What Is an Exit Strategy in Business (and Why Do You Need One)?

No business owner wants to think about the day when they will have to leave their business, but it’s important to have an exit strategy for a business in place just in case. Without an exit plan, you could find yourself in a difficult situation if something happens and you have to sell your business or retire. In this blog post, we will discuss what an exit strategy is and why you need one for your business. We’ll also provide tips on how to create an effective exit plan.

What Is an Exit Strategy in Business?

An exit strategy is a business plan that outlines how you will leave your business when the time comes. It includes steps for transitioning out of the business, as well as what will happen to it after you’re gone. Your business exit strategy can help ensure that your business continues to run smoothly without any major disruptions or problems once an owner leaves.

An exit strategy consists of three main components. First is deciding how you want to exit the business. This will often change in the course of negotiations, so you should be flexible on this.

The second is setting goals or contingencies (no one sets goals to close down) for where you need to be when you exit your business. For a sale, this usually means establishing consistent returns on equity for stakeholders. For closing down, it’s establishing financial limits beyond which you are losing too much money for too long. In either case, you want clear criteria for the overall health of your business.

The third component is determining how you get from where you are to where you set your goals. This often means establishing a coherent sales strategy, keeping well organized books, and honing your business model to boost earnings on sales.

Why Do You Need a Business Exit Strategy?

There are a number of reasons why you should have an exit strategy for a business. Here are some of the most important ones:

• To ensure that your business is prepared in case something happens to you and you need to sell it or retire
• To give yourself peace of mind knowing that you have a plan in place for the future of your business
• To make sure that your business is valued properly and sold at the right price
• To avoid any conflicts or disputes among family members over who should run the business after you’re gone

The first task with a business exit strategy is identifying exit opportunities. When you exit the business, it will be the result of either a sale or closing down.

In the event of a sale you will need to arrange when control and finances transfer. In some cases, a buyer will want to buy over a period of time, and have the current owner exit slowly. This allows for a degree of continuity between owners.

Credit: Andrea Piacquadio

In the event of a close, you will need to think about how assets will be liquidated and distributed. You will need to file the appropriate dissolution documents and cancel all business expenses. Forgetting to shut down a business service in the event of a close can be quite costly, so it’s good to have a complete list.

Business Exit Strategy Example

Selling your business can be tricky. There are a number of variables to consider and some may weigh against each other. Here are some things to focus on to increase the sale price of your business:

• Focus on earnings: One mistake business owners often make is being self-impressed with how much they can sell. Certainly this requires a degree of skill, but when a potential buyer is scouting your business, they will be more interested in how much they can make from it.
• Keep detailed records: A huge mistake business owners make is taking short cuts and relying on personal knowledge and approximations rather than keeping detailed books and organized documents. Often this means that the business relies on the owner to hold everything together, rather than having a self-sustaining business. This makes transitioning to new ownership almost impossible.
• Timing: Prospective buyers are likely going to want to catch a rising star rather than rescue a sinking ship. Often, you can get your best value after three years of consistent sales and earnings growth.
• Don’t negotiate alone: If you aren’t hiring a competent legal intermediary to negotiate the terms of your exit on your behalf, the first person you’re negotiating with is yourself. Having an expert who can explain the implications of potential decisions is key to successfully executing an exit plan.

• Build KPIs: In addition to earnings and sales, prospective buyers are going to want to see that your sales are backed by a stable business model. Some things to consider targeting:
  • Broad customer base
  • Product diversity
  • Exclusive contractual sales
  • Recurring contractual sales
  • Service agreements

Anything that demonstrates that your sales and earnings are here to stay should be on your radar.

It’s common practice to include an exit strategy in a business plan too. That is, business owners often plan their exit before even getting their business off the ground. This is an important step in goal setting and contingency planning that investors and creditors like to see.

A CFO’s Role in a Business Exit Strategy

When you exit your business, you want to make sure that you get the best deal for the years of hard work you put in. A CFO can manage your financial strategy to ensure that you maximize the value of your business when you are ready to sell.

While you spend your time perfecting your product and service offerings, your CFO will be hard at work crunching numbers and making projections. Your CFO will likely have a lot of questions for you regarding your exit, including:

• When do you want to exit your business?
• What do you want the transition to look like?
• What are the key value drivers of your business?
• Are your books organized and GAAP compliant?
• What are your plans for managing your debt?

Your CFO can help you set goals for your business in terms of sales, assets, and growth to target a particular valuation. They will present you with viable strategies along with their projected outcomes, so you can plan your journey to your exit from the business.

How to Hire a CFO for Exit Planning

A CFO is crucial to planning a business exit. Many businesses will hire a CFO specifically to help manage their exit strategy. If you’re looking to hire a CFO to manage your business exit, a fractional CFO may be a great option.

A fractional CFO manages a number of clients, working part time to provide expertise and insights at a fraction of the cost of a traditional CFO. They are used to hitting the ground running and cleaning up tumultuous businesses.

If you are looking for more tips on business exit planning, or want help putting an exit plan together, contact Michigan CFO today. We have been providing business planning services for our clients for over 15 years. We would be happy to assist you!

Featured Photo Credit: Firmbee.com