Why You Need a Business Exit Strategy

Failing to build a cohesive exit strategy is a recipe for disappointing results when selling your business. However, too often, business owners underestimate the need to plan ahead and establish a clear action plan. Continue reading to discover why having a business exit strategy is the key to long-term success when running (or selling) your business.

In this article, we discuss:

• Key components every exit strategy should include
• Eight benefits of having an effective business exit strategy
• The benefits of working with a business Advisor to plan your exit

Related Article: The Ultimate Checklist for Preparing to Sell Your Amazon Business

Key Components Every Exit Strategy Should Have

Not all business sales end in success. Without a comprehensive exit strategy, you may end up selling your business for less than it’s worth. In order to maximize your value and achieve a profitable exit, you must create an effective strategy.

Every business is unique, which means every exit strategy should be customized to meet the specific needs of the business it is designed for. Even so, there are common steps every strategy should include.

“Without a comprehensive exit strategy, you may end up selling your business for less than it’s worth.”

Assemble your exit team

When planning your exit, the first thing you should do is assemble your team of experts. Your team will help you navigate the process of selling your business and should include a:

• Business Advisor or business broker
• Personal financial advisor
• Business lawyer
• Business accountant

We will discuss the role of a business Advisor later on. Suffice it to say they are a central figure in your exit plan. Your business lawyer, accountant, and personal financial advisor all serve specific roles in your exit strategy to help you achieve success.

Creating a successful exit does not happen overnight. Depending on the current state of your business, you should assemble your team and start working on your exit strategy 12–24 months before you plan to sell your business.

Get a business valuation

Once your team is assembled, your business Advisor will provide a thorough valuation of your company. Your valuation will give you an educated assessment of the dollar value of your company.

At the same time, the valuation will provide you with a clear idea of the strengths and weaknesses of your business. From there, you will have a better idea of what you need to do to create a comprehensive exit strategy.

Create an optimization plan

If your valuation reveals that your company has room for improvement, create an appropriate optimization plan. Your plan should include strategies to address weak areas as well as ways to capitalize on your strengths.

Not all businesses need to be optimized before they are sold. If your business is already in tip-top shape, you may not need to create an optimization plan prior to selling.

Drive growth

Businesses that exhibit strong and steady growth trends are more valuable than companies that do not. If you are interested in achieving a higher selling price (and who isn’t?), driving growth is one of the most important things you can do to get there.

There are many ways to drive growth. The right way for you will depend on the specific needs of your business. Common strategies to drive growth include:

• Launching new products
• Optimize existing products
• Adding new marketing channels
• Optimizing existing marketing channels

Assess the best way for your business to drive growth, create a plan, and start implementing.

“Businesses that exhibit strong and steady growth trends are more valuable than companies that do not.”

Minimize risk

If you were buying a business, would you prefer to buy a business with more risk or less risk, assuming the expected payout was the same? The answer is pretty clear. While all businesses entail some risk, more risk corresponds with a decrease in value.

Risk can come from many areas. Any part of your business that relies on a single point of failure incurs risk. For example, let’s say you run an Amazon FBA business that only sells one product. Your business (and livelihood) would be eliminated if that product was unexpectedly removed from the marketplace.

Reducing single points of failure will help you build a more attractive business. At the same time, you must consider any potential legal risks that your company entails. Is your formation and entity paperwork properly registered? Do you have any potential patent infringement issues on the horizon? Are there any pending or likely lawsuits against your company?

Go through your business and assess areas of risk. Then, create and implement an appropriate plan to address them. Your legal advisor can be very helpful throughout this process.

Improve documentation

Every smart entrepreneur prefers to buy and manage a company that has clear and orderly documentation practices. Clear documentation includes:

• Orderly financial statements
• Clear standard operating procedures (SOPs)
• Email and communication with third-party vendors and suppliers

This documentation makes it much easier for a prospective buyer to accurately assess the performance of your business, helping them to make an informed buying decision. At the same time, it will demonstrate that you run your company in a responsible manner, instilling confidence in prospective buyers.

As a business owner, if you already have clear documentation, you are ahead of the game. If you don’t, your business exit strategy should include a plan to improve your documentation. When it comes to your financial records, your business accountant should take the lead.

Standard operating procedures, communication, and other forms of documentation may be best addressed by you or whoever is running the business for you.

Increase transferability

Prospective buyers will evaluate your business to determine if it is easily transferable. Transferability refers to the ease with which a business can change ownership without negatively impacting its performance.

Effective business exit strategies should evaluate and address the relative transferability of the company. If the business is tied to your image, personality, or likeness, a new owner may find it hard to fill your shoes. In this case, take time to extricate yourself from the business prior to selling it.

Confusing, poorly documented, or nonexistent operating procedures make it much harder for a new owner to run the business. By making operations crystal clear, you increase the transferability of your business and raise its value.

Lastly, build teams or hire individuals to handle the day-to-day workload of your company. The more automated the processes are, the easier it will be for a new owner to take over. At the same time, it will reduce the time required of them to manage the company. This makes it a much more attractive acquisition prospect compared to similar businesses.

