The 5 steps of exit planning
Why you should start your business with the end in mind
Most entrepreneurs start their business based on a passion or a great idea and get busy working in the business. That’s the fun part of business and the immediate reward for your having vision, taking risks and making the effort. But without proper planning for your eventual exit, much of that hard work can go to waste.
Ideally, your exit strategy needs to be part of your business plan from the outset. It’s just as fundamental to the lifecycle of your business as the launch and growth stages. To adhere to Stephen Covey’s principle of “begin with the end in mind,” follow these five steps to plan your exit from the outset.
1. Know your exit strategy before you launch your business: Develop a business exit strategy up front and include it in your business plan. This will help to clarify your objectives for launching the business; define what you think may be your endgame strategy; and help your investors understand your long-term plans for the business. Investors want to be sure your strategy, objectives and timeline align with their own. Just by mentioning an exit strategy, you are signaling to investors that you are thinking ahead.
2. Consider multiple exit strategies: You may have started your business with the intention to pass it on to your children, sell out to a partner when you retire or have it be acquired by a larger business. No matter your initial strategy, you need to have contingencies in place. Economic conditions, market value, deal terms, timing and many other variables along the way will potentially affect your ideal exit plan. By starting early, you can tailor a plan that works best for you, rather than wait too long and lose both choice and leverage.
3. Always initiate a “stop-loss” as part of your exit strategy: You are not locked into an exit strategy that you or someone else assumes is a foregone conclusion. If your plan is not coming together well, you should have several “go/no-go” decision points before you continue to commit to a certain path. Ideally, there should be alignment between your criteria, your company’s criteria, and your industry’s criteria for timing, fit and value.
To illustrate: business owner “Mary” planned her exit early, having hired her successor a year ago. But, after 12 months, Mary realized the successor could not fill her shoes and was not a good fit to run the company. She decided to cut her losses and started over because finding the right person to carry on her legacy was more important than retiring by a fixed date.
4. Keep your house in order: The grunt work involved in exit planning may not be as immediately satisfying as working in the growth phase of your business, but it is just as important. Things like keeping clean financial records, regular audits, documented systems and processes, complete, accurate and up-to-date governance records and complete human resource records are all expected by buyers, investors and the commercial bankers approving your buyer’s note. Without these, your ultimate value and viability will be impacted.
On the personal side, don’t put off your will, trust, durable power of attorney, healthcare proxy and HIPAA release. These are essential elements to secure your future that must be in place well before any transaction. Lay out a timeline and completion schedule for each item.
5. Put yourself in the buyer’s shoes: If you intend to exit well, then every decision you make in the business all along the way should be tied to your exit objectives and what your buyer will want. Does each decision move you toward or away from where you want to take the business and the outcome you desire? How will each decision bring more value to the bottom line? Will that decision reduce risk or improve quality or performance?
Kerri Salls, managing director at Derry-based This Way Out Group LLC, is the author of “Harvest Your Wealth” and “Multiply Your Business Value in 3 Steps.” She can be reached at firstname.lastname@example.org.