Why Every Business Owner Needs an Exit Strategy

You wrote a business plan to launch your company. To say goodbye to it, you need an exit plan to get the maximum possible return and to limit any future exposure to what happens to your company afterward. But years of experience teach you that nothing in business is predictable – and that’s why you actually need two exit plans.

Why every business owner needs an exit strategy

Today, most business brokers and advisors recommend incorporating a thorough exit strategy into your business plan from the very start. While it may seem counterintuitive to plan on starting or buying a business and simul

Today, most business brokers and advisors recommend incorporating a thorough exit strategy into your 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 move you can make in today’s fast-paced economy.

Here are some of the benefits of planning an exit strategy.

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, ideally, they will be guiding it toward their own predetermined preferred conclusion.

Provides a flexible template 

While your 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 an exit strategy is already in place, a business owner or estate can more quickly and efficiently 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 life cycle, which leads to 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.

Why you need 2 exit strategies

Creating one exit strategy may seem daunting enough, but to really cover your bases, you should actually craft two different plans: one for a voluntary exit and one for an involuntary exit.

With a voluntary exit strategy, you’ll know the following:

• When you want to leave: Maybe it’s in five years, 10 years or when revenue hits $10 million.
• Who you want to take over the business: It could be a brand-new owner, your current management or a family member.
• How much you want to leave with: Perhaps you’d like a lump-sum payment, a share of profits every month for the rest of your life or a mixture of both.
• What to do if you’re approached by a potential buyer: How will you react if you’re contacted out of the blue? Accounting firm Saffery Champness reported in 2021 that more business owners were receiving unsolicited buyout offers than in years past.

But things don’t always go the way you expect them to, so you need a plan for that as well. With an involuntary exit strategy, you’ll know what to do in the following situations:

• You fall ill and you’re not able to work in the way you used to (or work at all). You need clarity on who’ll take the reins and make decisions, and you need to train them beforehand.
• Your business begins to fail financially. You need to know which employees and assets can be jettisoned quickly to ensure an acceptable level of survival.
• You burn out and just can’t take it anymore. If it’s all getting to be too much, you need to look after yourself. To do so in a timely manner, you need to know what the business owns that has value and can be sold quickly.

The best way to plan for leaving your business for good is to prepare as if you have to leave it involuntarily.  That might sound counterintuitive, but the situations that lead to voluntary and involuntary exits have a lot in common. For example, in either scenario, you need to do the following:

• Train people to run the company in your absence. Somebody buying your business will have other interests and may not want to spend all their time on it. Knowing a business is not owner-reliant is a massive selling point. And if you’re ill or burned out, knowing your staff can continue to generate cash without you is a big comfort while you get better.
• Know which assets and staff to cut to survive. This is not just a way for you to reduce costs when business is suffering; it’s also a road map for a new owner looking to streamline operations and make more money.
• Sell off nonvital assets quickly for cash. When revenues drop, businesses need a cash injection while they wait for sales to return. A new owner could sell the exact same assets to offset some of the amount they paid to purchase your business.

With two exit plans in place, you have more bases covered, and you can carry out strategies that benefit both you and the new ownership.

What an exit strategy involves

A well-rounded exit strategy involves the following components:

Knowing when you want to leave

For a voluntary exit strategy, give yourself a date in the future by which you want to have achieved your ultimate goals based on metrics like company revenue and profitability. Also decide whether you’ll proceed with a sale even if you don’t achieve those targets. Once you have a date, your exit strategy approach becomes about building value in your business and making it as attractive as possible to potential buyers.

Discovering who your most likely buyers are

Who wants to buy your company depends on your line of business, revenue, growth rate and other factors. To get the wheels turning, take a look below at potential buyers for four very different types of businesses.

No two businesses are the same. A list of prospective buyers for your company will be unique to you, but in most cases, your organization will be most attractive to your direct competitors.

Bear in mind that sometimes your real value may be hidden behind your North American Industry Classification System (NAICS) Code. Consider this example: If you’re an e-commerce retailer, you might have created bespoke apps to run your business better. These apps might appeal to a technology company and greatly increase your value in a voluntary sale. They can also be sold to help you raise cash quickly if your company needs money now.

Building value and improving performance in your business

Look at new ways to get more people to your website or your premises every month with each visit costing you less. For instance, consider changing suppliers if you’re offered a similar quality product or service that does the job for a lower price. Ask yourself what you need to do to get that package to your customer in three days instead of four.

Keep finding areas of improvement across your business. To continue the example above, if you do have bespoke apps that help you run your business, keep developing them with your own needs in mind first, but also consider what other companies would need to make them want to rent them from you.

Another great way to build value is to do a competitor analysis. Investigate the competition in your market. Where are they doing better than you, and how can you match or beat them?

Chasing profitable growth

Be experimental and creative in your advertising, and keep tweaking every campaign to find wins like a drop in cost per sale or conversion. If you can prove to the buyer that by spending $1 on this campaign, you get $10 in revenue back, and that’s been the case for years, that has tremendous value.

Promote deals to customers through email marketing campaigns and SMS messaging, and aim to make as much money as you can on each sale. Think of your buyer when pricing up and chasing new business.

Doing everything you can to keep customers loyal

Don’t use the client email addresses and phone numbers you’ve collected just to move inventory; use them to grow customer loyalty. Let them know about a new product before it goes live on your website, and give them the first opportunity to buy it. Send emails asking customers to recommend you in online reviews. When someone does, give them a shoutout on social media, and offer them a present as a thank you. [Learn the importance of social media for small businesses.]

