Whenever you create something that’s interesting and useful, you create something that’s worth selling. And when you’re thinking of selling something that’s as vital to you as your business, it’s best to have a well-developed plan firmly in place.
In business terminology, an ending for a business owner is called an “exit,” while the planning of a defined ending is called an “exit strategy.” Having an exit strategy tells others who have the occasion to view your business that you’re in control of your business, that you’re aware and goal focused, and that you have a plan for an organized and profitable ending.
Business owners who don’t plan for ownership transition are often faced with the inability to receive enough money in an ownership change to fund a comfortable retirement. This doesn’t happen because such owners failed to create value in their businesses; rather, it’s because they failed to do the planning that would have allowed them to keep that value.
If you are just starting your business and intend to seek angel investors or venture capitalists, those investors will require that you have a viable exit strategy in place before they’ll award you a dime. Business owners who are approaching retirement may want to sell their business to an outsider, a key employee, or to a co-shareholder or partner. Alternatively, they may want to transfer their interest intact to children or other family members. How can all of this be accomplished? You got it — with an exit strategy.
If you’ve been in business for years and are just now thinking of developing an exit strategy, don’t despair. But do start your exit strategy today, keeping in mind that defining it is a process that requires careful thought. Rather than being something you’ll finish in 10 minutes, this plan takes time, both now and in the future. Continue to revisit your exit strategy as your business grows.
All strategic exit plans should identify the following key topics:
- Current valuation of your business
- The factors that drive the value of your business
- Methods to increase your business value
- The potential future value of your business
- Your options for ownership change
- Likely tax implications of ownership change
- Tax-saving methods specific to your business
- Your likely proceeds from strategic ownership change
Set Up a Strategy
Let’s say you accomplish the above imperatives and realize the current valuation of your business isn’t what you thought it was, perhaps because you were off the mark when you originally determined the factors that drive your business’s value. These two factors play into a third: your likely proceeds from an ownership change.
In cases like these, you’ll need to amend your exit strategy or potential buyers won’t be interested. Maybe expenses need to be reduced, better buying practices put into place, tighter controls placed on accounts receivable, improved service or focused sales and marketing initiatives need to be considered.
You get the picture. With a proper business valuation and some exit strategy planning, you can provide for a smooth transition and make the business more valuable and desirable. Alternatively, you can ensure that it will be turned over to family members on the most favorable terms to you, with the lowest tax consequences legally possible.
With your exit strategy in hand, work each day to make the decisions and moves that will position your business to reach your exit goal. In doing this, you’ll likely find that running your business is a much more fruitful and fulfilling experience.