Why it's Important to have an Exit Plan in Place
A strategic exit plan is key for long-term sustainability. Planning for the end “allows you to drive value to the business while positioning you to harvest that value at some point in your future,” according to Chris Snider, CEO of research and consultancy firm the Exit Planning Institute.
However, thinking of the end when you’ve barely begun or are currently at the peak of your business might seem unnecessary. And a lot of entrepreneurs agree. Around 72 percent of small business owners don’t have an exit strategy. Many have the intent to sell, but don’t have any plans in place for manoeuvring the business into the best position for an acquisition. Some underestimate the time it takes to exit a business successfully, or fail to properly incentivise and train managers for a management buy-out.
Below, we talk about how planning an exit early can drive everyday growth and help the business survive and thrive any eventuality.
Staying Agile in your Field
An exit strategy is essential, regardless of industry or niche. Markets have life cycles, and enjoy a period of growth before maturation. An exit plan allows you to keep your options open, adapting as the market--and the political climate--evolves. For instance, management buy outs are on the rise, driven by directors who want to offset the risk of politics in flux.
Predicting the profitability of some products is relatively easy. For instance, if you’re in the cloud business you can expect healthy growth well into the next decade. However, anticipating when big businesses will start evaluating smaller ones for growth potential is much harder. If you’re planning to sell your business one day, planning for the sale at the outset ensures you can maximise the sale when buyers do come knocking. And the larger the pay-out, the bigger the opportunity to enter another business at the exit.
Business handoffs to family members rarely go smoothly. A whopping 70 percent of family-owned businesses fail after transitioning to the second generation. Successors are often unprepared or not a right fit for the job.
One major reason for this overwhelming statistic is failure to plan for exits--half of family-owned businesses don’t have a succession plan in place. Caught up in the minutiae of operations, owners fail to take time to think about and prepare for the transition. Fighting over control between family members, confusion over how responsibilities are divided, and no proper documentation for legal purposes are just some pitfalls that undermine an unprepared business. An exit plan functions as a road map your successors can use to hit the ground running.
Promote Employee Ownership
Invested employees are loyal and productive--and there’s no better way to get employees involved in a business than by giving them ownership. While the Employee Ownership Trust model is relatively new, it shows great promise: employee owned businesses exhibit higher profitability and greater resilience against economic turmoil.
Transitioning the business to employees also unlocks attractive tax incentives, and not only for the owners. An EOT company enjoys income tax-free bonuses for employees. However, becoming employee-owned will not be the right fit for every organisation. Early exit planning allows owners the time to align what’s best for both the business and their employees.
Give Managers Time to Prepare
A management buy-out (MBO) is one of the most common and preferred methods to transfer a business, largely because it’s the fastest way to ensure the quality of the service continues and valuable managers stay on board after your exit. MBO deals have risen in recent years, with the total value of transactions jumping a massive 20 percent in 2017.
Since managers typically don’t have the money to outright buy the whole business, financing needs to be raised with the help of outside institutions. This process--along with drafting plans for how to share equity and responsibilities fairly among the buy-out team--takes time. An exit plan allows your management team to prepare accordingly, facilitating a smoother transaction and the most favorable deal for both sides.
Appealing to Investors
If you have external investors, they will insist on having an exit strategy, a tangible plan to grow and return their money. A sound exit plan builds trust; it shows investors you have an eye for the future and the critical thinking required to get there--something a lot of entrepreneurs who pitch the sky but fail to deliver don’t have.
Planning your exit strategy early also allows you to time your exit appropriately. Many business owners wait “for the right time” to start planning. But selling is often the last thing on an owner’s mind when it’s actually the best time to sell. Many become mired in chasing higher and higher profitability when a business is soaring, only entertaining the thought of exiting when the business becomes too tiring or feels like it’s not making as much money as it used too. Remember, if you feel like your business isn’t as attractive as it used to be, that’s what it’ll look like to investors, too.
Work Early towards Relevant KPIs
Business owners can have a variety of reasons for exiting a business--retirement, having an IPO, or getting acquired by large companies. But it’s a long road from what you want to happen to actually making it happen. Without an exit plan, you increase the probability of not getting the outcome you want.
An exit plan allows you to make strategic decisions. Buyers typically look at customer retention and long-term contracts to evaluate the health of your business. These are metrics that take time to build. For instance, if you’re a managed service provider, buyers typically want to see 3 to 5 year contracts. An exit plan lets you forge forward with an eye for these numbers, ensuring that when the time comes you’ll have the leverage needed to negotiate for the best deals.
Safeguard against Unforeseen Circumstances
Business owners like to think that they have full control over when to exit their business. However, that’s not always the case. Factors out of your control like health issues, internal and external conflict--even death--place your business at risk. And most aren’t ready. Roughly half of owners are forced out of their business involuntarily, estimates Snider.
Exits take time. The whole process can take anywhere from 3 to 10 years. But risks can become reality at any time. An exit strategy allows your business to pivot quickly without losing significant resources--which is what is likely to happen when the terms of your exit is written for you by factors beyond your control.
Retirement, conflict, and market maturation are permanent realities of being an entrepreneur. Planning for your exit early can help you maximise your pay-out and ensure the business and your employees succeed even after you step down.
To find out more you can visit our Exit Planning page.