7 Questions to Ask when Planning Your Exit Strategy
When you mention “exit strategy,” the average business owner hears “cha-ching.” In other words, “my exit strategy is to sell my company for a huge profit.” That may very well be the end result, but it’s not the only exit strategy, and many things need to happen before you get to that point. Here are some questions you need to answer before you walk away from your business.
1) How Much Longer Do I Want to Work?
You can’t just wake up one day and decide to sell your business if you want to do it responsibly and profitably. It usually takes a few years to develop an exit strategy. Ideally, an exit strategy will be part of the original business plan, although that strategy may change over time. If you own a business and would like to retire, sell your business, walk away from day-to-day operations, or pass the business down to the next generation, start the planning process now. Ideally, there will be at least three to five years before a sale.
2) How Much Control Do I Want to Maintain?
Some business owners are ready to leave tomorrow and never return. Some want to leave the company as an operator and remain as a consultant or chairman of the board. In this case, you’re essentially selling to yourself. Other people run the show while you sit on the beach and collect checks. Both are viable exit strategies.
It becomes complicated when you have multiple owners with different goals. If one wants to retire and another wants to continue working, it gets more complicated. The key is to communicate, get your needs and desires on the table, and work out an amicable solution.
3) Will I Be Able to Work for Someone Else?
Business owners are often expected to stay on for a couple of years after a sale and remain as the face of the company to ensure a smooth transition. Not everyone who is used to being in charge can work for someone else, even if it’s only for a short time. If you’re not willing to do this, you may not find as many interested buyers.
4) How Do I Replace Myself?
Many small business owners will say, “I do everything. I’m indispensable.” What they’re also saying is, “My company isn’t worth very much in a sale.”
This is another reason why preparing for an exit can take years. If the business can’t function without you, you have to find a way to transfer or replace what you do. If you have a specific set of talents or skills, you may have to groom someone, or more than one person, to replicate your skills and talents and, eventually, replace you.
5) Are My Records Ready?
If you want to get the full asking price for your business, your records need to be clean and organized so a third party can go through them with a fine-tooth comb. Otherwise, how can you prove the business is as valuable as the asking price?
6) Who Do I Want to Run My Business?
Depending on your situation, you may not have much control over this. If you’re in a strong financial position, you have options. You may choose to sell to a partner, outside party or a family member. You may choose to merge with another company and let them take charge of operations.
You may want to protect your employees and give them the opportunity to make more money through an employee stock ownership plan, which has become popular in recent years. Essentially, you sell the business to a pension plan for the benefit of the employees. The ESOP is a qualified retirement plan investing in the company stock. As the company grows, the ESOP grows in value, providing retirement benefits to the employees.
7) Am I Prepared Emotionally?
This is a delicate part of selling a company that many business owners fail to consider. Business owners often say the company has been like a baby who they’ve nurtured and watched grow up.
Are you prepared not just financially, but emotionally, to let go of a business you spent decades building? If your name is on the business, are you prepared to see it operating under another name in two years? If maintaining your legacy is important, you need to make your feelings known before you get too far down the road. A large conglomerate may be the likely buyer but your company could end up as an anonymous division, even if the buyer pays top dollar.
Of course, your exit strategy and the answers to these questions can get a lot more complicated and emotional if you decide to sell or leave your business to your children. In the next post, we’ll discuss various considerations that come into play when you pass your business down to the next generation.