Exit Planning Tools for Business Owners

Exit Planning

Exploring Business Exit Strategies: Definitions, Examples, and Top Types

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Every business journey has a beginning and an end. Just as you plan how to start your business, it’s essential to plan how you’ll eventually step back or move on. This is where a business exit strategy comes in. Simply put, it’s a plan that helps business owners decide when and how to sell or close their business in an organized way. But, how do you know it’s time? Read ahead to find out.

Understanding Business Exit Strategies: Definition and Importance

A business exit strategy is a well-thought-out plan that outlines how an entrepreneur or business owner will sell, dissolve, or transition out of their business.

So, What is an Exit Strategy in Business?

An exit strategy in business is a business owner’s plan to sell, transfer, or close their business. Think of it as the “exit door” for an entrepreneur. It’s how they transition out, either to retire, start a new venture, or due to unforeseen circumstances.

Knowing how to exit a business is critical because it not only determines the financial future of the business owner but also impacts the employees, stakeholders, and the industry at large.

This plan is crucial for mitigating risks and maximizing profits, especially long-term ones. Understanding a business exit strategy involves knowing its scope, from selling the business to passing it on to a successor.

A business exit strategy is a detailed plan that outlines the steps, processes, and actions required to exit a business. This could involve selling the business to a competitor, passing it on to family members, going public through an Initial Public Offering (IPO), or even winding down operations. Implementing exit strategies for businesses requires foresight, planning, and often expert advice.

Why is an Exit Strategy Important?

An exit strategy is not just an “exit”; it’s a crucial part of business continuity planning services. It offers a roadmap for the business, ensuring sustainability and financial health even if the original owner departs. The process of planning for a business exit offers opportunities to streamline operations, make the business more appealing to buyers, and increase its overall value.

Real-Life Examples of Successful Business Exit Strategies

There are multiple pathways to a successful exit, but a few standout examples can serve as blueprints.

Selling to a Competitor
In 2002, eBay acquired PayPal for $1.5 billion. This was a successful exit strategy for PayPal’s founders, who were able to sell their business for a significant profit.
These are just a few examples of successful business exit strategies. There are many other ways to exit a business, and the best strategy for a particular business will depend on various factors, such as the size and type of business, the owner’s goals, and the current market conditions.

Initial Public Offering (IPO)
Taking a company public through an IPO is another option. For instance, Twitter went public in 2013, providing a profitable exit for early investors and founders.

Mergers
Mergers can be a strategic exit strategy when two companies believe they can be more successful together than independently. A classic example is the merger between Disney and Pixar. In 2006, Disney acquired Pixar in a $7.4 billion deal.

Succession Planning
Not every exit strategy involves selling or going public. Sometimes, it’s about ensuring the business remains in trusted hands. Walmart’s founder, Sam Walton, did precisely that. Before passing away, he divided ownership of the company amongst his children, ensuring the retail giant remained in the family.

Top Types of Business Exit Strategies to Consider

There are many different types of business exit strategies to consider, but some of them are:
Selling the business to a third party
Selling the business to a third party is the most common type of business exit strategy. It can be a good option for business owners looking to maximize their financial return or ready to retire. However, it is important to note that selling a business can be a complex process, and working with a qualified advisor is important to ensure that the sale is completed successfully.

Merging with another company
Mergers with other companies can be a good option for businesses that are looking to grow or expand into new markets. It can also be a good way for business owners to gain access to new resources and expertise. However, it is important to note that mergers can be complex and time-consuming, and it is important to carefully consider all of the implications before entering into a merger agreement.

Going public (IPO)
Going public is the process of selling shares of a company to the public. This can be a good way for businesses to raise capital or increase their brand awareness. However, going public is a complex and expensive process, and it is important to carefully consider all of the implications before filing an Initial Public Offering (IPO).

