People often think of an exit strategy as a way to shut down a business, which it can be. However, an exit strategy is a plan that can help a business reach its long-term goals and smoothly transition to a new phase, whether that means rethinking the business’s direction or leadership, staying financially stable, or changing direction to deal with challenges.
As a legal practitioner, I will provide valuable insights on effective business exit planning.
Different types and sizes of businesses have different exit strategies. However, good plans can help you see how much your business is worth and set the stage for new goals and directions.
Complete Guide to Business Exit Planning
A business exit strategy is a plan for what will happen after you leave your business as the owner. The strategy will show in great depth how the change will happen. Just as you’ve made business plans to help your company grow and stay successful, an exit plan will help you hand over management when the time comes.
An exit strategy for your business lets you have a plan for when you decide to leave the company or if something were to happen to you. Remember that your exit plan will have to change over time for several reasons, such as business growth, market analysis, or government policies.
An exit plan for a business considers all the legal, tax, financial, personal, business, and value problems when someone sells or transfers private company ownership. Making sure you can leave your business financially safe and getting the most value out of your business before you leave should be your main goals when you’re exit planning.
Why Would Someone Want to Make a Strategy for Leaving Their Business?
Sometimes, leaving at the right time is best for your business. If you ever don’t want to or can’t put time into your business, it would be better in the hands of a new or more dynamic management.
A business owner should make an exit plan for several reasons. Here are some of these reasons:
- Another more profitable business
- Having health issues
- Retirement Plans
- Loss or gain of interest or passion
- An offer from someone who wants to buy your business that you didn’t expect
Succession vs Business Exit
Succession planning is the strategic handing off of management and leadership jobs within a business to ensure the change goes smoothly. Businesses that are sold or shut down are often part of a larger plan called “business exit,” when an owner or founder leaves the company. Business exit refers to ways to leave a company altogether, while succession is about keeping the same internal leadership.
Succession planning is identifying people who will take over the business. Finding these successors will allow them to improve their knowledge and skills so they can take over as leaders of an organization after the current leader steps down.
The only thing that succession planning is about is passing on a business’s direction (or management) from one generation to the next. One part of the exit planning process is planning for who will take over after you leave.
Business Exit Planning
There are many things to consider when planning your exit, such as selling the business to someone else, merging it with another company, or giving it to family members. Succession planning, on the other hand, is all about moving into a leadership role within an organization.
As the business owner plans to exit, they consider all the possible issues affecting their current and future business. The main goal of exit planning is to get maximum money from the company and ensure the shift goes smoothly, whether the exit is planned or a surprise. It also protects the business owner’s money, legal rights, and personal life.
Importance of Business Exit Planning
One of the main goals of business exit planning is to get the most money out of the business when it’s time to close. This means making the company more profitable, using clever tax methods, and ensuring it’s appealing to people who might want to buy it or take over after you.
If there is a good exit plan, the change of ownership will go smoothly, and the business will run more smoothly. This is especially important for keeping employees happy, maintaining good customer ties, and running the business.
Legal Considerations for Business Exit Planning
Part of planning to leave a business is figuring out the legal system. Entrepreneurs must consider legal requirements, contractual obligations, and possible liabilities to protect the company and its partners during and after the exit.
The exit plan you choose has significant legal effects. There are different legal issues to consider when selling the business to a third party, giving it to a family member, or merging it with another company. Entrepreneurs must carefully consider their goals, business type, and personal preferences to find the best way to leave their business.
Key Legal Aspects to Consider
Both buyers and sellers must research before deciding. People selling a business must give complete and accurate information about it, and people buying it must look at the risks and liabilities that might come with it. Legal due diligence includes things like contracts, intellectual property, job issues, and following the rules.
Tax On Capital Gains
Capital gains tax is an important thing to think about, and business owners need to look into ways to pay as little tax as possible. Common ways to do this are to use exemptions, deferral methods, or structure the deal to minimize taxes.
Tax on Estates
Estate tax planning is essential for family-owned businesses that want to keep their wealth for future generations. Entrepreneurs must work with their lawyers and financial experts to use trusts and gifts to reduce their estate tax exposure.
Employee Stock Ownership Plans
ESOPs are a unique way for workers to leave a company because they let them own some or all of the company. This could be a good choice for some businesses because it can help the seller and the employees with their taxes.
Agreements to Sell
Writing up a thorough sale deal is essential to planning your exit. This paper lists the details of the agreement, like the price, how to pay, what the buyer promises, and what the buyer has to do after the deal is closed. To ensure the agreement serves both sides’ interests, it is essential to hire an experienced lawyer.