Use customer tracking tools to work out the annual and lifetime value of each customer. Buyers look for those types of numbers. They also like companies with lots of clients who have given permission to receive emails and texts.

Customer loyalty is key in any involuntary exit plan. You can attract regular clients and raise money quickly with a one-time sale. For example, if you sell subscription services, offer a special annual deal to existing customers to generate an influx of cash.

Handing over responsibilities to employees

The hardest types of businesses to sell are mom-and-pop shops and one-man bands. To a buyer, it’s like buying a job, not a company. It’s also really hard to sell businesses where there are 10 to 20 employees, yet success is still the responsibility of the owner. That’s because it’s like buying the job of a senior manager.

Delegate an increasing number of responsibilities to your employees over time. Train them and trust them to take on key tasks. If they make a mistake, be there to help them and build up their confidence. If you don’t delegate, you’re training helplessness instead of anything valuable.

If a buyer asks, “Have you spent time away from the business?” you want to be able to confidently and truthfully say something like, “I spent three months in Hawaii and got one update email from the team a week. Everything ran like clockwork.”

For an involuntary exit plan, knowing you can step away for a while and still draw money thanks to your responsible staff gives comfort if you’re suffering from ill health or burnout.

Paying down company debt

You should try to pay down as much company debt as possible. That’s because when one company takes over another, things like business equipment loans and factoring service agreements cannot be novated.

In other words, they have to be settled in full on “completion day” (the day you sell your business). Normally, whatever you owe creditors is subtracted from the agreed-upon price you sell your business for, so you want to have less debt to subtract. Paying down debt also reduces your monthly servicing bills, meaning more profit in the meantime.

Starting to save money

Selling your business costs a lot of money. There are lawyers’ fees, accountant fees, professional service fees, a commission to your broker and more. For a business with $1 million in annual revenue, expect to pay up to $150,000 for a successful sale. If a deal is agreed to but falls through, you’ll still have to pay your team of outside advisors and experts.

If your business is struggling financially, having a decent amount of money saved up gives you more time to delegate day-to-day tasks to staff and raise cash by selling assets. If you also shrink your payroll and look for other savings, this will buy you even more time.

Tips for executing an exit strategy

Now that you know what an exit strategy involves, here are tips for executing your plans.

1. Bring in outside expertise.

You need to build your own professional team for the sales process because your buyer will almost certainly have one. You want to level the field as much as possible, but you also want people on your side who know the intricacies of selling companies.

Consider hiring part-time CFOs or fractional CMOs well before you put your company on the market. Bring experienced, proven talent with wider connections in the business world to your C-suite to help you improve the organization first. They’ll be invaluable in helping you carry out your exit strategy if a deal is on the table.

These same professionals will have proven themselves adept at crisis management in their careers too. They’ll be able to help you get out of awkward financial situations and train your workers to handle management responsibilities.

2. Keep your accounts up to date and your accountants close.

Inform your accountants that you want to be in a permanent state of readiness in case you receive a purchase offer out of the blue or you decide to put your company on the market. Once you’ve identified the financial areas of greatest interest to your buyer type, make sure your accountant updates the company’s finance reports on a weekly or monthly basis and keeps historical records of them. The best accounting software will definitely come in handy. [Related article: How to Hire the Right Accountant for Your Business]

3. Hire a corporate lawyer.

Retain a lawyer, preferably one with mergers and acquisitions (M&A) experience. Your buyer’s corporate lawyers will vigorously defend their interests and try to use the information you provide about your business to bring down the selling price. You need someone on your team to advocate on your behalf.

4. Hire a business broker and M&A advisor.

Opinions differ on the effectiveness of business brokers and M&A advisors for companies with an annual revenue of less than $1 million. If you’re confident enough, it might be worth forgoing using an advisor and handling the process yourself.

But what does a broker do? They market your business in a number of ways, often on websites like businessesforsale.com. They also handle initial inquiries, verify that potential buyers have the required funds to purchase your company and sit in on the negotiations over price. Many try to engineer a bidding situation where two or more interested buyers make offers at the same time to try to drive up the price.

Brokers often also intervene during the due diligence stage. During due diligence, the buyer’s professional team of lawyers and accountants will ask for lots of detailed information about your company, often over a period of between three and six months. Their job is to help the buyer understand exactly what it is they’re buying. Tempers often become fraught during due diligence for a variety of reasons. When this happens, the brokers often act as go-betweens to smooth relations and get the deal back on track.

5. Create your own data room.

In years past, a buyer’s lawyer would enter a private room at your lawyer’s office called a “data room.” Here, they’d inspect financial and employment records, as well as documentation regarding IP ownership and previous and ongoing legal disputes. Most data rooms are now virtual, and the professional teams acting for the buyer and the seller usually just email documentation to each other.

Create your own online data room as soon as you can, and ask your accountants, lawyers and managers to submit updated reports every month. Delays in providing information can upset buyers – something you want to keep to a minimum.

Running your business like nothing else is happening

Once you’ve settled on an exit strategy for your business, don’t spend any more than 30 minutes per day on it, even if you have a deal on the table and it’s going through due diligence. Concentrate on running your business as well as possible to retain and build on the value you’ve already created. Buyers will expect this, and they’ll be able to monitor if you’re protecting their interests from the updated information in the data room. Proceeding with business as usual while simultaneously preparing for the future is the best way to be ready for a voluntary or involuntary exit.

Bruce Hakutizwi contributed to the writing and reporting in this article.