What is a Business Exit Plan & How Can You Make One
The question: “what is your exit plan?” tends to draw a lot of blank expressions when asked to business owners.
A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.
This is as strong a case as can be made for exit planning.
The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.
By working together with a team of professional advisors — accountants, lawyers, and even brokers — you can ensure that you have the right documents in place for a business exit whenever the time comes.
In this article, we talk a little more about this plan and how you can make one for your business.
What is a business exit plan?
A business exit plan outlines the set of steps that need to be taken so that a business owner can make a successful exit from their company. Although most owners will have a timeframe within which they would ideally like to execute the plan, a well-constructed plan should be flexible enough to allow for unforeseen contingencies.
These could include any number of factors, related to the business itself or the personal life of the owner.
When is the best time to start a business exit plan?
Many owners make the mistake of thinking that a business exit plan means the same thing as a ‘retirement plan’, believing that they can start thinking about putting one together as soon as they hit 55 years of age.
This is an error.
Not because your departure is impending, but because it doesn’t give you the flexibility.
Instead of looking at a business exit plan as a retirement plan, rethink it as a ‘real divestment option,’ and how that changes the perspective.
What types of business exit plans are there?
There are basically two types of business exit plan: closing the business or selling it to a buyer.
In the case of a smaller company, a buyer could be found among existing employees, but this is less likely to be the case as the company grows.
This article assumes that the owner is looking for the best way to prepare a business exit plan with the intention of selling.
Steps involved in putting together a business exit plan
Remember that the purpose of the plan is to make a transition of the business to a new owner as straightforward as possible.
Although the steps which follow are general, nobody knows a business better than its owner, so by all means, take whatever steps are necessary to make your business as marketable to potential buyers as possible.
These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Your personal finances, family situation, and other career options are beyond the scope of this article.
Rather, the intention of the points below is to ensure that your business will be ready to sell in the fastest possible time at a price that works for you.
Business exit plan
- Know what your business is
- Ensure your finances are in order
- Pay off creditors
- Remove yourself from the business
- Create a set of standard operating procedures
- Establish (and train) your management team
- Draw up a list of potential buyers
1. Know what your business is
This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes ‘everything to every man.’
This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.
2. Ensure your finances are in order
This should be a short-term priority regardless of your plans for your business.
But if you intend to sell your business at short notice, the best platform you have is a clean, well-maintained set of financial statements going back at least three years.
3. Pay off creditors
The less debt that your business holds on its balance sheet, the more attractive it will be to potential buyers.
A common theme among small business owners in the US is credit card debt running into thousands of dollars. This can be a red flag to many buyers and should be paid off as soon as possible.
4. Remove yourself from the business
How important are you to your operations? If your business would lose more than 10% of its revenue were you to leave, the answer is “too important.”
If revenues are tied to the owner, buyers are not going to want to buy the business straight after the owner has left.
Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.
5. Create a set of standard operating procedures
Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs) — ideally in written form — that would allow any owner to maintain the business in working order in the morning, merely by following a set of instructions.
6. Establish (and train) your management team
Are your existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ‘no’.
They may need more training, or you may need a different set of managers. In either case, having a capable time in place will be valuable whether you decide to exit your business or not.
7. Draw up a list of potential buyers
A list of buyers should be made, and refreshed on a reasonably regular basis. Ideally, you would know what their criteria are for buying a business, but this is not always practical.
Keeping a longlist of buyers means that you can reach out to them at short notice if it is so required at some stage in the future.
This list is likely to include at least some of your managers or suppliers.
There is never a bad time to start thinking about a business exit plan. Any number of events could occur which would make a short-term exit from your business necessary.
You don’t have to worry about this, but you should be prepared for it.
Originally published at https://dealroom.net.