Non-Disclosure Agreements (NDAs)
To keep the business running smoothly and protect private information, it is essential to keep the exit planning process secret. People often use non-disclosure agreements to keep trade secrets and personal information safe.
Clear hiring agreements are necessary if the seller stays involved after the sale. There may also be non-compete agreements that say the seller can’t start a competing business within a certain amount of time and in a particular area.
Different Strategies to Leave a Business
When making the best exit plan for your business, you should consider what’s best for you and the business. Making exit plans is more than just thinking of ways to handle the worst-case scenario. What they’re about is slowly getting out of a business plan whenever you feel it is the right time to.
Here are the different types of business exit strategies you could use for your business:
Many business owners want to hire their family to work for them for a long time. As a business owner, you must plan to give the company to your successor or another family member. You can train the family member you want to take over as your replacement over time, so at first, this may seem like the best way to leave your business.
While filing for bankruptcy is not a good idea, it could be considered the last option. If you don’t plan an exit strategy and are forced to leave your job, you might file for bankruptcy as a last resort.
Remember that your business’s assets will probably be removed, and your credit may worsen. However, filing for bankruptcy isn’t the end of the world, and if things go badly, you won’t have to pay any bills your business has.
Initial Public Offering
An initial public offering, or an IPO, lets you sell your business to the public. However, it is essential to consider the general perspective of your business. It doesn’t matter if your company is one of the best in its field; people may not be interested in your work.
This might make your company less valuable. Statistics show that out of the millions of businesses in the US, In 2021, there were 1,035 initial public offerings. However, Initial Public Offerings can be very profitable for your business if all the right conditions are met.
While considering a business acquisition, ensure your workers are cared for after leaving the company. A business can buy out another business to hire its workers. This is called “acquisition hire.”
This won’t protect the good name your business has made. However, it will ensure your workers don’t have to worry about their jobs. Just remember to negotiate with the needs of your employees in mind.
Sell to a Buyer
If you’re not a sole owner, one part of your exit plan could be to sell your share of the business to a business partner or someone who has invested in the industry. Selling your share to the right person may keep things running smoothly in your company.
Buyout of Employees
You can trust the people who already work for your company to run it well. Some managers and other high-level workers may want to own the business they work for. The process can go smoothly during an employee buyout, making customers more committed to your company’s history.
When you want to leave your job and still want to be involved with your company, employee buyouts are a great choice. Since the people who work for you know you, the new business owner may ask you to be a consultant after you hand over ownership.
One of the final ways to get out of your business is to liquidate it. During a bankruptcy, everything that belongs to the company is sold. If you want to ensure you don’t have to worry about your business anymore, liquidation is a great way to leave it.
A merger is when your business is bought by or joins forces with another company that shares your goals. If you merge with another company, you can leave your current business totally or change how much you’re involved. This depends on whether or not the company merges with yours.
One great thing about mergers is that you can negotiate the price at which your company is sold. If you went the IPO way, on the other hand, your business’s value would depend on how relevant it is to the market.
Mistakes Sellers Often Make
The most common mistake owners make is focusing only on the price rather than paying attention to the terms and structure of an exit deal. Another common mistake is selling the company to the first competitor who makes an offer and not hiring experienced advisors (to save money on transaction costs).
If risk and reward are the only things that matter, then only the safest and most profitable businesses can be sold. People who want to buy businesses will be looking for good investments that can run with little or no help from their owners. These traits will be seen as desirable:
- Businesses that depend on their owner’s own products, services, or methods
- Strong, differentiable market strategies
- Large and stable business base
- Recurring revenue business growth
- Operational profits that are high
How Does The Size Of The Business Impact Exit Planning?
A business’s size significantly impacts exit planning, with more complex plans being needed for more prominent firms. The market, the company’s finances, and industry trends are some of the most important things that go into making the exit plan fit the business’s goals.
What Part Do Lawyers Play in Planning How to Exit a Business?
Legal help is important when planning your exit because of the complicated parts like contracts, taxes, and following the rules. The exit plan will align with regulatory standards and protect everyone’s interests if legal help is sought.
The best way for you to exit your business is the one that fits your goals. The best way to ensure your legacy lives on after you die is to sell it to a worker, a customer, or a family member. On the other hand, if you want to get out of the business quickly and for the best price, a buyout or liquidation is the best option.
When you plan your exit, you need to prepare for the possibility of your business to fail. Please talk to a financial and legal advisor before making any decisions. They can help you ensure that your exit plan fits your personal and business requirements.