, you'll have ample time to work through different scenarios and find the strategy that makes sense for you. Once you have a plan, though, don't file it and forget it. Revisit it periodically and revise as needed.
Your Hancock Whitney banker can help you with the next steps in building your business exit plan, from reviewing your financial plan, to conducting an informal business valuation, identifying any funding gaps and helping you find solutions.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
Hancock Whitney Bank offers other investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is wholly owned subsidiaries of Hancock Whitney Corporation.
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In this series, we’re helping you with your legacy and estate planning. In Part 1 , we shared advice on how to create family and professional wealth management teams. In Part 2 , we explained why family meetings are important, then shared tips on what to discuss and how to create a family mission statement. Here, in Part 3, we help you begin building a generational wealth management strategy and estate plan, using the foundation you laid in Parts 1 and 2.
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In this series, we’re helping you with your generational wealth management planning. In Part 1 , we shared advice on how to create family and professional wealth management teams. While those groups provide an essential infrastructure, holding family meetings is the solid foundation on which your wealth management strategy and generational wealth transfer plans will be built. Here, in Part 2, we explain why that’s the case, then share tips for what to discuss and how to use these gatherings to create a family wealth mission statement.
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Retiring as a small business owner isn't as hard as it seems. Here's how
Posted: November 26, 2023 | Last updated: November 26, 2023
Believe it or not, over one-third of small-business owners lack a retirement savings plan. But after spending years growing your business , we’re willing to bet many of them want a plan in place to ensure they’re meeting retirement goals.
Follow this guide to help ensure you don’t reach retirement age without a plan for your and your small business.
1. Set life and retirement goals
As a small-business owner, you’re no stranger to setting and achieving goals. Retirement is no different. Before you can retire, you must set a goal that aligns with your financial situation and the life you desire after retirement.
Do you plan to spend your golden years close to home? Or would you rather spend them traveling the world? Your retirement goals and timeline may differ depending on your desired retirement lifestyle.
To help get a clear idea of your retirement goals, ask yourself the following questions:
- What are your predicted sources of income during retirement?
- Where do you plan to spend your retirement years?
- What will your monthly expenses be once you retire?
- Have you considered the increased cost of living as you age?
- Have you considered the added expenses that may come with health issues?
- What age do you want to retire?
- How much do you need to have saved to meet this goal?
Once you have a clear retirement goal, you can start taking the steps necessary to meet it.
2. Choose a retirement plan
Unlike traditional employees, those who are self-employed have different options when it comes to retirement. From a SEP-IRA to a self-employed 401(k) plan, you’ll have to choose whatever small-business owner retirement plans match your business and retirement goals the best.
To help you make your decision, we’ve gathered some popular retirement plans for small-business owners:
A SEP-IRA is an employer-sponsored retirement arrangement eligible for the self-employed and business owners with more than one employee. As a small-business owner, you can make tax-deductible contributions on behalf of your employees.
In addition, small-business owners are also considered employees, so you’ll be able to contribute to your retirement account as well.
Because of this, a SEP-IRA is a cost-effective way to help both you and your employees with retirement. SEP-IRAs offer a range of investment options, including mutual funds, stocks, and bonds. As of 2023, SEP-IRA contribution limits are the lesser of either 25% of the employee’s compensation or $66,000.
A SIMPLE IRA is for small-business owners with less than 100 employees. Similar to a SEP-IRA, a SIMPLE IRA allows you to contribute to your and your employees' retirement. On the other hand, a SIMPLE IRA allows employees to contribute to their retirement, whereas only employers can contribute to a SEP-IRA.
As a small-business owner, you’re generally required to make a dollar-for-dollar contribution match up to 3% of employee compensation or a nonelective contribution equal to 2% of their annual salary.
As of 2023, employees face SIMPLE IRA contribution limits of $15,500. If you’re over the age of 50, you’re eligible for a total contribution of $19,000, thanks to a $3,500 catch-up contribution.
Another retirement plan option for small-business owners is a self-employed 401(k), also known as a solo 401(k). Unlike a SEP- or SIMPLE IRA, a solo 401(k) is a type of 401(k) available to small-business owners without any employees (aside from a spouse).
With a solo 401(K), you’re essentially acting as both the employer and employee, allowing you to contribute in both capacities. Like an IRA, 401(k) plans include a range of investments such as mutual funds, stocks, and bonds.
As of 2023, you’re limited to contributions of $22,500 as an employee and up to 25% of your compensation as an employer, with the total 401(k) contribution limit the lowest of either 25% of your adjusted gross income or $66,000.
3. Plan an exit strategy
As you prepare for retirement, you’ll also want to determine an exit strategy from your business. Whether you’re planning to sell your business or find people to help take over, it's important to create and follow an exit plan that best aligns with your retirement timeline and goals.
After all, the small business you’ve built over the years may be your largest asset and could be instrumental in funding your post-retirement life. Because market conditions can affect
4. Determine the future value of your business
Many small-business owners often make the mistake of overestimating the value of their business. If you plan on using your small business to fund your retirement, this overestimation can become problematic when it comes time to sell.
