Operating your own business is a tremendous task, and many business owners, especially in the small to the middle-market range, tend to avoid that task ending, after all, it’s what has paid their bills and consumed most of their time since opening it.
However, every business owner needs to sit down and plan their eventual exit. It will happen, and it’s best to plan well ahead of time than to wait until the last minute, not only for your sake, but for the sake of everyone involved in the company’s past, present, and future.
We’re going to go over what a business exit plan is, and how to develop a business exit plan successfully.
Let’s get started.
What is a Business Exit Plan?
A business exit plan is your plan on how to end your involvement with the business you’ve built. Sometimes, this means selling a business to a new owner and simply having them take over, but it can also be forming a partnership with another business while you step down, or letting the business become acquired and fully operated by another established company. You can also make an exit plan for something such as rebranding entirely and shifting the company’s focus without leaving it behind, hence, you’re “exiting” the company’s established purpose and moving on to something new.
For clarity’s sake, we’re going to focus on business exits that involve you completely leaving the business.
A proper business exit strategy and plan will focus on organizing the company’s past to make the upcoming transaction smooth and transparent for all parties involved, managing the present to ensure the business continues performing properly, and considering the future as many different people and connections will be affected by the transition.
All of this needs to be thought out long before exiting the business is even a near-future possibility. That’s where most business owners make their biggest mistake, they wait until they actually want to leave to consider a business exit plan, and that makes it much harder to perform the tasks outlined above. Ideally, you should begin forming an exit plan as early as possible. Even having a general idea of how you would like to leave the business upon opening it is a good idea, even though you likely won’t have nearly enough information at that point to start fleshing the plan out, it will give you a goal to plan around.
Forming a Business Exit Plan: Step-by-Step
There are six main points that you need to consider when developing a business exit plan, and there are some side points that would be a good idea to think about beforehand. We’re going to go over an extensive list of the things you need to think of and do while forming your plan.
1: Financial Organization
If you have all of your business’s financial information and records properly organized, your transaction will be a lot easier, regardless of how you’re stepping away from the business.
This is one step that you can do from day one. The second you start acquiring assets, hiring employees, and making profits, keep those records organized and in a safe place. Make backups just in case something gets lost. While most people will tell you 7 years of financial information is enough, you never know when something might happen and a sale might be necessary. Also, it’s a lot easier to start with organized, well-maintained records than it is to go back through years of records and try to organize them. So, the sooner you start, the fewer headaches you’ll have in the future.
Having all of your financial records organized isn’t just a boon when you sell, either. It’ll make operating your business easier as you get to the point when you want to sell your business, and if any problems such as audits pop up, you’ll be prepared, so this is useful for far more than just your eventual exit plan.
2: Decide How to Exit
You have a few options you can choose from when developing a business exit plan. You can close your business and liquidate the assets for profit, sell it to someone close to you with a Seller’s Financing Agreement, or sell the business to another business owner looking to expand into whatever sector you’re currently operating in. Those are the three main exit strategy solutions middle-market business owners make.
Each one of these options provides a different set of benefits and drawbacks. If you start liquidating all of your assets, your business is gone entirely. That has major implications for your employees and the businesses you work with for supplies or services, and your legacy is simply turned into a lump sum. Also, if you don’t have a lot of high-value assets to liquidate, you might not get as much money as you’d think.
If you sell to another company or an investor, you’ll have a lot of room for negotiating “shopping” for the right buyer, and sometimes, you’ll get a better price since they tend to have more capital to spend. However, the selling process can be complicated, and you have to understand that the buyer will have demands of their own, and if you go into a negotiation only thinking of yourself, they can walk away and not come back.
Finally, you can sell the business to someone you trust, such as a family member or a close employee who has demonstrated a desire to keep the place running. This is a good way to keep your legacy going strong because the people you’re likely to strike this type of deal with likely have an interest in the company’s future and are tied to it in some way.
A Seller’s Financing Agreement is usually used in this situation because your family member or whoever you’ve decided will inherit the business probably won’t have a few million dollars sitting around to pay all at once. Instead, they can pay at regular intervals via the profits they’re making. This works in your favor, too. It means you’ll continue getting regular checks, and you can stick around to mentor them until it’s paid off to make sure they operate the business in an effective manner.
