What Are Business Exit Strategies and Exit Plans? How Do They Differ?

Let’s begin by discussing Exit Strategies.  Exit Strategies are the methodologies by which a business owner can exit his or her business.  Commonly used Exit Strategies are transitioning the business to family members or management.  Another Exit Strategy is to sell the business to a third party.  Not having a formal Exit Strategy is sometimes referred to as the “work until you drop dead” Exit Strategy.

There are also less popular types of Exit Strategies.  In the case of a limited few start-ups or larger privately held companies, there is the possibility of “going public” as an Exit Strategy.  In my opinion, going public is not always a means to free yourself of the obligation of managing the business, but many do consider this to be an Exit Strategy.  (Please read, "Is Going Public a Viable Exit Strategy?")

Also, some advisors advocate adopting what’s sometimes called a “lifestyle” Exit Strategy.  This comes from the idea that a business owner can somehow structure the business in such a way that he or she can then just sit back and watch the company generate enough cash to support a good lifestyle in retirement. In my experience, this usually proves to be more of a dream than a realistic Exit Strategy.  Lifestyle Exit Strategies may work for a limited amount of time, but they never seem to really pay off over the long term, particularly in cases where the company loses its most valuable asset – the owner. (Please read, “Your Business – An Investment or Just a Paycheck?”)

On the other hand, Exit Plans by nature are far more comprehensive than Exit Strategies, although Exit Strategies are an important aspect of Exit Plans.  Exit Plans for business owners may include Exit Strategies, but they also focus on other areas of planning, such as:

Estate Planning
Wealth Preservation
Succession Planning
Contingency Plans
Retirement Planning
Corporate Strategic Planning

Beyond addressing the traditional planning processes above, there are additional components of Exit Planning that are specific to the needs of business owners and may or may not be considered part of an Exit Strategy.   Other goals of Exit Planning are to address issues like positioning the company in such a way as to maximize its value, the timing of any exit transaction, determining the nature and structure of any transaction, and most importantly, implementing strategies to minimize taxes and expense.

Lastly, Exit Planning strives to integrate a business owner’s personal and business financial goals and objectives into one comprehensive plan.  Most business owners have many advisors, such as business and/or personal accountants, attorneys, financial planners, insurance agents, bankers, and so forth.  All these advisors have their own skill sets and agendas. A difficult part of the Exit Planning process is to coordinate the services of these advisors so that the business owner has just one comprehensive plan, rather than many separate plans that each addresses just one part of the business owner’s overall financial picture.  The problems of piecemeal planning should be obvious.

As you can see from this brief article, Exit Strategies are just one small aspect of most Business Exit Plans.  How you decide to exit your business and which Exit Strategy you employ will certainly affect other elements of your Exit Plan – but be aware that Exit Plans and Exit Strategies are vastly different.
In upcoming articles, I will discuss each part of the Exit Planning process in greater detail.  Please check back again next week.