Planning Your Exit: Creating an Exit Strategy for Your Business

Planning your exit strategy is an important aspect of being a business owner. It's a process that allows you to prepare for the eventual sale of your business and maximize the value you've worked hard to build. An exit strategy guides you through the assessment of your business's sale potential and helping you make informed decisions about the pre-sale condition of your business. Whether you're considering selling your business in part or in full, immediately or after a few years, your exit strategy plays a pivotal role in achieving your goals. It's recommended to start developing an exit plan early, ideally three years in advance. This timeframe allows you to see the business from the buyers’ point of view, identify and plan value-enhancing business improvements, and make pre-sale decisions to enhance sale value and minimize tax impact.

Formulating Your Exit Strategy

The first step in creating an effective exit strategy is to define your desired outcomes. Your exit strategy should align with your goals, timing preferences, financial expectations, and personal aspirations.

Step 1: Your Sale Goal

Begin by clarifying your sale goal to shape your exit plan. What is your desired sale outcome?

• To sell your business in part and remain involved with its operation.
• To sell your business in full and remain involved with its operation.
• To sell your business in full and end involvement with its operation, either immediately or after a transition period.

Step 2: Your Timing Objective

Determine your ideal timeframe for the exit. Your timing objective sets the pace for your planning efforts.

• Immediate (0-6 months).
• Within a year.
• Within 2-3 or more years.

Step 3: Your Financial Objective

The financial aspect of your exit strategy is critical. Most businesses sell at a multiple of what is called seller’s discretionary earnings or owner’s cash flow, which is another way of saying how much the business earns annually for its owner. The earnings multiple is based on the condition and attractiveness of the business. Businesses in weakest condition sell at a multiple of 1 or less and businesses in strongest condition sell at a multiple of 5, or even higher.

Based on the condition of your business and the urgency of your timing, what is your financial expectation?

• My business is in strong condition and likely to command a high earnings multiple.
• I am prepared to accept a lower price due to my timing urgency and the current condition of my business.
• I am willing to commit time and effort to strengthen my business condition and therefore improve its likely attractiveness and earnings multiple.

Step 4: Your Pay-Out Objective

Consider whether you require an all-cash deal at closing or if you're open to offering seller-financed loans. This decision impacts the attractiveness of your business to potential buyers and the speed of the sale.

• I am willing to provide a seller-financed loan for a portion of the sale price.
• I will require an all-cash payoff at closing.

Step 5: Your Sale-Marketing Objective

Have you defined your preferred buyer, or are you interested in selling to any qualified buyer, whether a business or an individual? Are you looking to sell to a specific entity, like a partner, key employee, or family member? Your choice here determines your marketing and negotiation strategies.

• I prefer or am obligated to sell to a partner, key employee, employee group, or family member.
• I intend to pursue a sale to a targeted business such as a supplier, competitor, or strategic business buyer.
• I seek to sell to any buyer who has the necessary financial, expertise, and management capability to buy my business.

Step 6: Your Personal Post-Sale Objective

Your involvement after the sale is another important aspect. Decide if you want to stay connected with your business in a managerial or advisory role, or if you prefer a clean break.

• I want to stay involved with my business after its sale, in a managerial capacity or as a consultant or board member.
• I am willing to remain involved over a post-sale transition period of 1-3 months or longer.
• I prefer to end my relationship with the business upon completion of the sale.

Step 7: Your Post-Sale Objective for Your Business

Consider the fate of your business post-sale. Do you want to sell to a buyer who plans to maintain continuity and minimize disruptions, or are you open to selling to a buyer with intentions of merging or making significant changes?

• I prefer to sell to a buyer who plans to retain employees and to cause little disruption to staff, clients, or customers of the business.
• I am willing to sell to a buyer who plans to merge, move, or significantly alter the business.

Exit Planning Essentials

Crafting a well-thought-out exit strategy is fundamental for business owners looking to sell their businesses while maximizing value and achieving their personal and financial goals. By carefully considering your sale goal, timing objective, financial expectation, pay-out preference, marketing approach, personal post-sale objective, and post-sale business objective, you can create a roadmap that not only guides your exit but also ensures a smoother transition for all parties involved.

While these objectives may evolve as you assess your business's condition and make pre-sale improvements, they provide the foundation from which you can build a successful exit plan. It's never too early to start planning your exit, and a well-prepared strategy can make all the difference when the time comes to sell your business. A business broker or M&A Advisor can help guide you through the process of selling your business and developing an exit strategy. Visit the BizQuest Broker Directory to find professionals to help you sell your business.