The way you decide to sell your business will have a major impact on you and everyone else involved in its operation. So, try to think long and hard about this aspect of the plan well before you need to.
3: Consult Your Investors
If you have a middle-market business or even a fairly young small business, it’s likely that you have investors putting money into it, or who helped you get the business up and running, who haven’t paid off yet. You don’t get to write off their contribution to the business, and they will need to be repaid.
Because of this, your investors are probably the first people you’ll talk to about the sale. You’ll need to approach them and fill them in on your decision to leave, and then you’ll have to convince them that they’ll get their money back. That includes having a plan formed to actually do that, and you should be able to prove that the plan will work.
Your investors put money into your business because they believed in it, and they believed they’d get a return. If they haven’t gotten that yet, it’s your duty to ensure that they do.
You can do this by bringing the quotes for how much your assets are worth when you liquidate them, work the repayments into your sale agreement and show them that they’ll continue getting paid, provide the rest of what they’re owed with the sum you’re paid for the business, etc.
4: Transfer Leadership Responsibilities
This is obviously something you’ll have to do closer to when you’re actually going to sell. Unless you’re liquidating the company, your employees will likely stick around unless the new owners decide to implement a staff of their own. You need to start preparing a new leadership team to ensure that your responsibilities are covered during the transaction, and to ensure the buyer that they’re acquiring a team that can handle itself.
This does not mean you need to announce your exit. Doing that too early can cause issues within your company. However, promoting employees and readjusting your team, while moving someone closer to your position to ensure they can handle it when the time comes, is key.
A good example of this if you were to sell to a family member would be to bring that person in and have them shadow you. If they’re directly taking over your position, they’ll need to know how to do it. If the company is being acquired, you might want to move your top employee to your side ahead of time to ensure they can handle the job.
Doing all of this at the last minute is a bad idea because the buyer might enter their new business and find a team that isn’t operating as described, the business can start suffering, etc.
5: Tell Your Business Contacts
Very few companies operate self-sufficiently. You likely have suppliers, freight transferring companies, and even the local electrical or plumbing companies that keep your lights on and facilities flushing that rely on your business. Some of those might not be comfortable just shifting to a new owner, and if the new owner has plans to cancel contact with them, that can affect their business dramatically.
Make sure you reach out and inform your business contacts that you’ll be exiting the business, and if there is any part of the deal that affects them, you might need to let them know. If not, simply letting them know who they’ll be communicating with going forward is a good idea.
6: Inform Your Employees
Your employees are the backbone of your company. You can’t operate it by yourself, and without them, you’d have never gotten where you are. The sale of the company might impact their lives dramatically.
Let your employees know that you’ll be exiting, and what parts of the deal will be affecting them.
However, it’s important to hold off on this part of your plan until close to the end. They deserve time to make decisions to secure their own futures, but you don’t want to say something too early and have half your team leave after you’ve already told the buyer you have a fully capable staff.
Also, give them the details they need and deserve, but you don’t need to explain every aspect of your decision or leave room for negotiation. It’s your business, and you have every right to leave, just make sure you do it in a way that respects their service and tries to give them a fair shake, as well.
7: Break it to Your Customers
Your customers have likely been relying on your products or services for years. As a B2C company, each of those customers coming in to have their taxes handled, purchase their milk for the week, have their car worked on, or whatever it is you offer, have relied on you. If you’re a B2B company, you’re probably a big part of another company’s day-to-day operations.
It’s important to let your customers know that you’re leaving. If you’re a B2B company, introduce your customers to the new owner and ensure that your legacy of providing good service is in good hands. If you’re a B2C company and shutting down entirely, make sure they know of similar services that can replace yours.
8: Keep Promises
Plan out how you’re going to keep your promises. You likely have employees who are ready for the promotions you promised them, and if you don’t work those details into your exit plan or ensure that the new owner abides by them, that looks bad on you. The same goes for any promises made to your business contacts, investors, etc.
You might not be able to make decisions once a new owner takes over, but you can do your best to exit the business in a manner that shows your integrity and character.
Contact a Professional
This all seems very simple until you start to get into the process of developing a business exit plan. To make it worse, messing up any of these points can have serious consequences for your exit. It can cost you money, damage your reputation, or tarnish your legacy. If you’re having trouble, contact professional M&A advisors specializing in business sales to help you plan your business exit the right way.