How to Create an Exit Strategy: A Complete Beginner’s Guide
You’ve worked hard to get your business to where it is. Sales are trickling in, and you’re even getting offers to sell your venture at a good price. Now’s the perfect time to create your exit strategy. A well-crafted exit plan can help you run things with clarity and also increase your business valuation. Every year, several entrepreneurs consider exiting their business, but many are not prepared and do so. With the right knowledge and strategy in place, you can achieve a successful exit, while ensuring your business continues to thrive after you leave.
In this post, we’ll discuss what an exit strategy is and why it’s crucial. We’ll also go over the different ways of exiting a business and look at the steps involved in creating an exit strategy. Even if you don’t have any immediate plans to leave your business, it’s critical to build an exit game plan, so you know what decisions to make if circumstances change.
What Is an Exit Strategy?
An exit strategy is how you transfer the ownership of your business to another individual or company. It helps you get a return on the money and effort you have put into the business.
Many entrepreneurs want to start new things and sell up at the same time, which is where an exit strategy comes in handy. Alternatively, you may want to tie your business exit in with your retirement planning. You can count on your exit strategy to help you realize part or all of your business’ value so you can spend your golden years in relative comfort.
It’s best to create your exit strategy months before the exit happens. Planning helps you decide whether you should aim for short- or long-term income activities. For instance, if you intend to exit the business within the next few months, you should focus on things that generate cash quickly. Examples can include selling ad space, earning affiliate commissions, and offering memberships with recurring fees. However, if you want to remain in business for the foreseeable future, you should focus on long-term development activities. Building a brand image and developing long-standing customer relationships will help you create a better future for your business venture.
Types of Exit Strategy
One of the first steps to exiting a business is picking an exit strategy. The type of strategy you choose determines many aspects of your ownership. For instance, some strategies are designed to let you transfer 100 percent ownership to another person and move on, whereas others are meant to keep you involved in decision making.
Here’s a breakdown of the most common exit strategies:
Sell to Another Person
This exit strategy is a favorite of entrepreneurs who are looking for a new challenge. It involves a simple transfer of business ownership from you to another person. This is the ideal route to take if you have a lot of acquaintances with knowledge and interest in your business niche. That being said, you do not need to restrict yourself to individuals in your circle. In case you own a profitable business, you can count on marketplaces like Exchange to help you find a suitable buyer. The platform will verify the traffic and sales data on your website and then promote your business to thousands of buyers who visit its site daily. Everything from the listing to the transfer of ownership requires various levels of verification from both sellers and buyers, making the platform secure and trustworthy.
A business acquisition happens when a company purchases all or most of another firm’s assets and assumes control of its operations. For example, Google has acquired several high-potential businesses, including YouTube, Waze, and Nest Labs. Perhaps the best thing about this exit strategy is that you may be able to negotiate terms to stay on and continue to work in a management capacity if you desire. The buyer can pay for the acquisition in cash or by buying the company’s stock. Businesses are often acquired for their market share, their assets, their talent (referred to as acqui-hire), or their intellectual property. Like selling to another person, this exit strategy lets you negotiate the price, terms, and other details of your acquisition.
Become A Passive Owner
Passive ownership is where you remain in control of the business while decreasing your active participation in day-to-day decision making. This exit strategy can attract aspiring entrepreneurs who want to learn about the business under your leadership. As you look to take a backseat within your company, you have to realize that all of your commitment and effort led to a well-oiled machine where oversight might still be costly. If you have good systems in place and a smart individual who can take over reigns, you can be confident that your business will continue to run efficiently while allowing you to earn passive income.
Pursue Management Buyout
Management buyout or MBO happens when you sell a company or business unit to key personnel or managers using a mix of equity and debt. Business owners who opt for this exit strategy have strong non-financial motivations, such as continuing their company legacy or maintaining their reputation within the industry. MBO also offers tactical advantages that you may not realize with other exit strategies. For example, doing negotiations with the management minimizes the risk of confidential information being disclosed to the public. Plus, the deal can happen quicker since the buyer is already familiar with the business and knows the exact steps to take to further increase its value.
Transfer to A Family Member
Transferring the business to your son, daughter, sister, etc. allows you to keep it in the family. It also affords you the option of supporting younger family members who’re unable to earn comparable income from 9-5 jobs. Many entrepreneurs choose this exit strategy because they want to put the business in the hands of a “known” entity. Another benefit of taking this approach is the limited tax liability. If you transfer the business to a family member as a gift, you won’t have to pay any taxes on the sale. However, gifting the business may not provide you with enough – or any – proceeds to fund your retirement. The solution to this is to sell your business at a lower price, making sure the sale provides you with enough cash-out to meet your future financial goals.
