Updated January 04, 2020
All good business planning documents have a clear business exit plan that outlines your most likely exit strategy from day one.
It may seem odd to develop a business exit plan this soon, to anticipate the day you’ll leave your business, but potential investors will want to know your long-term plans. Your exit plans need to be clear in your mind because they will dictate how you operate the company.
For example, if you plan to get listed on the stock market, you’ll want to follow certain accounting regulations from day one that’d otherwise be non-essential and potentially cost prohibitive if your ambitions are to quickly sell the company to a more established competitor in your industry. If you plan to pass the business to your children, you’ll need to start training them at a certain point and get them invested in the company from an early age.
Here’s a look at some of the available strategies for entrepreneurs who want to build a business exit plan into their early planning process:
- Let It Run Dry: This can work especially well in small businesses like sole proprietorships. In the years before you plan to exit, increase your personal salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply close the doors and liquidate any remaining assets. With the larger income, naturally, comes a larger tax liability, but this business exit plan is one of the easiest to execute.
- Sell Your Shares: This works particularly well in partnerships such as law and medical practices. When you are ready to retire, you can sell your equity to the existing partners, or to a new employee who is eligible for partnership. You leave the firm cleanly, plus you gain the earnings from the sale.
- Liquidate: Sell everything at market value and use the revenue to pay off any remaining debt. It is a simple approach, but also likely to reap the least revenue as a business exit plan. Since you are simply matching your assets with buyers, you probably will be eager to sell and therefore at a disadvantage when negotiating.
- Go Public: The dot-com boom and bust reminded everyone of the potential hazards of the stock market. While you may be sitting on the next Google, IPOs take much time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. However, the costs can often be covered by intermediate funding rounds. Keep in mind, that the likelihood of your company ever going public is very low, as you’ll likely need to reach into the tens of millions of dollars in annual revenue before you’re an attractive IPO candidate.
- Merge: Sometimes, two businesses can create more value as one company. If you believe such an opportunity exists for your firm as a business exit plan, then a merger may be your ticket. If you’re looking to leave entirely, then the merger would likely call for the head of the other involved company to stay on and take over your company’s activities. If you don’t want to relinquish all involvement, consider staying on in an advisory role.
- Be Acquired: Other companies might want to acquire your business and keep its value for themselves. Make sure the offered sale price meshes with your business valuation. You may even seek to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.
- Sell: Selling outright can also allow for an easy exit. If you wish, you can take the money from the sale and sever yourself from the company. You may also negotiate for equity in the buying company, allowing you to earn dividends afterward — it is in your interest to ensure your firm is a good fit for the buyer and therefore more likely to prosper.