Most business owners understandably live in the moment. Operating a successful business depends on the real-time and continuous management of employees, vendors, cash flow and, of course, customers.
But business owners eager to ensure both their own financial security and the long-term viability of their company (which, let’s face it, is all business owners) need a comprehensive exit strategy. In its simplest terms, an exit strategy is a roadmap of the actions required for business owners to transition away from day-to-day control of company operations in as financially advantageous a position as possible while positioning the business to flourish over the long term.
It would be reasonable to assume that business owners would be eager to prioritize their own financial well-being and the sustainable health of their company. Yet a recent survey of business owners found that nearly half had no exit strategy whatsoever and that 13% had not even considered the necessity of having one.
The best time to craft an exit strategy was yesterday
Experience teaches business owners that effective long-term decision making requires a mix of research, contemplation and goal setting. Put simply, the most financially advantageous and strategic decisions require time. The many decisions that go into formulating an effective exit strategy are no different.
All too often, business owners only begin contemplating their exit shortly before they want to leave. Even worse, about half of all business exits are unexpected, the result of death, divorce, burnout or disability.
Lacking an exit strategy exposes the business owner and the company to enormous risks. The better way to think of an exit strategy is akin to the initial business plan that comprehensively laid out the rationale for a company and the reasons it was positioned to succeed. In fact, it is ideal to include a detailed exit strategy in that business plan that launches your company.
Three exit strategy options
Regardless of when you develop an exit strategy, keep in mind that the strategy you put together with the guidance of experts and your family will ultimately be a choice between one of three options. Determining how you’ll exit the business is a necessary first step because it will shape what you need to do to set yourself—and potentially the business—up for long-term success. The three ways to exit a business are:
Option 1: Sell the business.
For some business owners, the most attractive exit will be to sell the company or be acquired by a competitor and use the proceeds to ensure their personal financial security. But the question is, who to sell the business to and when? Some owners may decide that the most financially advantageous sale will be to someone who has no connection to the business.
If you decide that a sale is your best exit strategy, you’ll need to determine a sale price—which means valuing your business. There are several commonly accepted methods for determining a company’s value. One is the asset method, which is a straightforward calculation of a company’s assets minus its liabilities. Another is the income method, which values the future cashflow of a company, while a third method is based on the market value of similar companies in a sector.
Expert guidance will help determine which valuation method is most appropriate and will yield the business owner the largest return. Working with mergers and acquisitions (M&A) experts can help value your business in preparation for a sale.
Option 2: Transfer ownership of the business.
Some business owners may prioritize transferring ownership to a family member or a current company employee to retain some level of involvement in the company. This is an exit strategy that depends on a clear succession plan that determines future company leadership.
It’s wise to reality-check your beliefs about a family member’s interest in taking over your company. According to a recent survey of business owners, 44% planned to pass their company to family members. However, about half of all potential inheritors of businesses said they would prefer a bequest of the company’s assets rather than ownership and operation of the company.
Going through the process involved with developing an exit strategy will force business owners to have honest conversations with potential heirs about their desire to continue operating the company. If no family members are involved, an exit plan should still designate responsibilities to future leaders and ensure knowledge is transferred to set them up for success. This includes being transparent with employees about how their roles may change in the event of a sale and, when the time is right, communicating with vendors and customers that a change in leadership is coming.
Option 3: Shut the business down.
Business owners who have spent their career building a company will often resist liquidating their life’s work. But it can be a viable exit strategy, particularly if there are no potential buyers and no family members or employees want to take over. While liquidating your company assets rather than selling often means not earning the maximum possible return, the process can happen comparatively quickly and simply. But you will also need to account for relationships with your remaining employees and customers.
Why wealth management should be part of any plan to sell your business
If you decide your best exit is to sell your business, be sure to include wealth management in your strategy. According to estimates from the Exit Planning Institute, 80 to 90% of business owners have their personal wealth locked up in their company.
An exit strategy needs to clearly outline how that wealth can be transferred to the business owner as efficiently as possible. This is a task that requires advanced planning; continuous updates to evolve plans to take account of estate, capital gains and income tax changes; and, above all, professional guidance from wealth management and tax experts.
There is a tendency among many successful business owners to believe they can handle even the most complicated investment and planning on their own; it’s a belief that is a key ingredient in the performance of their business. But business owners should also understand that maximizing their own wealth and financial security is best served by taking full advantage of the tax and wealth planning expertise of professionals.
It’s understandable why many business owners don’t prioritize exit planning. Besides being consumed with the day-to-day operations of a business, owners can often have so much of their personal identity tied up in the business that they don’t want to contemplate what comes next. But developing and updating an exit strategy is a way to begin grappling with decisions that will inevitably need to be made while also positioning business owners and their companies for long-term success.
Whether you’re a business owner just starting out or planning for the future, Byline is here to support you every step of the way. Invest in the health of your company by talking with us today.