Create A Lifestyle Company
The lifestyle exit strategy involves changing your business model to fit your lifestyle needs. The refreshed business is still profit-oriented to some extent, but generating revenue is not amongst its main priorities. Instead, the ultimate goal of a lifestyle company is to harmonize work and life for the business owner. Entrepreneurs who choose this exit strategy usually change their operating model to keep work to the bare minimum. For instance, someone who operates a brick-and-mortar store can set up a lifestyle company by transitioning to an ecommerce-only business. They can also use dropshipping to eliminate the cost of storing inventory while handing the responsibility of packaging and shipping to their suppliers.
How to Create an Exit Strategy for Your Business
Now that you have an idea of the different ways to exit a business let’s look at how to build an exit strategy, step-by-step.
1. Define Your Goals
The first step in creating an exit strategy is writing a clear description of what you wish to achieve, for both yourself and the heir of your company. This will boil down to your future goals and whether you want to stay actively involved in the business. Ask yourself:
- Do I have enough money for retirement?
- Do I want a management stake in the business?
- Is starting another business a part of my future vision?
- Will my team be content with my decision to exit?
Answering these questions will help you identify the right exit plan for your company. You should check if there are any potential concerns from your family and staff members before making a decision. A low-key meeting held away from business premises can ensure all matters are considered before a strategy is drawn up.
2. Prepare the Business for Exit
For a smooth transition, your exit strategy should include measures that optimize company value, such as:
- Organization of financial records: Most buyers will ask to see at least six months’ worth of consistent and dependable financial records. If your reports aren’t all they could be, get them fixed now. You want that upswing to show as a sign of sustainable growth rather than a sudden spike.
- Documentation of existing processes: Documenting how the company is operated will make it easy for the buyer/successor to run everything tomorrow. An easy way to do this is to create a manual that highlights the exact processes you follow in each area of your business, including admin, sales, marketing, and customer support.
- Minimization of legal risks: Buyers don’t want to get into a legal issue, so make sure to comply with the laws and regulations that apply to your business. If you run an online store and have customers in Europe, for instance, you need to comply with GDPR laws before processing personal data.
- Improvement of business image: The ability to present your business as a high-value asset is crucial for a successful exit. Make sure your branding is as clean as possible by updating your website and addressing any negative reviews. Even if you’re close to leaving your business for another adventure, participate in social media conversations to spread positive word-of-mouth about your company and impress potential buyers.
3. Obtain a Valuation
Your next step is to determine your business venture’s value. Its value is what the buyer is willing to pay for a similar business. As such, it’s normal for them to analyze the revenue you generate yearly, the total amount of profit you bring in, and trends that impact buying patterns (like recessions or other economic trends). Occasionally, value is also associated with intangible assets such as market share and brand recognition. Consider getting a guideline valuation from a trusted business broker to get an idea of your company’s worth. If they predict a lower value than you’d hoped, you might postpone your exit, and work hard to drive up your company’s valuation.
Pro tip: Capitalize on your existing strengths to lay a strong foundation for your business. For example, you might have a fantastic product and stellar product packaging, but customers may not be able to identify these unique selling points. A well-crafted video highlighting the differences between your company’s and other products can make them aware of your value proposition.
4. Set a Target Date (and Stick to It!)
Though you can exit your business at any time, it’s essential to set a target date so you can coordinate the transition with your core stakeholders. Many owners choose an event-related exit date, such as when their first child is born. Others want to be actively involved until they’ve made enough to secure early retirement. Then some owners base their exit dates on goals they’ve set for their business. For example, they may forecast the number of years their company will take to reach a specific value and set their target date based on that time frame. No matter which approach you take, setting a target date will help you plan things accordingly.
Leaving your business is never easy, but for many aspiring entrepreneurs, it’s necessary to ascend the success ladder. Whether you want to sell an existing business to start a new business idea, or earn a clean break by getting acquired, make it a priority to create an exit strategy. By determining how and when you exit your business, you’re taking a critical step towards creating a healthy financial future, with greater freedom and rewards than if you were to get out abruptly. As a last tip, the best time to bow out is when things are going great. That’s when your business and brand are worth the most.