Does your Exit Plan need updating?

Not many business entrepreneurs have an Exit Plan. However, if you do have an Exit Plan in place, is it up to date? Circumstances change in your business and personal life rapidly, so your present Exit Plan might not necessarily fit into your present circumstances.

For those business entrepreneurs that do not have an Exit Plan, let me spend a few minutes why it is important for you to have one. An Exit Plan is vitally important to maximise your business worth and retirement strategy so that you can legally minimise tax and get maximum dollars for your business.

Graphic provided courtesy of the http://howtoplanandsellabusiness.com website

Exit Planning is a comprehensive analysis of all of the factors that affect an entrepreneur’s departure from their business. While Exit Planning includes succession planning, it also addresses issues more directly relevant and critical to entrepreneurs, such as whether they can leave the business when they want, to whom they want, and for the money they want and need. Exit Planning is an intricate process in which Exit Planning Advisors seek, create, and implement combinations of strategies and steps that uniquely address each entrepreneur’s goals and aspirations.

Importance of Exit Planning

Every company needs an exit strategy. Your exit plan is just as important as any other part of your business plan, and having one can help ensure a smooth transition if your company merges with another or you decide to leave your leadership role. Ideally, the exit strategy should be signed off by the founders before the first dollar of external investment goes into the company. A good exit strategy, well matched to the characteristics of the business and market, will:

• improve the probabilities of success
• shorten the time to exit, and
• often significantly increase the ultimate exit valuation

This is especially true today when early exits are such an attractive option for many start-ups. These days, companies are often sold only two or three years after they’re founded.  Flickr was a year and half old when it sold for $30 million. Club Penguin sold for $350 million when it was just two years old. YouTube sold for $1.6 billion when it was two years old.

Of course, in many cases it will take longer than two or three years to achieve an optimum exit. But this doesn’t reduce the requirement for an exit strategy and continuous work on the exit plan – right up until the day the company is sold.

Benefits of an Exit Plan

Developing an exit plan is the most important thing you can do to protect the value of your business. According to a recent Exit Planning Institute survey of business owners in 2015:

• 76% plan to transition their business within the next 10 years
• 83% either do not have a transition plan in place, whether they plan to sell to an internal buyer or to an external third party
• 40% of respondents do not have a plan that covers a forced exit (illness, death, etc.)

The same survey showed that the number one reason business exits fail is due to a lack of planning on the part of the owner. Without a predetermined exit plan, you will probably undervalue your company and leave hard earned wealth on the table. You’re more likely to pay too much in taxes and lose control over the process by being reactive, rather than proactive.

Think about it, most business owners spend more time planning their family vacations then they do planning how and when to exit their business. Rather than being proactive, most business owners are reactive and “forced” to sell because of burnout, health issues, marital problems, or business conditions without the time to prepare correctly. As a result, most business owners exit their companies at the worst time possible.

The greatest benefit to business owners who have gone through the exit planning process may be the peace of mind that comes with knowing there is a plan in place to help ensure they are meeting their business, personal and financial goals and can exit the business profitably. Even though an Exit Plan is in place, it is important to keep this Plan updated.

A well-designed and implemented exit plan is a powerful tool that enables you to:

• Control how and when you exit
• Create a strategic direction for your business’ growth
• Maximize company value in good times and bad
• Ensure the future worth of your business
• Minimize or eliminate capital gains taxes
• Have strategic options from which to choose
• Reduce stress and uncertainty for yourself, your family and employees
• Achieve your business and personal goals
• Facilitate retirement when you are ready for it
• Create a smooth transition for your management team or family members
• Ensure the survival and continued growth of the company
• Reduce or defer the potential tax impact on your estate, spouse or family

Foundation for all properly crafted Exit Plans

• Step One: Establish Entrepreneur Objectives
• Step Two: Quantify Business and Personal Financial Resources
• Step Three: Maximize and Protect Business Value
• Step Four: Ownership Transfers to Third Parties
• Step Five: Ownership Transfers to Insiders
• Step Six: Business Continuity
• Step Seven: Personal Wealth and Estate Planning

In general, exit strategy planning will involve understanding following aspects:

Step 1. Determine Your Exit Option: Although there are many variations of business owner’s exit options, generally they fall into one of the following broad categories:

• Transfer of ownership to heirs during owner’s lifetime or at death
• Sell to other owner ( if partnership ) or Employee
• Sell to a third party
• Liquidation and/or close down

Since ecommerce business owners are younger as compared to their brick and mortar counterparts and because the rapid changes in technology makes it more challenging for internet business owners to create a business that can be passed on to their heirs, first option is generally not applicable. Most internet entrepreneurs choose to sell to a third party as their exit strategy because this option offers the highest opportunity to maximize the return value from the business.

Step 2. Know Your Business Worth And Put A Plan In Place To Grow Its Value Keeping The End In Mind: Good Start is half the battle. Based on what I know about my internet business, what is my best guess time frame of exiting the business? Remember, if your business is growing and there are lots of opportunities for expansion, you may not have the clarity to define your exit strategy as you don’t know where you will be in few years from now. Even when you don’t have specific plans of exiting in near future, thinking how you will want to exit the business will get you thinking about important questions about your business. E.g. How much is your business worth? What are the value drivers that create sustainable advantage and increase your business value? Once you have pondered on these questions and done some homework, your next logical step is to develop a strategy to consciously integrate these drivers as part of your business planning and growth process so when it is time to sell your business; you are best prepared to get the most out of it.

Step 3. Maximize Your Cash Minimize Your Risk: Start educating yourself about the best way to sell your business to a third party that minimizes your risk and maximizes your cash. Business selling process can be daunting for the first time seller and entire process (from preparing for sale, listing and closing the sale) can take from up to six month to a year. There is a lot to consider – how do you prepare your internet business for sale? How long does it take to sell? Should you offer owner financing or not? What information will buyer expect to make an informed decision? Learning about these things will help open your eyes about missing processes and procedures in your business that buyers value when comparing your business with others available in the market.

Is now the right time to think about exit planning? 

You are quite busy so maybe you will look into it after… Just like purchase of a life insurance, the decision to plan an exit plan can be continually postponed. For your exit plan to be most effective, it must be planned well ahead of the actual exit. Unfortunately when business must be sold, it is usually too late. The prudent address the inevitable and prepare. Remember when it comes to exiting the business, it is either Grow or Go, There is no Status Quo.