Does your small business have an exit strategy?
How to Plan a Successful Small Business Exit Strategy
You may be thinking you don’t need one right now—perhaps your intention is to keep running your company successfully for many years to come. But things can change quickly, either in your business or your personal life, and it pays to be prepared.
What happens if you need to take a step back from your business for health or family reasons? What if your interests change, or your industry changes and your business is no longer so compelling in its current form?
It’s a common problem. More than half of small business owners plan to leave their businesses within ten years, but three-quarters of them have no plan in place, according to a survey by Securian.
So whether you’re looking to move on in the near future or just planning ahead, this tutorial will teach you how to put together an exit plan for your business.
We’ll look at what an exit strategy is and why it’s important. We’ll touch on some of the different possibilities for exiting a business, and then we’ll go through the steps involved in planning an exit strategy for your small business.
By the end of the tutorial, you’ll be clear on the importance of a business exit strategy and be ready to put one in place.
1. What Is an Exit Strategy?
First of all, let’s get clear on exactly what an exit strategy is.
It may sound negative, but it isn’t. Many small business owners are so focused on growth and success that they don’t want to think about leaving. But an exit strategy doesn’t mean your business has failed. It could be very successful and profitable—it just means that you’re moving on and letting someone else take charge. There are many reasons why you might want to do that, and we’ll get to those in the next section.
An exit strategy is simply a plan for what will happen when the day comes that you want to leave your business. It describes the form that the transition will take, and it lays out plans for some of the details—again, we’ll get to those later in the tutorial.
There are various different types of exit strategy. You might
- Sell your business to a larger company or to one of your
- Sell to a private equity firm or other investor.
- Pass it on to a family member or sell your stake and let one of your
business partners take over.
- Arrange for your employees or
managers to buy you out.
To learn more about these strategies and their pros and cons, see my previous tutorial on the most effective exit strategies for your business:
2. Why You Need an Exit Strategy
You may be reading this tutorial because you’ve already decided to create an exit strategy—if so, feel free to skip to the next section to find out how to do it. But if you’re still not sold on the idea, here’s a quick look at why every small business owner should have an exit strategy in place.
There are many reasons why you might want to exit your business in the future, but here are some of the most common:
- health problems
- change of interests
- an unexpected offer
- a new venture
- needing to raise money
- wanting to spend more time with family or
take care of a loved one
Those things might seem a long way off right now, but your circumstances can change quickly. What if a family member needs you? What if you get an attractive offer for the business tomorrow? What if a wonderful opportunity comes up to start a new business or take a dream job?
If you haven’t prepared in advance, these events can be overwhelming. You won’t know what to do, what options are available, how much your business is really worth, what kind of future you want for it, and so on.
Creating an exit strategy simply means thinking in advance about how you’d like to leave the business eventually. It can remove a lot of the uncertainty and leave you well prepared to deal with the transition, whether it happens in two weeks or twenty years.
So now let’s look at what’s involved in putting a plan together.
3. Set Your Goals
The first step in planning an exit strategy is being clear on what your goals are, both for yourself and your business.
All of the different exit strategies available have their pros and cons. Some options allow you to retain a financial stake or various levels of involvement in the business, either in an advisory or day-to-day role. Some give your company a better chance of surviving in its original form, while others may see it broken up.
So ask yourself what’s important to you:
you want to stay involved in the business or have a clean break?
- Do you want to
retain some control over its future direction, or do you want to give the new
owners free rein?
- Is it more important for you to maximize your financial gain
or to leave the company in good hands?
These are big questions, so try to spend some time thinking about them—this is not something you can squeeze into the odd half-hour between meetings. And your decision will probably affect other people too, so you may also want to consult your family members, your business partners or your staff before making a decision.
If you speak to staff members, of course you’ll need to be sensitive about how you frame the issue, so that they don’t panic about their job security. But if you deal with it in the right way, it can be a great idea to involve them in the big decisions about the company’s future rather than keeping them in the dark.
4. Choose the Best Option(s)
As we saw in the introduction and in the earlier tutorial on effective exit strategies, some of the main options available to you are:
- Pass it on to a family member.
- Sell to another company (a “trade sale”).
- Have your management team buy the company
- Have your staff pool their resources and
buy it (employee buyout).
- Sell your stake to a business partner or
- Invite investment from a private-equity
- Hold an IPO.
- Simply close the doors and sell off the
Use the information you’ve put together in the previous section to inform your choices. For example, if your goal is to maximize your financial gain, selling to a large company will likely be a good strategy. But that may well see your firm merged into the larger entity and losing its independence, so if you prefer to see the company survive in its original form, another option like a management buyout may work better.
All of the options have pros and cons, so read the previous tutorial to find out more about what those are and how to weigh them up.
If you’re planning for an immediate or imminent exit, then you’ll want to choose one option, but if you’re planning more generally for the future, you may want to choose several possibilities. For example, your “Plan A” might be to run the business until retirement and then invite a management buyout. But you may also want to consider the “trade sale” option, so that if someone makes an offer for your company or your plans change in the future, you’re prepared for that possibility too.
5. Make a Plan
Once you’ve decided on an option or options to pursue, you’ll want to make a detailed plan.
