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.
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.
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.
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.
“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.
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.
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:
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:
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:
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.
Don’t think of an exit strategy in the short term. It might take five or 10 years for a successful exit strategy to reach its end. This is all about being ready to leave your business on your terms as much as possible whenever the time comes.
A well-rounded exit strategy involves the following components:
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.
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.
Local retail or hospitality business
Individual with cash looking for a career change or a local or national competitor who wants your location and customers
Fast-growing e-commerce company
A rival e-commerce company selling the same products or a search fund or venture capital fund that believes it can grow your business much faster and sell it off to a private equity group in five years’ time
Scientific or professional services company
Competitors who want your staff, customer base and intellectual property; you’ll also be a target for companies whose products or services complement your own and that want new things to cross-sell to you and their customers
As-a-service subscription model
Competitors and tech investors interested in monthly recurring revenues
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.
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?
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.
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.
According to business services provider Freshworks, loyal customers spend “67% more in their 31st to 36th month with a brand than in their first six months of the relationship.” It also found that it costs five times more to persuade a new customer to buy than an existing one. See our review of the Freshworks CRM to learn how the Freshsales system can help you manage your customer relationships.
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.
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.
Reducing debt should be part of your involuntary exit plan too. You can sell unneeded or unwanted assets to pay down outstanding bills.
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.
Now that you know what an exit strategy involves, here are tips for executing your plans.
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.
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]
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.
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.
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.
You don’t need to cure all the imperfections in your company before putting it on the market. A common myth among sellers is that buyers want spotless, perfectly run businesses. They don’t. All they want is a company they can add value to, and they expect a certain degree of imperfection.
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.