To start your business, you penned a business plan. You need an exit strategy in place before you say goodbye to it in order to maximise your return and minimise any potential exposure to what happens to your company afterwards. However, as years of experience will tell you, nothing in business is predictable, which is why you should really have two exit strategies.
Why every business owner needs an exit strategy
A comprehensive exit strategy should be included in your business plan from the outset, according to the majority of business brokers and advisors today. Although it might seem illogical to intend to launch or acquire a business while simultaneously
A comprehensive exit strategy should be included in your business plan from the outset, according to the majority of business brokers and advisors today. In today’s fast-paced economy, it may seem counterintuitive to plan for the start-up or purchase of a business while also considering how to exit or sell it, but this is actually the best course of action.
The following are some advantages of developing an exit strategy.
Provides a blueprint for success
You will never know where you are going or when you will arrive if you don’t know. An exit strategy offers a schedule for tracking your development and aids in defining success.
Informs strategic decision-making
Without a clear end goal in mind, business owners may find it easier to focus on the “job” they have given themselves than on the long-term plan for operating the company. Daily decisions can become more strategically oriented when an exit strategy is implemented, keeping the end goal in mind.
Enhances the value of the business
Since “value” is a relative concept, having an exit strategy does not guarantee that a company will be worth more when it is eventually bought or sold. Rather, since the current owner will ideally be steering the company towards their own predetermined preferred conclusion, having an exit strategy increases the value of the business to them.
Provides a flexible template
If your exit strategy is in place from the beginning, it offers direction and standards to refer to in the event that unforeseen events arise, even though it will probably need to be modified over time as conditions change. For example, an unexpected early departure from the business may result from a divorce, sudden death, serious health issue, or required relocation. An estate or business owner can proceed more swiftly and effectively without losing a great deal of value if they have an exit plan in place.
A solid framework for the entire business life cycle is also provided by developing an exit strategy, ideally with the assistance of professional advisors like a business broker, attorney, commercial real estate broker, and accountant. This leads to both tactical and strategic advantages overall, not to mention peace of mind during those stressful times when the day-to-day operations of the business are so demanding.
Why you need 2 exit strategies
While coming up with a single exit strategy could seem overwhelming, in order to truly cover all the bases, you should develop two distinct plans: one for a voluntary departure and another for an involuntary one.
When you have a planned voluntary departure, you will be aware of:
- When you intend to depart: perhaps after ten years, five years, or when sales reach $10 million.
- Who you would like to take over the company: It might be a family member, your current management, or a brand-new owner.
- How much money you wish to leave with: Maybe you want a one-time payment, a monthly profit share for the remainder of your life, or a combination of the two?
- What to do if a prospective customer approaches you: Should someone contact you out of the blue, how would you respond? In 2021, Saffery Champness, an accounting firm, revealed that a greater number of entrepreneurs were getting unsolicited buyout offers compared to previous years.
However, things don’t always go as planned, so you also need to have a plan for that. Knowing what to do in the following scenarios is possible if you have an involuntary exit strategy:
- When you get sick, you can’t work as much or at all as you used to. You must establish in advance who will be in charge and make decisions, as well as provide them with the necessary training.
- Your company starts to lose money. To guarantee a sufficient degree of survival, you must understand which personnel and assets can be promptly let go.
- You simply can’t take it anymore after you burn out. When it all becomes too much, you must take care of yourself. You must be aware of the assets that the company has that are valuable and marketable in order to act promptly.
Preparing as though you must leave your company against your will is the best way to make long-term exit plans. Although it may seem paradoxical, there are many similarities between the circumstances that result in both voluntary and involuntary exits. For instance, in both cases, you must take the following actions:
- Teach others how to manage the business without you. The person who purchases your company might not want to dedicate all of their time to it because they have other interests. Being independent of its owners is a major selling point for a business. Furthermore, knowing that your employees can make money without you in the event of an illness or burnout is a huge comfort as you recover.
- To survive, know which resources and employees to reduce. This serves as a roadmap for a new owner hoping to increase revenue and streamline operations in addition to helping you cut expenses when business is struggling.