Passing the business down to family members
Passing the business down to family members can be a good way for business owners to keep the business in the family and to ensure that it continues to operate successfully. However, it is important to plan carefully for the succession process and ensure that the family members who will be inheriting the business are prepared to take on the responsibility. This strategy also allows for long-term business continuity planning.

Shutting down the business
Shutting down the business is the least desirable business exit strategy, but it may be necessary if the business is not profitable or if the owner is unable to find a buyer. If you are considering shutting down your business, developing a plan to minimize the financial impact on yourself and your employees is important.
No matter which business exit strategy you choose, starting planning early and getting professional advice is important. By carefully planning your exit, you can increase your chances of a successful transition.

Crafting Your Business Exit Plan: Essential Steps and Tips

Once you’ve decided on an exit strategy, the next step involves crafting a business exit plan example.

Step 1: Valuation
Begin by assessing the valuation of your business, either through a professional service or self-evaluation methods.

Step 2: Legal and Financial Planning
Legal and financial planning are essential for any business exit plan. This planning phase often involves exit planning services to handle complex transactions.

Step 3: Timeline
Set a realistic timeline for your exit, allowing sufficient time for all transactions and transitions to occur.

Choosing the Right Exit Strategy: Factors to Consider for a Smooth Transition

Several factors must be considered to choose the appropriate exit strategy for business.

Market Conditions
Market conditions can heavily influence the success of your exit strategy. Assess the current economic climate, competitor behavior, and industry trends.
Business Health
Evaluate the financial health of your business. Factors like revenue streams, debt, and assets all play a role in determining how viable certain exit strategies may be.
Personal Goals
Your personal goals and life circumstances will also significantly determine your exit strategy. Whether you aim for quick liquidation or want to ensure long-term business continuity will inform your decision.

Bottom Line

Business exit strategies are fundamental to ensuring a business venture’s smooth transition, sustainability, or profitable conclusion. In order to successfully exit a business, it is important to plan ahead and have a solid understanding of the industry. This may include merging with another company, being acquired by a larger entity, going public, or passing the business on to the next generation. As entrepreneurs and business leaders map out their ventures, considering and planning for an eventual exit is not just prudent but essential for maximizing value and ensuring the continued success of the enterprise.

 

Amit Chandel  is a “Certified Tax Planner/Coach”, and “Certified Tax Resolution Specialist”. He has extensive experience in Tax Planning and Tax Problem Resolutions – helping his clients proactively plan and implement tax strategies that can rescue thousands of dollars in wasted tax and specializes in issues relating to unfiled tax returns, unpaid taxes, liens, levies, foreign bank account reporting, audit representation, and any other type of tax controversy; Financial Consulting; Business Planning, Business Valuation, Forensic Accounting and Litigation support. He is the recipient of the prestigious Certified Tax Planner of the Year Award-2017, bestowed by the American Institute of Certified Tax Planners..

How a Business Owner Can Effectively Plan Their Exit

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man running toward business exit on blue background

Many business owners are finding it difficult to retire or transition out of their business due to a lack of exit planning together with a challenging economic environment. Shrinking cash flow, net income and credit have forced owners into fight-or-flight mode.

Several companies have successfully compensated by trying to expand sales and cutting costs. Many small to mid-sized companies, however, have experienced a drop in value, with no end in sight.

Owners are also entering the chapter in their life when exiting their business in one way or another is becoming more probable. Unfortunately, the business may not be currently worth what they need it to be to successfully exit.

Or what very often happens, is the business owner wakes up one morning, so to speak, and decides that they don’t want to run the business anymore and often decides the fate of the business without any careful planning.

The reality is that selling or exiting a business, is probably the single most important decision an owner will make. Instead of blindly hoping to sell their business “one day,” an alternative is for the business owners formulate a thoroughly planned exit strategy in order to sell or transfer their business for maximum value or compensation in the most tax-efficient method.

Creating an exit strategy, a process which takes three to five years, is the most significant step a business owner can make. All businesses are different and all business owners are different, therefore the exit strategy must be integrated with the owner’s objectives and requirements.

