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Exit Right: How to Plan the Proper Exit Strategy

4 min read

When it comes to exiting a business, whether by stepping down, selling or retiring, early planning and relationship building are key. Having a well-thought-out exit strategy can help ensure a successful transition of power.

“An exit strategy is thinking about the end game. Just about all small businesses will end at some point, whether the business just closes or the owner sells the business. The biggest thing I can suggest is that the exit strategy be considered at the very beginning of the business… particularly if you’re bringing in partners or you’re not a sole proprietor,” said Brent Stidman, a partner at HCJ CPAs & Advisors. “So an exit strategy is planning, in advance, how you will exit your business, how you will get paid for your business, how you will pass it on to the next generation if that’s what you choose to do.”

Several things need to be taken into consideration when formulating an exit strategy. Thinking proactively about possible unexpected illnesses, dissolving partnerships or even untimely deaths can help business owners create a strong plan.

If the right time for a business leader or shareholder to exit happens to fall while the business is still thriving, it’s important to have a detailed plan laid out for the transition of power.

“[For] exit strategies that come in the middle when the business is going, like the loss of a partner or shareholder… you need to be very specific, whether it’s an operating agreement or a shareholder agreement, as to how that exit dollar amount will be paid to that exiting member,” Stidman said.

Good Plan

If planning an exit wasn’t part of the business plan at the beginning, how far in advance should a business leader start thinking about their exit?

“Usually three to five years,” said Mike Boschetti, director and principal of Strategic M&A Advisors. “A lot depends on how well-positioned the company is for sale.”

To determine whether their business will bring a good sale, business owners should ask themselves if the business has been positioned to bring the highest value in the market. Make sure business value drivers have been recognized and improved if needed.

According to Boschetti, key business drivers include a “management team capable of running and

growing the business without the current owner, limited customer or supplier concentrations, good management systems and quality financials and financial processes that capture important information about sales, cost of sales, operating expenses and inventory that can be analyzed to look for improvements.”

As someone in the process of retiring, Stidman said it’s important for any exiter to consider the best interest of any partners involved and leave on the best terms possible.

“You want to make sure that you leave those clients in good order for those that are succeeding you — that you start the communication process as early as you can, both with your fellow employees, other owners and your clients,” he said. “You want to make sure that you preserve that revenue source the best you can for those who are coming behind.”

Consider this …

It’s just as easy to make mistakes while leaving a business as it is to make mistakes while running the business at its prime.

For those with little to no experience on leaving a leadership position, hiring an adviser may be the right decision when beginning to form your exit strategy. Advisers can help point business owners in the right direction in a variety of ways, such as who to pass the business to and when the best time to exit may be.

Plans for after the exit should also be considered. Before leaving, figure out what comes next — what new goals are you looking to achieve and how will you spend your time?

Should selling be the right exit strategy, determine how the sell should be structured, both to benefit the seller and the existing business.

According to Boschetti, a plan of sale should be structured with the mindset that it “could take five years to execute.”

“Here, the insider, who probably doesn’t have the funds to buy the business, could finance some of the purchase with the owner while the owner is still in control and then use outside financing around the five-year mark to purchase the rest of the ownership,” he said. “This way, the owner stays in control until he or she receives all of his or her money.”

No matter the method, a successful exit comes from thorough, advanced planning and finding the right moment to step away.

“I think time is extremely important,” Stidman said. “The longer time period you have to start executing your exit plan, the more successful it will be.”

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