- Fast liquidate non-essential assets to raise money. Businesses require a cash infusion when their revenues decline while they wait for sales to increase. The exact same assets could be sold by the new owner to partially offset the cost of buying your company.
You can implement strategies that benefit both you and the new ownership when you have two exit plans in place. This gives you greater peace of mind.
What an exit strategy involves
A comprehensive exit plan includes the following elements:
Knowing when you want to leave
Establish a date in the future, based on metrics such as company revenue and profitability, by which you want to have accomplished your ultimate goals for a voluntary exit strategy. Make a decision on whether to move forward with a sale even in the event that you miss those goals. Once you have a date, developing value in your company and maximising its appeal to buyers becomes the focus of your exit strategy approach.
Discovering who your most likely buyers are
The right buyer for your business will depend on a number of factors, including growth rate, revenue, and industry. Check out the possible purchasers for four distinctly different kinds of businesses listed below to get things started.
Every business is unique. Although you will have a list of specific potential customers, your company will typically be of greatest interest to your direct competitors.
Remember that sometimes the North American Industry Classification System (NAICS) Code conceals your true worth. Think about this instance: If you operate an online store, you may have developed custom apps to streamline operations. A tech company might find these apps appealing, which would significantly raise your value in a voluntary sale. If your business needs money right now, you can also sell them to help you raise money fast.
Building value and improving performance in your business
Consider new strategies to increase monthly traffic to your website or physical location while lowering the cost of each visit. For example, if you are offered a lower-priced, similarly-quality product or service, think about switching suppliers. Consider what steps you must take to deliver that package to your client in three days as opposed to four.
Continue looking for ways to improve your company as a whole. Using the previous example once more, if you do have custom apps that assist you in managing your business, keep developing them with your needs in mind first, but also think about what other businesses would need to rent them from you.
Analysing competitors is a fantastic method to add even more value. Examine the rivalry within your industry. Where are they excelling that you are not, and how can you equalise or surpass them?
Chasing profitable growth
When it comes to your advertising, try new and creative things and don’t stop refining every campaign to find success—such as a decrease in cost per sale or conversion. It is extremely valuable if you can show the buyer that, over a period of years, investing $1 on this campaign generates $10 in revenue.
Use SMS and email marketing campaigns to advertise deals to customers. Try to maximise the profit margin on each transaction. When setting prices and pursuing new business, keep your customer in mind.
Doing everything you can to keep customers loyal
Utilise the phone numbers and email addresses of your clients to increase customer loyalty rather than using them to transfer inventory. Inform them about a new product and provide them with the first chance to purchase it before it is live on your website. Send out emails requesting that clients give you positive online reviews. Give them a social media shoutout and a gift as a token of appreciation when they do. [Discover why social media is crucial for small businesses.]
Determine each customer’s yearly and lifetime value by using customer tracking tools. Buyers search for those kinds of figures. Additionally, they favour businesses with a large clientele that consent to receive emails and texts.
Any plan for an involuntary departure must prioritise customer loyalty. A one-time sale can help you quickly raise money and draw in repeat customers. For instance, if you sell subscription services, one way to get extra money is to give current clients a special yearly discount.
Handing over responsibilities to employees
Mother-and-pop stores and one-man bands are the hardest business categories to sell. It’s similar to purchasing a job to a buyer, not a business. Businesses with 10 to 20 employees are particularly difficult to sell, but the owner is still ultimately accountable for the company’s success. This is because it’s akin to purchasing a senior manager’s position.
Give your staff members more and more responsibilities as time goes on. Teach them and have faith in them to handle important duties. Be there to support them and boost their confidence if they make a mistake. You’re training helplessness rather than anything worthwhile if you don’t delegate.
Should a potential buyer inquire, “Have you spent time away from the business?” You should be able to state with assurance and sincerity something like, “I lived in Hawaii for three months and only received one email update per week from the team.” Everything worked as it should have.
For an involuntary exit plan, it’s consoling to know that your responsible staff can take a temporary leave of absence while you continue to receive income, especially if you’re experiencing health issues or burnout.
Paying down company debt
Paying off as much of the company’s debt as you can should be your goal. This is due to the fact that agreements pertaining to factoring services and business equipment loans cannot be novated when one company acquires another.