Is it a “lifestyle” business that produces revenue which does not need to be sold? Can the business be transferred over to a family member or key employee, or will it be sold to a third party? If a business owner is entering the stage in life when they need to be planning their exit, here is what they should be attentive to:

Define Objectives

Before you formulate your exit strategy, you must know when you want to leave your business, to whom you want to leave it to and how much money you hope to get from the transaction. Formal retirement planning and the creation of a life goal statement should be the first steps in this process.

Ascertain Value and Cash Flow

Regardless of who you are selling your business to, if your payout will come from future cash flow, then future cash flow is more important than current value. You can use many reliable valuation methods to estimate your business’ value. A formal valuation can come later.

Build Value

This step decreases the risk linked to owning your own business and helps improve the outlook for future growth. Setting your business up to operate without you, through improving the dedication of key employees, systematizing your business to run on autopilot, expanding market share, diversifying revenue sources, and growing corporate leadership, can significantly increase your businesses value.

Establish a Successor

The process of transferring your business takes time the sale will continue even after the deal is confirmed because future payouts are usually necessary. The transaction is completed once the agreed price is fully paid. Careful planning is required to successfully manage a sale to insiders who frequently are short of the necessary capital for a total cash buyout.

Conserve Wealth

Selling your business will create income for you, your family and the Internal Revenue Service. Cautious planning must be employed to diminish taxes, and preserve the accumulated wealth.

Exiting a business is probably the most important decision a business owner will make. They usually only get to do it one time, and all of the many years of hard work, risk and dedication is being realize with one event.

Regardless if an owner is transferring it to an insider or selling it to a third party, careful planning and consideration must be taken over an extended period of usually 3 to 5 years. It is a process that is driven by the owner and accompanied by a team of advisors that may include their financial advisor, accountant, business attorney, estate planning attorney, and so on.

It is also important that one of the advisors is thoroughly experienced with the process and can help the owner along through the required steps.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

What are the Critical Elements in Training My Business Successor?

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Business training flat icon with businessmen in office and speaker making presentation vector illustrationTraining your Business Successor is crucial in ensuring a smooth transition of ownership and leadership. The following are critical elements to consider when preparing your Business Successor:

Knowledge Transfer:

  • Identify the knowledge and skills necessary to run the business effectively.
  • Document and share critical information, processes, and best practices with your successor. This includes financial management, sales and marketing strategies, operational procedures, customer relationships, vendor management, and industry-specific knowledge.

Mentoring and Shadowing:

  • Provide your successor with hands-on experience by allowing them to shadow you and observe your day-to-day activities.
  • Encourage them to ask questions, participate in decision-making, and gradually take on more responsibilities.
  • Act as a mentor, providing guidance and sharing insights from your experience.

Delegation and Autonomy:

  • Gradually delegate tasks and responsibilities to your successor, allowing them to practice decision-making and leadership skills.
  • Start with smaller tasks and gradually increase their level of autonomy as their competence and confidence grow. This will help them develop their management style and take ownership of their role.

Communication and Collaboration:

  • Foster open and transparent communication with your successor.
  • Encourage them to share their ideas, concerns, and observations about the business.
  • Establish regular meetings or check-ins to discuss progress, challenges, and future plans.
  • Involve them in important meetings with key stakeholders, such as clients, suppliers, and employees, to develop relationships and gain a broader understanding of the business ecosystem.

Strategic Thinking:

  • Provide exposure to strategic decision-making by involving your successor in developing business plans, goal setting, and long-term strategies.
  • Discuss market trends, competitive analysis, and growth opportunities.
  • Encourage them to think critically and creatively about the future of the business and how to adapt to changing circumstances.

Building Relationships:

  • Introduce your successor to essential stakeholders in the business, such as key clients, suppliers, and industry contacts.
  • Help them establish and maintain relationships, as these connections can be valuable for the business’s future success.
  • Encourage networking and participation in industry events and associations to expand their professional network.