If you plan on using your small business to help fund your retirement, you'll want to conduct a business valuation to help determine the future value of your business. That way, you reduce the risk of being surprised if your business isn’t worth what you thought it would be when it comes time for retirement.
In addition, performing a business valuation can identify any factors that could lead to your business losing value in the future. For example, if your small business relies heavily on personal relationships you’ve built with your customers, the value of your small business may decrease once you step away.
On the other hand, your business may be operating in a growing industry, giving you a reason to believe that your small business may increase in value as you approach retirement.
5. Examine your other assets and investments
After evaluating the value of your business, it's time to do the same for your other assets and investments. From stocks and bonds to real estate, you’ll want to carefully assess the value of each of your assets and investments.
While doing this, be sure to keep in mind the income that you’d need your investments to produce in order to match your retirement goals. If your current investments don’t appear as if they’d make the necessary income to meet your retirement goals, you may want to explore different investment options.
6. Prepare your will
As the saying goes, “Nothing is certain except death and taxes,” you can prepare for the former by preparing a will when considering your small-business owner retirement plan options.
In the unfortunate event that you pass before your retirement, you’ll want to iron out what happens to your business following your passing. This may include passing the business onto a spouse, parent, or child in your life.
To help you throughout this process, you may want to seek the help of an estate planning attorney to ensure that you leave no boxes unchecked when creating your will.
7. Avoid touching your retirement savings too early
As you near retirement, it may become tempting to start dipping into your hard-earned retirement savings. But before doing so, it’s important to understand that you may be penalized for accessing your funds too early. In addition, early access to your retirement funds may lead to costly tax payments.
Plus, if the market is down when you withdraw your funds, you’re locking in your losses and missing out on potential growth once the market rebounds.
For example, withdrawals from an IRA or 401(k) account before you’re 59 and a half years old may be subject to a 10% penalty and federal income tax. To ensure you’re getting the most out of your retirement savings, be sure to do your research and determine how long you need to wait to avoid any penalties.
Run your business with confidence
Now that you know how to retire as a small-business owner, you can continue running your business with confidence, knowing you’re taking the proper steps to achieve your retirement goals. From tracking expenses to assessing your small business’s income, accounting software can help inform your retirement plans.
How to retire as a small-business owner FAQ
Do you still have questions about how to prepare for retirement as a small-business owner? Read through the answers to these common questions to learn more.
What happens when a small-business owner retires?
A small-business owner’s retirement can vary from person to person. Some small-business owners may decide to sell their businesses and use the cash to fund their retirement. On the other hand, others may pass their small business along to a successor, such as a family member, to maintain and grow their family’s wealth.
What is the best way for a small-business owner to save for retirement?
Because retirement plans and timelines vary between individuals, the best retirement plan for small-business owners will not be the same for everyone. To ensure you’re saving for retirement the best way, consider your retirement goals and desired retirement income requirements when choosing a retirement plan.
Do business owners get Social Security when they retire?
Yes, self-employed small-business owners earn Social Security work credits like traditional employees.
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org .
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10 Soviet buildings inspired by Le Corbusier
In October the world began celebrating the 130th birthday anniversary of Le Corbusier (1887-1965), arguably the most important and influential architect of the 20th century. In his time, this great urban planner determined a significant part of the future of world architecture. His followers worked throughout the world, developing the famous Five Points of Architecture: the necessary presence of supporting columns, a flat roof, horizontal windows, a plain façade and a freely-designed ground plan.
The USSR, which hosted the architect three times, implemented only one of his building designs – the Tsentrosoyuz (Central Union) Building. However, the ideas of the Frenchman with Swiss origins were widely popular among Soviet modernist architects. Russia Beyond remembers their most vivid constructions in the Soviet Union.
1. Narkomfin Building in Moscow
Narkomfin building. Exterior view.
This is the most famous monument of Soviet Constructivism in the capital. The communal house designed by architects Moisei Ginzburg and Ignaty Milinis was built between 1928 and 1930 for employees of the People’s Finance Commissariat (Ministry). The construction was overseen by Finance Commissar Nikolai Milyutin, for whom the first penthouse in the world was erected on the building’s roof. Architects called the project a building of a transitional type, since it symbolized the transition from the traditional way of life to a new, socialized existence. Three kinds of apartments or “living cubicles” were planned for the residential block. On the bottom level there were the two-tiered, three-room apartments with a surface area of 60 sq. m. with a kitchen and a toilet (cubicle K), which were used for traditional family habitation. Above were experimental cubicles for two people — dual, two-tiered apartments (2F) with a surface area of almost 30 sq. m. Most of the cubicles in the building have a small surface area of 15 sq. m. (F), and are designed for only one person. A separate communal block was built for the residents of these cubicles. It contained essential household services such as a laundry room, a cafeteria and a library.
2. Communal House on Gogol Boulevard in Moscow
Demonstrative Construction complex.
