The Importance Of A Business Exit Strategy

When you’re starting and running a business, there are so many moving parts requiring your attention that an exit strategy is probably one of the last things on your mind. However, a wisely-constructed business exit strategy is a very important element of your business plan.

A business exit strategy can have a significant impact on your future as the business owner, your personal wealth,  the stability of the business following your departure, and can guide decisions over the course of a business’ lifetime.

In this blog, the Lauber Business Partners team will cover some things to consider to ensure a successful exit strategy including the different types of exit strategies and what preparations you should make when forming and executing your exit strategy. 
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What Is an Exit Strategy?
An exit strategy is a plan outlining how a business owner will dispose of his or her interest in their business. They’re usually executed when a business owner is ready to retire, or when an entrepreneur is ready to transition the company he or she built.

The type of exit strategy used will often depend on how successful the company is. For example, companies that are either highly successful or otherwise profitable can be sold. This type of exit strategy can be very profitable for the owner. On the other hand, owners of businesses that are less successful may base their exit strategy on actions that will minimize losses by liquidating its assets.

Types of Business Exits
Most business owners will choose one of two main types of exit strategies. Again, the strategy chosen will depend on the business’ current financial status, the current owner’s wishes for the business’ future, and many other factors.

Selling
Selling the business is typically the most profitable type of exit strategy. There are a few different ways that a business can be transitioned when the owner is exiting:

• Sale to another business or individual: The business is bought by an interested party, a competing business, or a group of investors.
• Going Public: Business owners may choose to take their company public through an initial public offering (IPO). This involves selling shares of the business on public stock exchanges.  This type of exit is very complex but also may be extremely lucrative.  A business must have the potential to scale significantly to consider an IPO.  This type of exit is not normally available to small business owners.
• Private Equity Sale:  Private equity involves investment firms raising capital from high-net-worth individuals and institutional investors to acquire equity in companies. The goal is to grow the value of the acquired company over a period of years and then sell the company for a profit.  This value creation is normally achieved via growing the acquired companies and streamlining its operations.  Such sales can be very lucrative for the seller but often result in significant changes in the acquired business.  This sort of sale will often afford the seller the opportunity to “rollover” a portion of his or her equity in the new entity.
• Employee Stock Ownership Plan (ESOP): An Employee Stock Ownership Plan is a mechanism for an owner to transfer/sell ownership of his or her company to its employees.  An ESOP is a type of retirement plan that provides employees with ownership in their company through shares held by a trust. ESOPs offer significant tax benefits for both the company and its employees, serving as a mechanism for business succession, long-term wealth building, and a high-involvement work culture. Employees receive their vested benefits, which can be paid as company stock or cash, after leaving the company.

Closing / Liquidating
Closing or liquidating is another exit strategy. This may be more or less common depending on the industry, as well as factors such as the size of the company, its profitability, the number of employees, and more.

Closing or liquidating a business may be necessary if the owner is having a difficult time finding an interested buyer. The owner would wind down operations – liquidating its assets (AR, equipment, inventory, intangible assets, etc.) and paying its liabilities, hopefully leaving the owner with some residual value.   Closing or liquidating is typically the least profitable type of exit strategy.

A Third Option?
While we indicate two options for exit above, there may be a third option to consider.  A third option may be for the owner of the business to continue to hold the business and hire a person to run the business on his or her behalf.  This would allow the business owner to continue to reap the financial benefits of owning the business, yet be able to pull back from the day-to-day rigours of running the business.  Whether this is a viable option depends on a number of factors – the size of the business, the strength of the team, the profitability of the business, the prospects of the business and the risk tolerance of the owner.

When to Begin Creating Your Business Exit Plan
Many business owners don’t begin to consider their exit strategy until they’re ready to leave. However, a business exit strategy is an important part of your overall business plan. Having an exit strategy in place from early on can be helpful in guiding overall business decisions, while also ensuring you are prepared when the time comes.

Start creating your business exit strategy as soon as you can for the smoothest exit possible.

Preparations For Selling Your Business
If you’re planning to sell your business, there are preparations you should make for the best possible results. For the best outcome possible, consult with experts as you consider these steps in your strategy:

Assess Your Business and Personal Finances:Begin by assessing your business. What is the business’ value? How profitable is it and how profitable has it been in the past?  Having a firm grasp on your business’ financial profile is essential for getting the best deal when you sell.  It is important to look at your financial results through the lens of a buyer.  When evaluating your business a buyer wants to understand how sustainable and repeatable your financial results are going forward.  The more comfortable they are, the more they will be willing to pay to acquire the business.  Oftentimes, buyers will conduct a Quality of Earnings analysis, resulting in a Quality of Earnings Report. The objective of this analysis is to understand what future earnings might be after they acquire the business by doing a deep dive into its historical financial results and understanding what drives its profitability.  It is also becoming more common for a seller to conduct a Quality of Earnings analysis in advance of a sale to identify opportunities for improvement before a sale and provide a view into the issues a buyer may have in the sale process.

In addition to the quantitative assessment of your business, it is important to evaluate other factors impacting your business’ valuation.  These factors would include things like the quality of your team, the effectiveness of processes, quality products or services, condition of assets, relationships with vendors, etc.

It is always advisable to meet with investment bankers or business brokers to understand the sale process and get some preliminary opinions on the value of your business.  Most intermediaries are open to these discussions to get to know you and your business.   An owner should be doing this periodically during their course of owning the business.  In addition to getting some opinions around valuation, an owner can get a feel for the acquisition market environment and the approach of the advisor.

An owner also needs to take a hard look at his or her personal finances. If you’re retiring, how much do you need to yield from the sale of the company? If you are not retiring but moving to another venture, how much do you need to support your lifestyle and pursue your next project?

Making these assessments will ensure you’re taking care of yourself in addition to your company.
Assess Your OptionsOnce you have a clear picture of your business and your own personal finances, you should begin to assess your options for selling.

• Do you have interested buyers?
• Have you put out feelers to gauge interest in your company?
• If there are multiple interested buyers, consider what factors other than money are important to you during the sale.

Finally, you’ll need to agree to a deal. Leaving the business you own can be one of the hardest things you’ll do in your professional career. Your business may be a reflection of you, your values, and the countless hours you’ve put into it. Fortunately, at this point, you should have a firm grasp of your own needs and the business’ needs, which will make the decision slightly easier.

Trust the Exit Experts at Lauber Business Partners
Novelists often say that successful stories begin with the end in mind, and the same thing holds true for business. However, just like with stories, starting a business with an exit strategy in mind is easier said than done. Nevertheless, creating a plan for leaving your business helps you prepare for the future and maximize the value of the company. An exit strategy is an essential plan every business owner should have in place.

If you’re ready to sell your business, turn to the finance and accounting experts with Lauber Business Partners. Our experienced team can help your business through the most critical parts of selling your business, such as performing financial analyses, projections, negotiating with potential buyers, and countless other valuable services.

To start the conversation and begin executing your exit strategy, contact Lauber Business Partners today.

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