A Business Plan Needs an Exit Plan from the Very Start
There are Lots of Exit Options Owners Can Plan for, but Putting Together a Plan is Essential
Business owners need to plan the sort of exit they hope for early on and treat exit options explicitly as part of their initial business plan. Whether owners are looking to sell outright, be acquired by another company, go public, choose simply to liquidate, or let the business run dry matters. Hereâ€™s why.
The final portion of your business plan outlines your exit strategy. It may seem odd to develop a strategy this soon to leave your business, but potential investors will want to know your long-term plans. Your exit plans need to be clear in your own mind because they will dictate how you operate the company. For example, if you plan to get listed on the stock market, youâ€™ll want to follow certain accounting regulations from day one. If you plan to pass the business to your children, youâ€™ll need to start training them at a certain point.Â
Hereâ€™s a look at some of the available strategies for entrepreneurs:
Exit Strategies for Long-Term Involvement
- Let it run dry: This can work especially well in small businesses like sole proprietorships. In the years before you plan to exit, increase your personal salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply close the doors and liquidate any remaining assets. With the larger income, naturally, comes a larger tax liability.
- Sell your shares: This works particularly well in partnerships such as law and medical practices. When you are ready to retire, you can sell your equity to the existing partners, or to a new employee who is eligible for partnership. You leave the firm cleanly, plus you gain the earnings from the sale.
- Liquidate: Sell everything at market value and use the revenue to pay off any remaining debt. This is a simple approach, but also likely to reap the least revenue. Since you are simply matching your assets with buyers, you probably will be eager to sell and therefore at a disadvantage when negotiating.
Exit Strategies for Short-Term Involvement
- Go public: The dot-com boom and bust reminded everyone of the potential hazards of the stock market. While you may be sitting on the next Google, IPOs take much time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. However, the costs can often be covered by intermediate funding rounds.Â
- Merge: Sometimes, two businesses can create more value as one company. If you believe such an opportunity exists for your firm, then a merger may be your ticket to exit. If youâ€™re looking to leave entirely, then the merger would likely call for the head of the other involved company to stay on. If you donâ€™t want to relinquish all involvement, consider staying on in an advisory role.
- Be acquired: Other companies might want to acquire your business and keep its value for themselves. Make sure the offered sale price meshes with your business valuation. You may even seek to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.
- Sell: Selling outright can also allow for an easy exit. If you wish, you can take the money from the sale and sever yourself from the company. You may also negotiate for equity in the buying company, allowing you to earn dividends afterwards â€” it clearly is in your interest to ensure your firm is a good fit for the buyer and therefore more likely to prosper.
Daniel Richards is a freelance business writer who has covered small business industry news for the U.S. Chamber of Commerce, National Association of Women Business Owners and the National Retail Federation.