Why Every Business Owner Needs an Exit Strategy

Business.com / Business Basics / Last Modified: May 25, 2017
Photo credit: Have a nice day Photo/Shutterstock

Establishing an exit strategy – a plan for eventually leaving or selling the business – is a common-sense part of smart entrepreneurship, and it lends a sense of safety and peace of mind to what is inherently a risky proposition.

In the construction industry, it’s long been standard practice – backed up by modern regulations – to ensure that every building, floor, or structure where people will be living or spending any amount of time has at least two doors, preferably on opposite ends of the space.

Why? Because, if anything happens inside the building that requires the occupants to leave quickly, there needs to be an adequate number of exits available. And if something like a fire or other damage makes it impossible to get out one way, there needs to be another exit available for people to use.

When you picture yourself in that room or building, having multiple available exits is not just a matter of convenience, but it’s a matter of safety and common sense, too.

The same principle applies to owning and running a business: establishing an exit strategy – a plan for eventually leaving or selling the business – is a common-sense part of smart entrepreneurship, and it lends a sense of safety and peace of mind to what is inherently a risky proposition.

Let’s briefly discuss what an exit strategy involves, and why it’s necessary for every business owner.

What does an exit strategy involve?

Planning an effective exit strategy is going to be necessarily different for every business. It needs to include a customized plan that accounts for the individual company’s unique circumstances, market and industry conditions, trends, and the goals and time frame of the owner(s). There’s no one-size-fits-all template you can download and fill out to establish an exit strategy for your business.

That being said, every exit strategy is going to incorporate an appropriate combination of the following elements, with minor variations for unique circumstances:

Goals - What does the owner want and need to get out of the business when they leave? Is it primarily a matter of profit, or are they eager to leave their mark?

Time frame - When does the owner want or need to complete the sale? If the time frame is flexible, it puts the owner in a much better negotiating position. If it’s tight, options and potential are limited.

Intentions for the business - Does the owner expect to see the business continue indefinitely after they leave, or are they comfortable with seeing it dissolve? This important factor will help determine if the business is to be sold, merged with another business, set up for transition through succession planning, or simply liquidated.

What’s next? - Does the owner want to take proceeds from a sale of the business to fund another venture or retirement? Or are they only interested in breaking even and getting out? A well thought-out exit plan must address all these elements as specifically and concretely as possible. Otherwise, it becomes nothing more than a vague wish list rather than a vital part of the business plan.

Why is an exit strategy important for every business?

Today, most business brokers and advisors recommend incorporating a thorough exit strategy into the business plan from the very start. While it may seem counterintuitive to plan on starting or buying a business and simultaneously plan how you’re going to sell or remove yourself from it, this really is the smartest plan in today’s fast-moving economy.

Here are some benefits of establishing an exit strategy as early as possible:

Provides a blueprint for success - If you don’t know where you’re going, you’ll never know when you get there. An exit strategy helps define success and provides a timetable for charting your progress.

Informs strategic decision making - With no planned end game, it’s easy for business owners to get caught up more in the “job” they’ve given themselves rather than the long-term strategy behind running the business itself. An exit strategy keeps that endgame in view and can make day-to-day decisions more strategic in nature.

Enhances the value of the business - “Value” is a relative term, so this doesn’t necessarily mean having an exit strategy will make a business worth more when it’s finally acquired or sold. Rather, having an exit strategy enhances the company’s value to the current owner since they will be guiding it toward their own predetermined preferred conclusion.

Provides a flexible template - While the initial exit strategy will likely need to be adjusted over time as circumstances change, if it’s there from the start, it provides guidance and benchmarks to use should unexpected events occur. For instance, a sudden death, divorce, major health problem, or required relocation can cause an unexpected early departure from the business. If the exit strategy is already in place, a business owner or estate can more quickly and efficiently and move forward without losing tremendous value.

In addition, the act of creating an exit strategy – preferably with the help of professional advisors, including a business broker, attorney, commercial real estate broker, and accountant – provides a solid framework for the entire business lifecycle, which provides both practical and strategic advantages across the board, not to mention peace of mind for those times when the day-to-day running of the business is so stressful.

If you’re currently considering buying a business, or if you are preparing your business for sale, it’s vital to consider your exit strategy and get the help you need to ensure it incorporates everything you want to get out of your commercial ventures. Like a wisely-placed door in a room, it will offer convenience, safety, and security in your entrepreneurial efforts.

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