Emotional Intelligence and Leadership Development:

  • Focus on developing your successor’s emotional intelligence and leadership skills.
  • Help them understand the importance of effective communication, empathy, conflict resolution, and team management.
  • Provide opportunities for leadership development through training programs, workshops, or executive coaching.

Continual Learning and Adaptability: Encourage your successor to embrace continuous learning and adaptability. The business landscape is ever-changing, and staying updated on industry trends, technological advancements, and best practices is essential. Encourage them to attend relevant seminars, conferences, and workshops and engage in professional development activities.

Remember that the training process should be tailored to your successor’s specific needs and capabilities. It’s essential to be patient and supportive and allow for a gradual transition of responsibilities. By investing time and effort in training your successor, you increase the likelihood of a successful handover and the long-term sustainability of your business.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Exit Strategies – The Road Less Traveled

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The road less traveled is often a misimpression when considering a transition from business ownership. Surveys show that roughly 85% of owners expect their exit to happen via a sale of the business to a third party.

A third-party sale is certainly attractive. The idea of monetizing decades of work in one lump-sum payoff seems equitable. Years of sacrificing to “invest in the business” is supposed to generate a return. “He (or she) sold the company” when applied to someone who is clearly enjoying a comfortable lifestyle in retirement acts as an advertisement for the benefits of cashing out.

Unfortunately, that isn’t only less frequent than assumed, but it’s so infrequent as to be close to a rarity.

The Numbers Don’t Lie

Baby Boomers owned businesses at about twice the rate of previous or succeeding generations. Franchising and an overcrowded job market for corporate careers drove about 6% of Boomers into entrepreneurship, where the traditional average for business ownership is closer to 3% of the population.

A decade ago, according to the SBA, about two-thirds of all businesses between 5 and 500 employees were owned by persons 48 years old or older. Today, just over half are owned by folks over the age of 58. That makes it pretty safe to extrapolate that around 4% of that age group still own businesses.

Census data puts the number of persons turning 65 years old at 10,000 a day, so it’s a decent guess to say that 400 of those, on average, probably own a business. That’s 2,800 a week, or about 140,000 a year. Not everyone exits when they hit 65, and almost 90% of those businesses employ fewer than 20 people.

For exit planning discussions, let’s divide the under and over-20 employee companies into two groups, which we will call “Main Street” and “Mid-market.” (Note- this is not a valid market definition of those two terms. For further explanation see the Afterword in my most recent work The Exit Planning Coach Handbook.”)

Main Street companies would then be 90% of our 140,000 owner population. That’s 126,000 businesses. According to the IBBA, Business Brokers sell about 8,000 Main Street companies annually, or about 20% of those they list. That leaves 92% of Main Street owners to find another way.

Of the 14,000 or so that we are classifying as Mid-Market, Private Equity activity accounts for about 6,000 transactions annually, many of which are handled by brokers. (So there is an unknown amount of double counting here.) The last two years saw a spike of about 50% in acquisitions due to low interest rates, but it is safe to say that at least a third of these presumably very desirable middle-market businesses have to find an alternative exit plan.

Advisors Ignore the Numbers

With these statistics, why do owners and their advisors continue to focus on exit strategies that only work for a small minority? The higher visibility of transactions is part of the bias, as are the higher professional fees that they generate, but the biggest issue is a lack of advisor education.

Advisors who work with owners approaching a transaction have an obligation to inform them of their options. Unfortunately, this is not always the case. We survey the exit planning industry annually. Only between 5,000 and 6,000 advisors claim exit planning as an offered service. That’s an advisor-to-owner ratio of 23:1 each year. If we consider the entire remaining population of Boomer-owned employers, that ratio is five hundred to one.

Most owners have 50% of more of their personal net worth in the business. Yet we continue to see financial planners who base their clients’ retirement calculations on an unconfirmed estimate of what the company will contribute via a third-party sale, when such a sale may be the least likely outcome. A financial plan for a business owner cannot be holistic if it doesn’t consider 50% of his assets.

