I know that many business owners are wary of business exit planning because of just how comprehensive it can be. However, it is, in fact, key to business survival.

Through years of interacting with major business owners, the more relaxed and confident ones have been those with an exit plan. 

My aim is to emphasize the importance of having an exit plan, and the common business exit plan mistakes you should avoid. 

A professional man in a suit madly holds and crumples some papers

Common Business Exit Plan Mistakes 

Business exit planning is an important process that has huge implications for business owners. Whether you’re exiting due to changes in your lifestyle, retirement, or simply looking to cash out, the right exit plan can make the difference regarding how much you gain from the business. 

Ideally, an exit plan should help you walk away from the business with enough money to meet your financial goals while also guaranteeing a seamless transition for the company. However, while it may sound simple, drafting a solid exit plan can be quite tricky. If you’re not careful, you may mess it up. 

Top 12 Mistakes Made During Exit Planning

Despite how important a business exit plan is, many entrepreneurs make serious mistakes that can affect their financial security and the future of their business. Here are some common exit plan mistakes to avoid:

Procrastinating on Planning

It’s easy to get caught up in the day-to-day operations of your business and put off planning your exit. However, waiting until the last minute can limit your options and result in a less-than-optimal outcome. If possible, it’s advisable to start planning your exit the day you create your business. 

Starting well in advance of your eventual exit allows you to dedicate enough time to consider your best exit strategy and set goals. It also enables you to take steps that will strengthen the business and improve its value.

Neglecting to Diversify

Relying too heavily on your business as your sole source of retirement funds can be risky. To prevent an entire loss of everything you’ve worked hard for, it’s advisable to diversify your investments early on in the business. This spreads out your risk and increases your financial stability upon exit. 

Examples of places you could invest in to diversify your portfolio include: 

A man sitting on a couch with a laptop in front of him

Failing to Consider Taxes

Taxes can cut a significant chunk out of the proceeds you receive from selling your business. Hence, a major mistake will be to not take steps towards tax reduction. Some of the major taxes you need to consider are:

When planning, make sure you assess the tax implications for various exit strategies. You can then brainstorm the steps to take to minimize the tax burden, based on each strategy. Some of these steps include annuity and charitable trust. When tax planning, it’s advisable to talk to a tax and financial expert about the best strategies you can employ. 

Overvaluing Your Business

It’s natural to have an emotional attachment to your business and believe it’s worth more than it actually is. However, overvaluing your business can lead to unrealistic expectations and make it difficult to find a buyer willing to meet your asking price. 

The advisable thing to do is to hire a professional to carry out a business valuation for you. This gives you an idea of the true worth of your business, after which you can determine if that value meets your goals. If it doesn’t, then you must find ways to increase the value of the business and bridge the gap. 

Ignoring Succession Planning

Regardless of what your exit strategy is -whether you intend to sell the business or pass it on to a family member or employee-, succession planning is one aspect you must not ignore. Failing to groom and train potential successors can leave your business vulnerable and decrease its value. 

This is especially true if business operations are heavily dependent on you, as it tells potential buyers that without you, the business may struggle.

Ignoring Tax Implications

Tax implications play a significant role in business exits. Ignoring tax considerations can result in unexpected tax liabilities or missed opportunities for tax savings. Provisions under the Internal Revenue Code, such as Section 1202 for qualified small business stock exclusion, offer potential tax benefits for certain business sales. 

Consulting with tax advisors and structuring the exit plan tax-efficiently are essential to avoid costly mistakes.

A woman sitting at a desk, focused on signing papers and holding a pen

Incomplete or Inadequate Legal Documentation

Proper legal documentation is critical in exit planning. Common mistakes include incomplete or inadequate agreements, such as important utility patent documents, buy-sell agreements, shareholder agreements, and transition plans. 

Relevant provisions under contract law and corporate governance include the Uniform Commercial Code (UCC) for the sale of goods and state-specific corporate laws governing business transactions. Business owners should work with experienced legal counsel to draft comprehensive and enforceable agreements.

Not Communicating Your Plans

Keeping your exit plans a secret from key personnel in the organization, including employees, clients, suppliers, and partners, can create uncertainty and undermine trust. This lack of transparency may also disrupt the smooth transition of the business. 

However, by keeping everyone informed about your intentions and involving them in the transition process, you can reduce resistance and promote a smoother transition.

Not Seeking Professional Help 

The strength and viability of your exit plan largely depend on the team that is executing it. This means that you need to carefully assemble a solid team filled with professionals who can help make your exit plan a success. Some experts you should hire include:

Having these professionals executing your plan will guarantee that no critical details are overlooked, and you can make smart decisions that will help you walk away with a substantial amount. 

Woman overseeing documents while seated, while her coworkers are standing beside her

Not Having a Post-Exit Plan 

Many business owners only focus on the exit process, and they forget to consider what comes next. The truth is exiting your business is a major life change, and without a post-exit plan in place, you may struggle to find purpose, identity, relationships, and financial security outside the business. 

So, take some time to envision your life after exit. Set clear goals and develop a plan for how you will invest your time and resources in the next chapter of your life. If you need some emotional or mental support, don’t hesitate to reach out to your family and friends.  

Not Preparing Your Business for Sale

Neglecting to prepare your business for sale can significantly reduce its attractiveness to potential buyers, which ultimately reduces its sale price. Some major issues that can raise red flags and deter prospective buyers include:

To make sure your business is ready for sale, take time to review and update your financial and legal records. Also, make sure your operational processes are streamlined and up to date. 

Taking the First Offer You Get

Jumping on the first offer you receive without exploring other options can result in you leaving money on the table. As long as you have a good marketing strategy in place, more offers are bound to come in. With multiple offers, your demand goes up, and this puts you in a good position to get more. 

So, take the time to review the offers carefully, consult with your advisors, and negotiate terms that align with your goals and maximize value. Also, make sure you conduct due diligence to prevent you from making an irreversible mistake. 

Not Having a Contingency Plan

Even the best-laid plans can go wrong. Without a contingency plan in place, you may be left vulnerable if unexpected circumstances arise, such as a sudden illness or economic downturn. Thus, you should consider various worst-case scenarios and develop contingency plans to mitigate potential risks.

A professional man in a suit sitting at a desk, with his hands out in a poised and attentive manner

Related Questions

What Is the Best Exit Strategy for a Failing Business?

The best exit strategy for a failing business is one that minimizes losses and maximizes recovery for the owner and shareholders. The most common one is liquidation, which involves closing down the business and selling assets to pay creditors and shareholders back. Other viable exit strategies include abandoning the business until later or selling it off. 

How Can I Minimize Taxes When Selling My Business?

To minimize taxes when selling your business, you can make use of tax-saving opportunities, such as structuring the sale as an asset sale rather than a stock sale. You can also use tax-deferred exchanges, such as 1031 exchange for real estate assets. Another strategy is to make use of a Grantor Retained Annuity Trust (GRAT).

How Early Should I Start Planning My Business Exit?

Ideally, you should start planning your business exit from the start of the business. However, if you have already started your business, you should start planning no less than five years before you want to exit. This allows time to address any weaknesses that may affect the business sale, increase its value, and groom successors. 

Conclusion

Planning your exit strategy is just as important as building your business. To have a solid plan in place that can maximize the value of your business and meet your financial goals, you must avoid the common mistakes discussed above. It’s also advisable to consult with legal and financial professionals who can assist you in executing your plan.