I know one of the factors you probably wonder about is the right time to start planning your business exit. If you’ve run the business for a long time, there’s a good chance that this is a critical consideration for you. 

Through years of dealing with many business owners cutting across a range of industries, one thing that has struck me is the confusion about the right time to begin business exit planning.

My aim is to set this straight by detailing when to start planning for a business exit and just how important it is. 

When to Start Planning for a Business Exit

Experts advise that business owners should begin planning for an exit no less than 5 years before their desired exit. These last 60 months are critical, and the actions you take in them can make or break your exit. This implies that if you want to leave your business in five years, you should start planning your exit now. 

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Planning your exit early is important for many reasons. It guides your decision-making, helps you to establish a strong business foundation, and reduces the risks of disruptions to your exit. More on the Importance of planning early will be discussed further in the article. First, however, what is business exit planning?

What Is Business Exit Planning 

Business exit planning refers to the process through which business owners prepare for their eventual departure from their company. This process involves choosing an exit strategy that can maximize the value of the business, protect your existing utility patent rights, reduce loss, and, most importantly, help them achieve their financial and personal goals post-exit. 

From a legal standpoint, several laws and regulations in the USA govern business exits, including tax, corporate, securities, and employment laws. Understanding and complying with these regulations is essential for a successful exit.

When planning an exit, there are three main options – to sell the business, to transfer ownership, or to shut down the business. The following are different exit strategies that can help you achieve whichever option you aim for:

Importance of Planning Your Business Exit Early 

By starting the exit planning process sooner rather than later, you give yourself ample time to strategize, address potential obstacles, and position your business for a successful transition when the time comes. Here are some reasons why planning your exit early is so important:

Maximizes Value

One of the primary benefits of planning your exit early is the opportunity to maximize its value. Starting early allows you to take steps that increase the value of your business over time, such as: 

With these steps, you can make your business more attractive to potential buyers or investors when the time is right.

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Minimizes Risk

Planning your exit early allows you to identify and mitigate any risks that could threaten the success of your exit. These challenges could either be legal, financial, and operational, in the form of: 

By addressing them in advance, you can minimize disruptions and promote a smoother transition. 

Facilitates Succession Planning

If you intend to pass your business on to family members or an employee, then early planning is important to guarantee a smooth transfer of leadership. There are several steps to succession planning, including identifying potential successors and training them to be ready for leadership roles. 

As a result, you need to start early so you can provide your successors with the necessary training and mentorship to prepare for leadership roles within the organization.

Gives You Options

Planning your exit early gives you the flexibility to explore different exit options and choose the strategy that best aligns with your personal and business goals. The truth is, if you’re deciding in a rush, you’re bound to make mistakes. However, early planning gives you time to carefully evaluate the pros and cons of each option.

Whether you’re considering selling the company, taking it public with an Initial Public Offering (IPO), or merging with another company, you can make informed and confident decisions by planning early. 

Gives Peace of Mind

This is perhaps one of the most important benefits of planning early. Knowing that you have taken the necessary steps to safeguard your financial future and that of your business will give you a sense of confidence and peace that ultimately allows you to function better, both in and out of the workplace. 

Signs You Need to Start Planning for a Business Exit

Regardless of how long you plan on running your business, life can get in the way of plans. When this happens, you need to be able to make the most out of the situation, and that is exactly what an exit plan will do. 

Ideally, you should begin planning for an exit from the very start of your business. However, if you already started your business and don’t have an exit strategy in place, here are some signs that you may need to start planning one:

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Changes In Your Personal Life

If you’re experiencing major changes in your personal life, it may be a sign that you need to start planning for an exit from your business. Some changes that can influence your decision include:

The Business Is Old Enough

If your business has been operating for at least two years, it’s time you start thinking about your exit in the future. By this point, you’re likely to have overcome the initial challenges of starting a new business and assumed some form of stability. 

Starting the planning process at this stage allows you to begin working on your exit plan from the foundation of the business, which ultimately guarantees a fulfilling exit when it’s time.

Decline in Business Performance

A decline in the performance of your business can significantly reduce its value, making it less attractive to potential buyers. So, if your business is experiencing declining performance, poor financial health, stagnancy, or operational challenges, it’s advisable to start thinking of an exit strategy that will keep your losses to a minimum. 

Additionally, shifts in the market conditions of your industry, such as increased competition can also affect the value and viability of your business. However, with the right exit strategy, you can get the most from the business and manage your losses effectively. 

Disagreements Between You and Your Partner(s)

If you find yourself at odds with your business partners about the direction and future of the company, the safe thing to do is start planning an exit. Constant disagreements can lead to poor decision-making, resentment, and division, which ultimately harms the business.

However, by having an exit plan in place, you can save yourself from the headache, as well as save your business. 

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The Business Is Doing Well

If your business has experienced momentum and growth for an extended period, it’s natural for you to want to keep things up for as long as possible. However, this continued momentum serves as an indication that it’s a good time to sell the business. 

While it can be tempting to ride the waves indefinitely, you need to understand that market conditions can change for the worse. As a result, it’s advisable to capitalize on the business’s momentum and maximize its value before any downturn occurs. 

Burnout 

If you find yourself constantly feeling overwhelmed, exhausted, or disengaged from your business, it may be a sign to start planning for a transfer of ownership. Entrepreneurship can be demanding, and if your excitement for the business has turned to dread, then it’s possible you’ve lost your passion. 

It’s important to recognize when it’s time to step back or pursue other less-demanding interests in order to save your health and your business. 

Related Questions 

What Are Some Common Exit Strategies for Small Businesses?

Common exit strategies for small businesses include merging with or getting acquired by another company, transferring ownership to family members or employees, going public with an initial public offering (IPO), and liquidating business assets. The most suitable exit strategy for small business owners depends on factors such as their goals, the nature of the business, and market conditions.

How Long Does the Business Exit Planning Process Take?

The business exit planning process can take anywhere between six and twelve months and, in extreme cases, eighteen months. This timeline will vary depending on the nature and size of the business, the chosen exit strategy, the owner’s goals and readiness to exit, and the amount of work that needs to be done.

Who Should I Involve When Planning to Exit My Business?

When planning to exit your business, you should involve any major company personnel, including shareholders, partners, the management team, and key employees. It is also important to involve a team of professionals, including business advisors, financial experts, patent lawyers, and any successors listed in the succession plan. 

Conclusion

As a business owner, the right time to start planning your exit is today rather than tomorrow. Planning early allows you to set an early foundation for your exit and gives you enough time to prepare your business for the transition. Remember that hiring professionals, such as business lawyers, can significantly improve the success of your plan.