The Why and How Behind Exit Planning

Nov 12, 2021

Business exit planning is, above all else, a strategic plan, but one with an end date in mind. Similar to a strategic business plan, exit planning requires a clear assessment of your business’s strengths, weaknesses, objectives, and the opportunities and threats it faces. It’s a way to test out concepts and identify obstacles you may face in achieving your objective.
It’s also a series of time-sensitive goals arranged in order of implementation, providing you with a sequence of activities necessary to get to where you, and your company, want to be.

Who should be thinking about an exit plan? Everyone.

Whether you’re a few years into owning your own company or are nearing retirement, exit planning is something everyone should consider. However, for those considered Baby Boomers, roughly 55 to 75 years old, there is more urgency to the planning process.
In short, anyone who wants to maximize the eventual value and asking price of their business, or has thought about what life will be like after selling their business, should begin developing an exit plan. Even those without a firm date in mind for an eventual sale should consider planning as a way to focus the direction you want to take with your company. Also, it’s important to always have a succession strategy on hand for your business in case the unexpected occurs, as we all know things don’t always go according to plan.

When and Why to Start an Exit Planning Strategy

When to begin devising your exit strategy is contingent on many factors. However, it’s best to begin at least five years before your desired exit, though ten years would be ideal. Some advisors, however, believe you should begin succession planning as soon as you start your own business.

Consider that many Silicon Valley investors frequently ask their prospective partners, “What is your exit plan?” It’s not out of a desire to get rid of a founder but to determine if they’ve thought about how they will grow and monetize the business to reach its highest possible value.

For Baby Boomers, the time is now. That generation owns roughly 60 percent of all small- and mid-sized businesses. Four hundred of those owners are reaching 65 every day, and as many as 75 percent of them have no exit plan for when they plan to sell their business, and if it is in an attractive state to potential buyers.

Why is the time now? Consider that the Baby Boomer generation, by 1965, the generation represented 40% of the U.S. population. Their generation drove a dramatic growth in highly educated workers without enough corporate jobs to sustain the demand. That reality led many to open businesses themselves. This entrepreneurial mindset helped strengthen the national economy and deliver nearly 50 years of prosperity. Now, those entrepreneurs are ready to retire.

There has been no shortage of challenges for these business owners over the past 20 years, yet Baby Boomer entrepreneurs have shown great tenacity. This generation has endured – and thrived – during the dot-com bust, the aftermath of September 11, 2001, the Great Recession, and the COVID-19 pandemic. Yet throughout those challenging times, many business owners have shown resilience and expansive growth. But now, it’s time to consider the next phase.

Planning now allows business owners to maintain control over the sales process, whether to a third party, employees, or family members. With time to plan, owners can understand options and identify and assess the impacts of change on their business and themselves.

How to Start Exit Planning
Business owners often wonder where to start with planning. Here are three core questions to answer:
1. Where do you stand now with liquid assets and income streams?
2. Where do you want to be financially in retirement or in the venture of your next life chapter?
3. When do you want to get there, whether it’s stepping back from the business while holding a smaller role, or being completely removed from work through a sale?

There are four major variables when it comes to assessing your business. The answers to these questions help determine your action plan to maximize your return:
● What is the fair market value of the business?
● Who is the most logical buyer of your business?
● How attractive is your business to potential buyers currently?
● Who is on your advisory team to assist in the planning process?

Here is an inside look at some of the thought processes around those variables.

Assessing Value
The fair market value is what a willing buyer is likely to pay when both parties have complete and accurate information about your business. That means that sellers and buyers both must have a realistic expectation of business value, not a random multiplier that’s been heard at a cocktail party. That fair market value varies greatly from perceived value, which is influenced by multiple factors, including need, market position, exclusivity, or brand identification.

Fair market value is largely determined by cash flow, which is determined largely by assets excepting inventory, which is rarely added to an assessment. It’s also based on industry comparatives.

Value determinations are made in many ways. Accountants and brokers may offer an opinion of value. At the same time, appraisals will often be used to determine price, and those appraisals, may or may not match fair market value.

There are many approaches to finding a buyer – a leveraged buyout, an industry sale, a family succession plan, private equity, or a business broker. In each case, exit planning involves examining your options and deciding which options make the most sense to achieve your objectives. If the options are out of reach, you may need to change your objectives or time frame.

While different buyer types are looking at different scenarios in considering your business, intangibles will play a key role in nearly all cases. That’s why you need to consider the intangibles that can impact the sale price, including:
● Your management team and employees
● Owner contributions to the sale
● Customer demographics
● Competition and market outlook
● Business systems and processes
● Sales and margin trends
● Technology

These intangibles don’t show up on a balance sheet but play a considerable role.

Advisory Team
You’ve invested so much in your business. As you plan an exit, you want a trusted team around you to help advise on your strategy. One of the key hires is to find someone who can coordinate the work of the various other professionals, including those consulting with you on your business’s legal, financial, tax, and operational needs. Putting together this team is one of the most important things you can do and allows you to develop the right strategy to ensure your exit runs smoothly and is successful.

There are many factors that can cause a business owner to delay the start of their succession planning process, but the most important step you can take is to start. Your future self will thank you when the time comes to sell your business, or pass it on to the next generation, as you will be in the best position to turnover your company at its highest value, with the smoothest handoff.