Attorneys and accountants frequently report that the first time they interact with a client about exiting is when a purchase offer is already on the table. Proactive discussions about eventual transfer or succession are usually brief, and cease when the client says “I’m not ready yet.” They let their clients postpone the discussion until circumstance or happenstance intervenes.

Business Brokers, of course, only talk to clients who have already decided on their preferred course of action. As a former Certified Business Intermediary, I can say from experience that unfortunately, most have no alternative for the 80% of listings they can’t sell.

The Road Less Traveled

The truth is, despite popular conceptions to the contrary, sales to third parties are the road less traveled. Certainly, many lifestyle businesses are really jobs and have to close when the founder/owner/CEO retires. Many others, however, could recoup the owner’s investment with a structured transfer to employees.

road less traveledGiven a few years, most owners could hire and train a suitable buyer. That usually requires support, since few have experience in recruiting and teaching someone to do what they do. There is also some education involved to help the owner understand how investing in a top-flight employee today can pay huge dividends in the future.

Additionally, there is the issue of owners who believe that they have to keep any rumor of their impending retirement from others in their industry. Customers, vendors and competitors are a fertile market for acquirers. A good advisor can act to maintain confidentiality when putting out feelers.

Advisors need to be more proactive in approaching clients about their objectives and their options. Initiating a structured conversation around both is in the best interest of the client and the advisor. They may choose to avoid the road less traveled.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

The Build vs. Buy Equation

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If you’re wondering what your business might be worth to an acquirer, there is a simple calculation you can use.

Let’s call it “The Build vs. Buy Equation”.

At some point, every acquirer does the maths and calculates how much it would cost to re-create what you’ve built. If an acquirer figures they could buy your business for less than they would spend on both the hard and soft costs of re-deploying their employees to build a competitive product, then they will be inclined to acquire yours. If they think it would be less costly to create it themselves, they are likely to choose to compete instead.

The key to ensuring that what you have is difficult to replicate is focusing on a single product or service and building on your competitive point of differentiation. When you create a product or service that is unique and pour all of your resources into continuing to differentiate it from the pack, you can dictate terms, because re-creating your business becomes harder the more you focus on one thing.

The worst strategy is to offer a wide range of services and products only loosely differentiated from others on the market. Any acquirer will rightly assume they can set up shop to compete with you by simply undercutting your prices for a period of time and driving you out of business.

C-Labs Focuses On Building An Irresistible Product

Chris Muench started C-Labs in 2008 to go after the burgeoning opportunities presented by the Internet-of-Things (IOT). He began by writing custom software applications that allowed one machine to talk to another. In 2014, he got the industrial giant TRUMPF International to acquire 30% of C-Labs, which gave him the cash to transform his service offering into a single product.

By the end of 2016, Muench’s product was showing early signs of gaining traction but C-Labs was running out of money.

In the end, TRUMPF acquired C-Labs in a seven-figure deal that could stretch to eight figures if Muench is successful in hitting his future targets. Why would a large, sophisticated company like TRUMPF acquire an early-stage business like C-Labs? Because they knew that re-creating Muench’s technology would cost much more than simply writing a seven-figure cheque to buy it outright.

In other words, TRUMPF used The Build vs. Buy Equation and realized that buying C-Labs was cheaper than trying to reproduce it.

Selling too many undifferentiated products or services is a recipe for building a business that—if it is sellable at all—will trade at a discount to its industry peers. By contrast, the trick to getting a premium for your business is having a product or service that is irresistible to an acquirer, yet difficult for them to replicate.

Kerry Boulton, CEPA is Australia’s most respected exit strategy advisor. With over 20 years in business as an entrepreneur, transformative coach, consultant, sought after speaker and talented facilitator, Kerry has been helping business owners like you to overcome challenges while providing the steps needed to ensure that you find the financial freedom you deserve.