Business Exit Planning: Why & How
by Joe Draper, on 4/9/20 9:38 AM
Many business owners think of an exit plan as something thrown together in the 23rd hour of owning their business. Something their attorney and accountant ‘clean up’ after they make the decision to sell. A well-crafted exit plan can be much more, ensuring that a business will be prepared for planned (retirement, etc.) or unplanned (medical issues, resignation, etc.) events. It is a combination of succession planning to identify and develop the organization’s future leaders and perpetuation to maximize value at the time of sale whether to employees or a third party. Here are 5 key elements to begin a path to success.
- Begin today: Business owners that begin planning at least five years before exiting achieve maximum value. Last minute planning can cost you, 40% or more.
- Set exit goals and objectives - develop the habit to work on the business rather than in the business. Take 15 minutes each week for one month to outline what your most desirable outcomes are:
- How much equity do you want/need from the business?
- When would you like to leave the business?
- How you would like the business to continue (e.g. sale or transfer to family/employees/others or liquidate)?
- Identify what you would like to do after departing the business. Having a post-exit plan is an important emotional and mental component.
Proactive rather than Reactive: Having safety nets (financial, personnel, etc.) are better than managing crises.
- Identify the positions that are critical to business success: ownership, management, operations, specialized role players, etc.
- Discuss goals, career paths, and interests with current employees to learn about their desires.
- Develop a gap chart that combines this employee information with the personnel needs of the business in the future and during the transition timeline.
- Focus on your Team: Your employees are your greatest asset. Get what you need out of them by offering training, development, and feedback mechanisms. They will be critical for the future success of any ownership transition.
- Test the ‘Team’ to see how the business performs while you are not there to determine how dependent the business is on you. Can you take a longer vacation than normal?
- Ownership/management skills don’t happen overnight. Develop a plan to get next-level performance from each individual on the team.
- Keep morale high by offering opportunities like team building exercises, mentoring, or job shadowing
- Lay a Transition Foundation: Having a solid plan in place allows for the best chance of success during the transition but it takes time.
- Assess your current resources: financial position (personal and business), employees, advisors, past business success, growth projections, etc.
- Integrate this into a Gap chart similar to the one developed for employees above.
- Tunnel vision can limit your ideas for a path forward so be honest with yourself and keep an open mind to investigate all potential opportunities.
- Strategy Development: Areas of Focus could include – Exit Plan development/implementation, Financial plan, Hiring plan, Communication plan, Continuity Plan, others
- Identify a ‘point person’ that will manage the outlined process. This will help with keeping the process on track and hold critical players accountable.
- Assemble a Trusted Advisor team that can offer experience, direction, and pertinent ideas for the best path forward.
- Focus on the ‘Prize”. This is different for each owner. What ever the reason for moving forward with an Exit decision (no longer enjoyment in the business, frustrated with profitability, ready to do something else, life event changed personal situation, etc.), remember that you only have one time to sell or transition the business and doing it ‘right’ should always be the focus to achieve your Exit objectives.
An Exit plan should address the three guiding principles of a successful Exit: maximizing the value to you (as defined by you: financial, legacy, community identity, charity, others), minimizing risk during this process, and staying in control of the process. Although at times it will seem daunting and overwhelming, remember that this should be an enjoyable project to get the best outcome from the activity that has consumed your energy for years: running your business. An Exit Plan is arguably the most important project you have ever embarked on in your business, so keep a positive attitude and surround yourself with a team that will support your path forward.