The goal of exit planning is to build a road map that results in a business sale at an above-market rate on the owner’s preferred terms and timing. The transaction process can take months, or years, depending on how well-prepared the business is to go to market and transition ownership.
Business owners have built a legacy, with products and services, with employees and vendors, and an Exit Plan can help ensure the sale of the business follows more of a blueprint to success versus a haphazard fire sale.
Exit planning should be taken as seriously as customer service, product development, or employee safety, and allocate dedicated time to put a plan in place.
Reasons to Exit Plan
Cash-out when the timing is right
- Ensure what you think the company is worth matches what the market will bear
Manage business continuity risk
- Have a succession plan in place so that the business is in good hands should any unfortunate health emergency take place (i.e. company does not get handed down to a spouse or children that do not have the experience to run the company)
- Money is not everything in the sale of a business. Exit Planning can help incentivize key employees to take on leadership positions, protect key family members in the event of a sale, or cement certain aspects of the business when ownership transitions
In an ideal world, business owners begin the exit planning process 3 to 5 years from their desired sale date and work with crucial advisors (wealth advisors, CPAs, legal counsel, etc.) to build out a plan that aligns with the owner’s goals. Understanding the transaction timeline will help allocate resources to the most pressing issues that influence the valuation and best support a successful transaction. You can review an easy-to-read infographic here.
Exit Planning in 6 Steps
Step 1 – Obtain a 3rd Party Valuation
- A robust and comprehensive valuation helps an owner understand the potential value range in the event of a sale, and is an input to personal wealth management and estate planning.
Step 2 – Understand the Current Performance of Key Value Drivers
- Working with a 3rd party on a business valuation will give owners benchmarks and goals on value drivers – cash flow performance, business risk, and opportunities for growth
Step 3 – Build an improvement Plan and Workback Schedule from the Expected Sell Date
- Knowing where you are today will help chart the path to improve the business and the probability of a positive outcome for the Exit. Improvement areas typically include:
- Customer and vendor diversification
- Operation improvements (technology, systems, processes, etc.)
- Reliable earnings growth
- Key management in-place
- Employee training procedures and handbook
Step 4 – Business Sale / Transaction Readiness
- Any and all buyers will want to take a look under the hood at how a business operates. Business owners must:
- Clean up financial statements
- Document key processes (sales, manufacturing, service delivery, accounting, project management, etc.)
- Standardize inventory management
- Reduce long-term debt
- Minimize the required net working capital
- Showcase a business that is clean, tidy, safe, and successful
Step 5 – Assemble Your Trusted Advisory Team
- It takes a community of experts to provide all of the guidance a business owner needs to successfully sell a business. The advisory team should include a CPA for tax planning, a wealth management professional for personal finance/estate planning, a mergers and acquisition advisor for finding buyers, negotiating, and consummating the transaction, and an attorney to protect the interest of the seller in any sales or financing agreements.
Step 6 – Remain Flexible
- If we have learned anything during the past two years, business leaders must remain flexible and change according to customer trends, supply chain changes, and the overall business cycle. The same holds true when it comes to selling a business. If persistent headwinds are producing inconsistent earnings, owners may be required to stay in the business longer so that they can improve financial performance and ultimately the multiple used to value/ sell the business. Likewise, if the business is exceeding expectations, owners should use those tailwinds when the business cycle is favorable to the seller.
The worst outcome a business owner can have is to liquidate the company’s assets at a discount on the fair market rate due to bad timing or unforeseen circumstances. By prioritizing exit planning, business owners can avoid leaving the sale of their business to chance, take control of the process, and create multiple options to sell on their own terms. Learn more on how to sell a manufacturing business using these exit strategy steps.
Exit Equity can help you start exit planning with your business and help you find the best buyer for your business. Are you ready to start exit planning with your business?