When Should Business Owners Start Developing an Exit Plan? Here's What You Need to Know. Here's why business owners should plan their exits ahead of time and some tips for how to plan properly.
By Nick Mascari Edited by Chelsea Brown
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Any transformative business decision requires good strategy and planning. Your business exit is one such decision that will inevitably transform the business. Think of it this way: If you only started planning for a significant initiative a few days before you needed to roll it out, you would be making a huge strategic blunder. Why would a business exit be any different?
The truth is, business exit planning is good business. Many business owners might believe they don't need to worry about having an exit strategy until the time for them to exit comes around. In this article, we'll explain why that's a bad idea and why exit planning is something that shouldn't wait.
Related: Start Your Planning Your Exit Strategy Now With These 4 Tips
Focusing strategy on the present and immediate future
Executives and business owners may not plan ahead for a business exit strategy because they are too focused on the present and immediate future of their organization. You yourself probably feel it is more important to focus your efforts on strategies that will ensure growth, profitability and stability in the near term. Additionally, executives often lack clarity about how much value their company might have at some point in the distant future when an actual exit might take place. This uncertainty can make planning for an eventual exit seem like a waste of time or resources compared to tackling other pressing needs within the organization.
You would be right in rationing your focus and strategizing based on urgency and priority. Business exit planning does not supersede current and short-term business goals as you can clearly see in valuable metrics such as KPIs or OKRs.
HOWEVER, planning your exit is a good business strategy whether you intend to sell your business or not. Focusing on more immediate concerns and plotting a well-executed business exit are not mutually exclusive. When you properly plan a business exit, you are setting up your company to maximize growth and profits by creating an organization that can run independently of you with top talent, a solid foundation, financial stability and a competitive advantage that outlasts your stay.
You should certainly look at the macro picture ASAP — ideally, exit planning should begin during the startup or early growth stages of a business so that all future decisions are made with the long-term in mind and so that founders have an understanding of how they want to exit their business before they become heavily invested and committed.
Related: The How-To: Building An Exit Strategy For Your Business (Even Before You Start)
Sound business exit planning
Business exit planning should be incorporated into the overall business strategy. It can start with setting objectives and clear exit goals, such as when to sell or transfer ownership of the business and at what price.
Naturally, estimating the exit goals and acceptable terms and prices ahead of time can be challenging, as it requires careful consideration. This is, in fact, one of the reasons executives avoid planning business exits ahead of time. First, you will need to research current market trends in order to estimate what price the business may fetch if sold — today or three, five, even ten years from now — whenever you foresee the exit to be most viable based on your strategy. This involves looking at comparable businesses that have been recently sold or put on the market in order to get an idea of potential interest levels from buyers. You can perform some forecasting yourself and use relevant market prediction data from research.
Second, you should evaluate your own personal financial situation when setting exit goals so they are realistic, especially regarding what type of return you expect from selling your business at a given point in time. Take into account factors such as:
cash flow needs both now and in retirement
any potential tax implications related to the sale (i.e., capital gains taxes)
whether or not there are other shareholders who need to be taken into consideration when determining an appropriate price
existing debts that must be paid off before ownership can be transferred
Additionally, it may also be beneficial to look at trends in investment returns from similar businesses over time — both past performance as well as forecasts for future performance — to ensure you have realistic expectations about likely ROI.
The overall plan should also involve regular updates in order to stay on track and make course corrections if needed so it does not interfere with other initiatives or ongoing priorities in your organization. Additionally, by creating a succession strategy for key people in the company during this process, you can ensure continuity of operations even after you leave your position.
A word of caution, however: Do not run your business with the sole focus of securing an exit strategy. That's the opposite of never planning ahead.
Related: Planning Your Exit Strategy? Follow These Tips
Why plan so far ahead anyway?
First, it allows you to prepare for any potential issues that may arise and create a contingency plan to address those issues. It also gives the company an opportunity to review current strategies and make adjustments if needed, ensuring they are in line with the ultimate goal of exiting at an optimal time. Furthermore, planning ahead can help protect against any unforeseen circumstances that could cause significant financial losses or damage to the company's reputation. It also creates opportunities for reinvestment or diversification into other markets or industries upon exiting existing ones.
Lastly, having an exit plan can provide peace of mind, which is essential when making decisions about long-term investments and goals within a business strategy. Better yet, it's peace of mind not only for you as the business owner or a key decision-maker, but for the entirety of the organization.
According to some surveys, nearly half or 48% of business owners do not have an exit strategy, and 58% do not even know how much their business is worth as they have never had it appraised. Apparently, there are a lot of decision-makers who are irresponsibly indecisive and alarmingly uninformed to address one of the biggest decisions they and their organizations will inevitably have to face. Are you going to be one of them?
You need your leadership team to be capable enough to successfully plot crucial strategies such as business exit plans. They need the foresight to understand the importance of looking so far ahead and the capability to plan for an exit while not hindering ongoing initiatives in your organization.