Put differently, they must be fully paid on “completion day,” which is the day you sell your company. The amount of debt you owe creditors is typically deducted from the sale price of your company, so the less debt you have, the better. In the interim, paying off debt results in lower monthly servicing costs and increased profit.
Starting to save money
It’s expensive to sell your company. In addition to a commission to your broker, there are fees for accountants, lawyers, professional services, and more. A successful sale may cost a company with $1 million in annual revenue up to $150,000. You will still be required to pay your group of outside experts and advisors in the event that a deal is reached but ultimately fails.
If your company is having financial difficulties, having a reasonable amount of money set aside allows you to assign daily responsibilities to employees and generate revenue through the sale of assets. This will buy you even more time if you also reduce your payroll and look for other ways to save costs.
Tips for executing an exit strategy
After learning what an exit strategy entails, follow these pointers to carry out your preparations.
1. Bring in outside expertise.
Your buyer will almost certainly have a professional team, so you will need to assemble your own for the sales process. As much as possible, you want to level the playing field, but you also want people who understand the nuances of selling businesses to be on your side.
It is advisable to hire fractional CMOs or part-time CFOs well in advance of listing your business for sale. Bring in seasoned, proven talent with broader business connections to your C-suite to assist you in enhancing the company first. Should a deal be on the table, they will be of great assistance to you in carrying out your exit strategy.
Throughout their careers, these same professionals will have demonstrated their proficiency in crisis management. They can assist you in resolving uncomfortable financial circumstances and preparing your staff to take on managerial duties.
2. Keep your accounts up to date and your accountants close.
Tell your accountants that you would like to always be prepared in case you unexpectedly receive a buyout offer or decide to list your business for sale. Once you’ve determined which financial areas your buyer type is most interested in, be sure your accountant maintains historical records of the company’s finance reports and updates them on a weekly or monthly basis. Without a doubt, the best accounting software will be useful. [See also: How to Choose the Best Accountant for Your Company]
3. Hire a corporate lawyer.
Keep an attorney on staff, ideally with experience in mergers and acquisitions (M&A). Corporate solicitors representing your buyer will aggressively protect their interests and attempt to use the details you supply about your company to reduce the asking price. Someone needs to stand up for you on your team.
4. Hire a business broker and M&A advisor.
The usefulness of M&A advisors and business brokers for startups with annual sales under $1 million is a subject of debate. If you’re sufficiently confident, it might be worthwhile to handle the process without the assistance of an advisor.
But what is the role of a broker? They advertise your company in a variety of ways, frequently on platforms such as businessesforsale.com. They also respond to initial questions, confirm that prospective purchasers have the necessary funds to buy your business, and observe the price negotiations. In an attempt to increase the price, many attempt to set up a bidding scenario in which two or more interested buyers submit offers simultaneously.
Brokers frequently get involved in the due diligence phase as well. The buyer’s expert team of solicitors and accountants will request a great deal of specific information about your business during due diligence, frequently over the course of three to six months. Their role is to assist the customer in fully comprehending the product they are purchasing. Due diligence can cause tempers to flare up for a number of reasons. In these situations, the brokers frequently serve as go-betweens to mend fences and restart negotiations.
5. Create your own data room.
A “data room” was a private room at your lawyer’s office that a buyer’s lawyer would access in the past. Here, they would review employment and financial records, as well as records pertaining to intellectual property ownership and settled and pending legal disputes. Nowadays, the majority of data rooms are virtual, and the expert teams representing the seller and the buyer typically correspond with each other via email.
As soon as you can, set up your own online data room and request that your managers, attorneys, and accountants provide updated reports on a monthly basis. It is best to avoid upsetting buyers with prolonged informational delays.
Running your business like nothing else is happening
After you’ve decided on an exit strategy for your company, even if you have a deal on the table that is undergoing due diligence, don’t spend more than half an hour a day on it. Focus on managing your company as efficiently as you can to preserve and increase the value you’ve already generated. Buyers are going to anticipate this, and they will be able to track whether you are safeguarding their interests based on the updated data in the data room. The best way to be ready for a voluntary or involuntary exit is to carry on as usual while also making future plans.