“By making operations crystal clear, you increase the transferability of your business and raise its value.”

Eight Benefits of Having a Business Exit Strategy

Selling your business is likely one of the largest financial decisions you will ever make. Knowing why having an exit strategy is important can help motivate you to adequately prepare for your exit ahead of time.

Below, we discuss eight benefits of a comprehensive business exit strategy. With a strong business exit strategy, you can:

• Create more efficiencies within your business
• Enjoy more peace of mind while running your business
• Run a more profitable business
• Attract more interested buyers
• Increase business value and achieve a higher sales price
• Win better deal terms
• Enjoy a smoother selling process
• Safeguard your financial future

1. Create efficiencies within your business

Business exit planning brings with it a number of benefits that you can enjoy while you still own your company. In preparation for your sale, you may improve your documentation, create SOPs, automate processes, and build teams.

As we have seen, this helps to increase your business value and make it more attractive to potential buyers. At the same time, it makes your business much easier and more efficient to run while you still own it. This saves you time that you can then spend focusing on bigger-picture items or engaging with the people you love.

2. Enjoy more peace of mind while running your business

Ensuring your legal documentation is up to snuff and assessing the risk of future legal disputes is an important part of preparing your business for sale. Doing so reassures a prospective buyer that your business is positioned well from a legal perspective.

At the same time, it can mitigate legal risks while you still own your business. Knowing that your business is vetted and protected can help you enjoy more peace of mind prior to your exit. Given the stress involved with running or selling a business, peace of mind is a valuable commodity.

3. Run a more profitable business

As you drive growth and create a more efficient business, your profit will likely increase as a result. In addition to raising the value of your company when you sell it, you can also enjoy the benefits of increased profits while you still own your company.

Whether you reinvest the profits back into the company to continue to drive growth or use them for a different purpose, extra cash is never a bad thing.

“The more potential buyers your business has, the greater the competition for your business will be.”

4. Attract more interested buyers

Many buyers are looking for a proven and organized business to purchase—and the easier it is to run the company, the better. When it comes time to sell, a more profitable and efficient business stands out amongst the competition.

This helps to attract a greater number of interested buyers. The more potential buyers your business has, the greater the competition for your business will be. This puts you in a stronger position and can help you achieve a more profitable (and easier) exit.

5. Increase business value and achieve a higher sale price

One of the main benefits of a comprehensive exit strategy is it allows you to increase the value of your business and achieve a higher sale price.

Given the significance of your business in your personal finances, it often makes sense to take the time to increase business value prior to selling. As an example, let’s say you own a $2 million business. If you sell it without optimizing you will still receive a handsome payout.

However, if you take 18 months to implement an exit plan and increase business value by 30 percent (a reasonable amount), you walk away with an extra $600,000. Most business owners would consider this a worthy use of 18 months.

6. Win better deal terms

The final sale price is not the only aspect of the sale that has a strong influence on your post-exit life. The deal terms you wind up with play a large role in the overall success of your sale.

Not all sales are structured the same. Some potential buyers may make all-cash offers paid in full at the time of closing. Others may make an offer to pay a portion of the sale price up front with the rest being paid over a period of time. Others may wish for you to stay on and run the company for several years after the exit.

The final deal terms you arrive at depend on the offers available to you and the outcome of negotiations between you and the buyer. By optimizing your company and attracting more offers, you position yourself to walk away with deal terms that suit your needs and preferences.

7. Enjoy a smoother selling process

Selling your business can be a stressful process even in the best of circumstances. If things go south, it can be a nightmare. By having a cohesive business exit strategy and preparing ahead of time, you set yourself up to enjoy a smoother selling process overall.

8. Safeguard your financial future

By achieving a higher sale price and winning more favorable deal terms, you improve your chances of safeguarding your financial future. It all starts with running a profitable business and engaging in careful business exit planning.

“By having a cohesive business exit strategy and preparing ahead of time, you set yourself up to enjoy a smoother selling process overall.”

Why You Should Work with a Business Advisor to Plan Your Exit

Many business owners face the decision to navigate the exit process alone or recruit the assistance of a qualified business Advisor. For most, hiring an Advisor leads to a more profitable and successful exit.

What is a business Advisor?

A business Advisor, or business broker, is an experienced professional who specializes in helping individuals sell their businesses. They bring with them a wide range of skills and extensive experience in order to help you achieve a more profitable, easier, and more successful transition.

How does a business Advisor help you sell your business?

Your Advisor will work with you at every step of the way. This includes:

• Conducting a business valuation
• Identifying company strengths and weaknesses
• Building your marketing package
• Listing your business for sale
• Attracting qualified buyers
• Analyzing offers
• Negotiating deal terms
• Navigating due diligence
• Drafting and authorizing agreements
• Closing the deal and transferring assets

Each of these steps brings with it its own challenges. By helping you navigate the complicated exit process, your Advisor plays an indispensable role in your exit experience.

“For most, hiring an Advisor leads to a more profitable and successful exit.”

Conclusion

Navigating the path to a successful sale can be a difficult endeavor. However, with the right exit strategy and an experienced Advisor at your side, you greatly increase your chances of achieving a successful and profitable transition.