I know one of the less-talked-about aspects of business that you, as a business owner, will likely worry about is business exit. If you’ve built your business up to a point and you’re ready for a new challenge, you would want the business to keep thriving. 

Through several years of interacting with business owners, this is a common worry they have nursed. However, with the right plan, exiting a business can be done smoothly.

My aim is to walk you through how to exit a business properly by implementing a proper exit plan. First, what is a business exit plan?

What Is a Business Exit Plan?

A business exit plan is a blueprint that outlines how business owners can smoothly transfer their ownership of a business to another individual or entity. Also known as a business exit strategy, this plan makes sure that entrepreneurs can generate maximum value from their company post-exit while minimizing disruptions to business operations. 

Female presenter gesturing towards a paper on a whiteboard

Common Motives for Developing an Exit Plan 

Whether retirement, pursuing other business opportunities, or simply moving on, various motives drive business owners to create exit plans. If you find yourself in any of the following scenarios, then it’s time to develop an exit strategy.

Retirement Planning

This is one of the most common reasons people plan for their exit. Aging is inevitable, and having a plan ahead of retirement allows you to plan your exit to align with your retirement goals. 

Lifestyle Changes

Changes in your lifestyle can make it difficult to continue running your business. Proper planning will make your transition smooth and help you make the most financial profit possible in situations like this. Some lifestyle changes that can affect your ability to run a business include:

Market Uncertainty

Market uncertainty is a significant concern for many entrepreneurs, especially those in highly volatile sectors. Factors like government policies and strong competition can affect the profitability of a business. Developing an exit plan in situations like this is highly necessary to reduce the risk of running at a loss. 

Business Failure

Despite the best intentions and efforts of entrepreneurs, not every business succeeds. Business failure can occur due to various reasons, including:

When faced with the prospect of failure, it may be best to develop an exit plan to salvage what you can and avoid further loss.

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Types of Business Exit Strategies

There are various exit strategies, and the best choice for you depends on factors such as your business size and type and market conditions. Here’s a look at some of the most common types:

Merger and Acquisition 

Merger and Acquisition (M&A) involves combining your company with another one (merger) or getting bought by another company (acquisition). Both strategies can be a good way to combine resources, expand market reach, and increase productivity and output. 

Depending on the state of the business and your negotiating skills, an M&A exit strategy can provide you with enough cash to meet your financial goals post-exit. However, remember that you may still need to be involved in some of the business. 

With an acquisition, however, you have to relinquish your ownership and control rights to the acquiring company. This means you wouldn’t be involved in the day-to-day of the business anymore. If intellectual property (IP) is involved, be sure to get an IP lawyer involved

Family Succession

Succession planning is an important aspect of any exit plan for family-owned businesses. Also known as the legacy exit strategy, it involves keeping the business in the family by passing ownership and management to a family member. This way, the legacy and values of the company are preserved, and its operations can continue smoothly. 

Acquihires

An acquihire exit strategy involves selling a business primarily for the talent and skills of its employees rather than its products or services. If you have a startup or small business with limited resources and a skilled workforce, an acquihire can be a great option. 

This is because it allows you to negotiate a good deal for yourself while securing the future of your employees.

Management and Employee Buyouts (MBO)

A management buyout (MBO) or employee buyout involves selling the business to its existing management team or employees. This allows key employees or management personnel with in-depth business knowledge to take ownership of the company and continue its operations after your exit. 

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Initial Public Offering (IPO)

Taking your company public through an initial public offering is another exit strategy that you can consider. An IPO involves selling company shares to the public, which can substantially benefit business owners and investors.

However, this process is subject to strict federal regulations, making it lengthy and expensive. So, it might not be your best option if you want a quick exit. 

Liquidation

Liquidation is one of the most common exit plans because it can be fast and simple. It involves selling off the company’s assets, including:

After the sales, any outstanding debts of the business have been paid off, and the remaining proceeds are distributed among the shareholders. 

Bankruptcy

Filing for bankruptcy is a last-resort strategy used for failing businesses and is typically not included in any exit plan. During a bankruptcy proceeding, the business’s assets are seized and granted debt relief. While it is not an ideal exit strategy, it may relieve owners burdened by overwhelming debts and financial obligations.

How to Develop a Business Exit Plan 

Ideally, your exit plan should be in place no less than 5 years before your actual exit. Having learned about the motives and types of business exit plans, here’s how you can create yours.

Determine the Length of Involvement 

Before drafting the specifics of your plan, first ask yourself how long you plan on staying in the business. Are you looking to exit soon, or do you plan on staying for several more years? A clear timeline will help you develop a strategy that aligns with your desired time frame.

Prepare Your Finances

The next most important thing to consider is your finances. Start by assessing your current financial situation, including your personal and business assets, cash flow, and expenses. If you have any outstanding debts, make sure you include how you plan to pay them off. 

The goal is to make sure that your financial statements, going back at least three years, are well maintained. 

Consider the Best Strategy for You 

With your finances prepared, it’s time to decide which exit strategies you want to go for. While your choice should majorly depend on your goals after the exit, you should also consider the needs and well-being of the company. If you’re unsure what to go for, it’s advisable to consult with a business lawyer.

Business people forming a unity symbol by stacking their hands on a table

Create a Succession Plan 

Succession planning is an important component that should be included in any exit plan, especially if you intend to pass on your business to family members or existing employees. It involves identifying potential successors within your organization and developing a plan to groom them for leadership roles. 

A good succession plan will guarantee the continuity and stability of your business during your exit and beyond. One of the first steps in creating an exit plan is valuing the business accurately. This involves assessing tangible assets, intellectual property, financial performance, market position, and growth potential. 

Relevant provisions under USA law for valuation include IRS regulations, such as Revenue Ruling 59-60, which guides valuing closely held businesses for estate and gift tax purposes.

Implement the Strategy 

Once you have created your exit strategy, write it to make it easily accessible. Make sure you outline the specific steps, timelines, and strategy involved in executing the plan. You should also review your exit strategy regularly and update it to make room for changes in your business or personal circumstances. 

Doing this regularly guarantees that your plan remains relevant and effective.

Related Questions 

Why Is a Business Exit Plan Important?

Business exit plans are important for many reasons. They clarify the exit process, minimize disruptions to operations, and preserve relationships with partners and investors. Additionally, an exit plan developed years before an exit allows entrepreneurs to prepare for and make strategic decisions that outline their plans. 

What Should an Exit Plan Include?

An exit plan should include your business goals in clear and concise terms. It should detail the business’s financial, legal, design and utility patent management, and operational aspects. It should also include your personal goals and family goals. Additionally, it should include an assessment of the business’s value and how to address any outstanding debts. 

Which Business Exit Strategy Is Best?

The best business exit strategy for you will depend on various factors, including your personal and business goals, the size and type of the business, and the current and predicted state of the market. For some, a merger or acquisition may offer the highest return on investment, while others may find an IPO to be better for them.

Conclusion 

Whether you’re just starting or are already established, it’s not too early to start thinking about your exit plan. It’s an important business part that should not be overlooked. Contact a legal professional if you need help drafting an exit strategy, especially if IP transfers are involved.