The Demonstrative Construction complex for construction workers also combined features of the old and new ways of life, the so-called “machines for living.” The building was designed by the architects who had conceived the Narkomfin Building in the same period. The complex consists of two residential buildings intended for both individual and family habitation and a two-story communal block for socialization.
3. Communal House of the Textile Institute
Communal House of the Textile Institute.
In 1929 emerging architect Ivan Nikolaev planned the Communal House of the Textile Institute in accordance with Le Corbusier’s ideas. Two thousand people were supposed to live and study in this building following a very rigid order. The building has the shape of the letter H. Six-meter-square cabins served as bedrooms, plus there were student shower rooms, a cafeteria and finally a study area. At the end of the 1960s the building’s interior was partially restructured and given over to the Institute of Steel and Alloys as a dormitory.
4. Tsentrosoyuz Building in Moscow
Myasnitskaya street. The Tsentrosoyuz Building or Centrosoyuz Building constructed in 1933 by Le Corbusier and Nikolay Kolli.
Le Corbusier’s only structure in the USSR was finished in 1936, when modernist architecture was accused of formalism and became unfashionable. The plan for the building that was being constructed for the Central Union of Consumer Cooperatives was chosen in an open competition, in which not only the best Soviet architects but also the stars of European architecture participated, including Peter Behrens, Max Taut, London’s Vernet & Tate Studio and Le Corbusier himself. The co-authors were his cousin Pierre Jeanneret and Soviet architect Nikolai Kolli, who had worked for two years in Le Corbusier’s studio in Paris. He was the one who supervised the construction process.
The complex was built in accordance with Le Corbusier’s five rules. Ramps instead of stairs became the project’s most prominent feature. They were set up throughout the structure. Furthermore, the first open space offices were installed in the building. When completed, it was the largest office administrative building in Europe.
5. Chekist Town in Yekaterinburg
The Chekist Town.
The complex was built between 1929 and 1936 according to a design by architects Ivan Antonov, Benjamin Sokolov and Arseny Tumbasov as a small dormitory for young state security employees. The complex consists of 14 buildings of various height. Besides the residential building, service buildings, a kindergarten, a clinic and a cafeteria, there is also the 11-story Iset Hotel, a palace of culture and an administrative building. The plan was based on the idea of the communal house. During the Soviet years the complex functioned as a “town within a town.” It was surrounded by control points and entry and exit into the town was allowed only with a special pass.
6. Gosprom in Kharkov (Ukraine)
The House of Governmental Industry.
This was one of the USSR’s first skyscrapers and it was perhaps the only example of a high-rise constructivist building in the country. The House of Governmental Industry was built between 1925 and 1928. Project development was in the hands of a group of architects who were among the first to apply Le Corbusier’s principles to an administrative building (in general, the Swiss-French architect planned private villas and multi-apartment buildings). The building is included in UNESCO’s preliminary list of monuments.
7. Engineer Building of the Ministry of Roads in Tbilisi (Georgia)
The building of Ministry of Roads.
This is another example of a free interpretation of Le Corbusier’s ideas by Soviet architects. The building, constructed in 1975, basically symbolizes a branching out road network. Its body consists of five horizontal two-story blocks that are supported by three vertical rods attached to a cliff. In 2007 the structure was recognized as a national architectural monument.
8. Friendship Resort in Yalta
The Friendship holiday hotel in Yalta on the Black Sea coast.
This is the most unusual example of modernist architecture. It was designed by architects Igor Vasilevsky and Yuri Stefanchuk in 1985. Since the structure had to stand on uneven terrain – a mountainside – its creators devised a particular construction, which people nicknamed “the UFO.” The building’s concrete bodys in the form of a ring with an 80-meter diameter is supported by three towers that contain an elevator, stairs and utilities. An innovative solution was the use of heat from the Black Sea for the heating, air conditioning system and hot water supplies for the buildings.
9. Vyborg Library
Alvar Aalto Library in Vyborg.
This showpiece construction, designed by modernist architect Alvar Aalto, was constructed between 1927 and 1935, when Vyborg (850 km northwest of Moscow) was part of Finland. The large rectangular building made of white concrete with free layouts, continuous glazing and (Aalto’s trademark) funnel-shaped windows in the ceiling is an example of the international style, one of whose followers was Le Corbusier. In 2013 the library was reopened after a 12-year restoration project and is now considered one of the city’s symbols.
10. National Historical and Archaeological Museum in Osh (Kyrgyzstan)
A museum on the sacred mountain of Sulaiman-Too in the city of Osh.
This is one of the most remarkable structures of Soviet modernism. Constructed in 1978, it was carved into the side of Sulayman Mountain. Although externally this building hardly resembles Le Corbusier’s typical structures, the principles according to which it was built are representative of the modernist view. The structure mimics the adjacent cliff: the entrance in the form of a concrete arch with continuous glazing and longitudinal beams blends with the mountainous relief. Behind the gate stands a two-story cavernous complex that houses the exhibits.
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