How will the transition take place? What steps will be involved?
The Elements of a Solid Exit Plan
In order to have an effective plan in place, you’ll need certain details.
The first is a valuation of the company. How much is your business worth? This is particularly important to know in the event of a sale, but it’s also relevant in other situations. Even if you’re passing the business on to a family member or business partner, you’ll need to know its value in order to calculate the tax implications, how much your stake is worth, and so on.
An accountant can help you with this. Or you can also get some tips from this tutorial:
Then you’ll need to plan preliminary steps. This is what you’ll do before the transition occurs. A key part of that will be to get the company accounts in order, if they’re not already. You may also want to prepare the business for the transfer of ownership in other ways, such as:
- simplification of processes
- selling off non-core businesses
- collecting accounts receivable
- paying off debts
- removing any entanglement between your
personal finances and those of the business
- hiring a team of experts to handle the exit
Then you’ll need to make a succession plan. This lays out what will happen in the event of a change of ownership. If you’re leaving the company, who will take over your work? Go into detail here, and account for everything you do within the company. Similarly, if other executives will be leaving with you, how will they be replaced? Or if you plan to stay involved in the company, what will that involvement look like specifically? How will that work?
The idea here is to plan as comprehensively as possible for the company’s existence after your exit. For more tips on effective planning processes, see our collection of planning tutorials on ThemeKeeper Tuts+.
Form a Team
Exiting from a business is a major event, and especially if it’s a large or complex business, the process can be quite complicated. There are tax implications both for you and the business. If you’re selling to another company, you’ll probably need help with things like finding a buyer, getting the accounts in shape, helping the prospective buyer inspect those accounts to the degree necessary, arranging the legal documentation, notifying the appropriate authorities, and so on.
So you’ll probably need the services of an accountant and a lawyer at the minimum, and if you’re arranging something like a private equity buyout or a trade sale, you may benefit from hiring a broker or consultant with experience in arranging such deals.
If you’re planning a long way ahead, of course you don’t need to hire those people right now. But it helps to do some research and find some possible candidates, so that you don’t have to start from square one when the time comes for you to put your exit strategy into practice.
Consider Personal Finances
Having an exit strategy is a business decision, but it’s also a personal decision. It will usher in a new chapter in your life, whether that’s retirement, a new business, or something else. So you’ll also need to plan your personal finances to make sure you’re ready.
If you want to retire, do you have enough saved? One survey found that almost 70% of self-employed people are not saving for retirement on a regular basis. If your business is successful, you may be able to use the proceeds from selling it to fund your retirement, but it’s dangerous to rely on that—what if you have a few bad years or get hit by an economic recession, and the value of your company plummets or you struggle to find a buyer? It makes sense to have alternative plans in place.
The same applies if you’re planning to exit for other reasons. New ventures will require money, as will taking time off to attend to family affairs or personal goals. Make some estimates about what’s required, and start diverting a chunk of your personal income every month to a savings account dedicated to meeting that goal.
6. Step Back
No matter which exit strategy you choose, it will mean either less involvement for you or no involvement at all.
So, for the transition to be successful, you need to figure out a way for the company to work without you. Often this can be a problem for small businesses, in which the owners may have started out doing everything themselves. Even after they’ve hired other employees, it can be hard to step back, and many entrepreneurs find themselves handling everything from the sales to the company accounts.
If you plan to sell your business, this may be a major red flag for potential buyers. The company may be successful, but if its success depends on your personal involvement and effort, what will happen when you leave? Nobody wants to buy a company whose value is driven by one person.
Similar problems exist with other exit strategies. If you want to pass the business on to a family member, you may be passing them a poisoned chalice if the company doesn’t have the processes in place to function effectively without you. If you plan to let your managers or staff buy you out, they’ll need to be able to manage without you.
So if you’re planning to exit the business in the near future, you should assess your role in the company and take urgent steps to detach if you are doing too much. Train your staff to take over from you, hand over key functions to your managers, and document the processes involved so that anyone can take over without needing to ask what to do. The sooner you begin the transition, the better.
Even if you don’t plan to leave the business for many years, taking a step back and giving your employees more responsibility can still often have a lot of benefits. It gives them more sense of ownership, and it lets you focus on the more important strategic work instead of getting caught up in day-to-day minutiae.
(If you don’t have any employees, you can still see if there are functions you can outsource or automate. Or at the very least, document what you do so that someone else can easily take it over.)
For more on the benefits of delegation and how to do it, see the following tutorial:
Congratulations! You’re now ready for a successful exit.
In this tutorial, we’ve looked at what an exit strategy is and why it’s important. Then we’ve covered the process of putting together an exit strategy from start to finish.
As with any planning process, of course, it’s also important to revisit that plan at regular intervals in the future, so that you can take account of changing circumstances and make sure the plan is still relevant.
For some small business owners, putting together an exit strategy may be a painful process—it’s anticipating the day when you’ll no longer be there at the head of the company you’ve built.
So you may be tempted to avoid it or procrastinate. But I hope this tutorial has made the process more understandable and less intimidating and helped you to take the next step of actually putting a plan in place. If you have any questions or comments, feel free to leave them below!