When you first start a business, establishing an exit strategy is probably the furthest thing from your mind; however, it’s important to plan an exit strategy ahead of time to secure your financial future. This article will provide you with an introduction to how to exit your business.
Questions to Ask Yourself Before Creating an Exit Plan
Before developing an exit plan, ask yourself these important preliminary questions:
- How much longer do you wish to stay in business?
- Do you owe money to creditors?
- Do you wish to sell or close your business?
- What financial goals do you have and what do you want to achieve out of exiting your business?
- Do you have investors?
Decide if You Want to Sell or Close
There is a difference between selling and closing your business. Each path requires a different exit strategy to ensure that your professional goals are achieved.
If you are selling your business, you must first determine your primary goal. Are you trying to sell for as much as possible or hoping for someone to carry on your business legacy? If you’re trying to maximize profits, examine the market and understand what a prospective buyer will want. The price-to-earnings ratio (P/E) is a common metric that business buyers use to value companies. To maximize your P/E ratio, you will want your business maximizing revenue in its final quarters while limiting expenses. This will help increase your P/E ratio and drive up the value of your company.
If you are more interested in the future success of your business under new ownership, have some potential successors in mind and talk to them individually about your goals and their goals for the business. Ultimately, you have the power to sell or not, so if you don’t like a potential successor’s vision for your company, hold off on selling until you find the right buyer.
If you simply want to close your business rather than sell it, your strategy will be much different. If you’re going to close, you should close the right way to minimize downside and maximize your benefits. This will include terminating any existing relationships (e.g., employees, contractors, leases, etc.) and paying all liabilities. If this requires additional time, then having those conversations with creditors can help reduce the overall burden.
Developing Your Exit Strategy
Once you’ve answered the previous questions, you can explore different aspects of your exit plan. Similar to building a business, creating an exit plan takes time and, in many cases, strategy. To further develop an exit plan, consider the following:
Plan Your Finances
This is the biggest and most important step in your exit plan. Any taxes and debts owed must be paid before you close. After paying your debts, you will have a better idea of the financial situation of your business. Whether you look at these numbers yourself or with the help of an accountant, having a holistic understanding about your business’s finances will be beneficial.
Choosing New Management
If you are selling the business, buyers will want to understand the managerial situation that will be “left behind”. This is especially the case if you, as the owner, were the ultimate delegator of tasks and assignments. New owners will want to ensure that an effective management team and systems are in place or, alternatively, be able to install a new management team. As the seller, you will be expected to provide visibility into the current structure as well as insight on employees and other relationships. This occurs during due diligence and as part of the transition. If the continued success of your business is important to you, share crucial knowledge and information with key employees and leaders before you leave to help ease the transition to a new ownership group.
Once you have decided to sell or close, be sure to notify your employees, suppliers, customers, investors, creditors and all other stakeholders. This is not only a common courtesy, but it will promote clarity and help highlight any outstanding obligations that may need to be fulfilled before the sale or closure is complete. Your stakeholders will have questions about the impending changes, so be prepared to supply them with answers. The timing of this notice is critical and can be impacted by the terms under which you agree to sell the company to a prospective buyer.