TOP REASONS WHY EVERY OWNER NEEDS A BUSINESS EXIT STRATEGY
Yet, in the process of hustling through the daily grind, many business owners often fail to think about and plan for an exit strategy.
Exiting the business you’ve spent years building can often be emotionally difficult. The process of letting go can be hard. Additionally, you need to consider your employees’ futures, commitments to business partners, private investors or maybe family when exiting your business.
You want to make sure you exit with a cash out amount and settlement terms that reflect all the hard work and investment you’ve put in over the years.
What is a business exit strategy?
An exit strategy is a comprehensive roadmap for selling your business.
Planning a business exit strategy means taking a long term view of your business. A long term view with an exit strategy in mind helps you make the right strategic decisions throughout your business journey, so when the time comes, you can sell your business for maximum profits.
Exit planning is often overlooked in the life cycle of a business by most business owners. Many business owners have sacrificed blood, sweat, tears, life savings and years to build their businesses and then sell for a fraction of what their business is really worth.
Because they do not understand the selling process, what creates value in their businesses or what the real value of their business is.
They don’t understand that the real money is in the preparation, not on sales day.
Here’s the golden secret.
The real money lies in the future value of your business – in your business’s true potential.
A good exit strategy ensures your business is attractive to buyers and holds maximum value before any sales process begins.
Why is a business exit strategy so important?
Every business owner at some stage will leave their business.
There are many reasons for this such as retirement, health issues, exhaustion, new career choices, lifestyle changes, an attractive offer, family hand downs or a sudden need for cash etc.
Regardless of whether you intend to sell now, in the near future or in many years to come, you should always protect your business against unexpected events.
Planning early enables you to exit on your terms.
Failing to develop a business exit plan could limit your options when it comes time to sell and force you to sell for a fraction of what your business is really worth.
Are you planning on selling your business and enjoying the life you've built?
When is the right time to plan your exit strategy?The sooner you begin preparing your business exit strategy, the more options and flexibility you will have when sale time comes. Options such as how much are you prepared to sell for. Flexibility as to who you sell too and terms of the business sale.
Waiting until you need an exit strategy can result in unnecessary pressure that could impact your decision making process and negatively affect the outcome of your final sale price and terms.
Simply put, the earlier you begin preparing your exit strategy, the more control you will have when you sell your business.
Advantages of developing an exit strategyThe goal of a business exit plan is to prepare for your inevitable departure from your business. There are benefits to having an exit plan before you decide to sell.
A business exit strategy will help to;✅ Create a system that allows for an efficient transition to the new owner
✅ Create a strategic plan for increasing the business value so you can cash out with a substantial profit
✅ Plan for your retirement lifestyle of choice
✅ Future proof yourself in the event of any sudden adverse events that prevent you from working
✅ Give you peace of mind and security that you will be able to exit your business confidently, profitably and on your terms
✅ Ensure the business is “sell ready” if unexpected offers or investment interests are made
Developing a business exit plan allows you to focus on the goals of your business, your current and future needs, and the available options for accomplishing those goals. Failing to develop a strategic business exit strategy could result in a complicated, disorganised, and frustrating exit instead of a streamlined, successful exit.
How to choose the right exit strategy as a business ownerThere are a few common exit strategies to consider when you decide to sell your business.
Some business owners choose to sell on the open market, while others take a more personal approach, such as passing it on to a family member or selling it to an employee.
It’s important to keep in mind that some exit strategies aren’t suited for many small businesses. Options like initial public offerings (IPOs), mergers and acquisitions can be expensive, time-consuming, complex, and stressful.
Choosing the best exit strategy for your business is a very important and personal decision and one that shouldn’t be taken lightly. The type of exit will depend on your personal goals, financial needs, industry conditions and the current state of your business.
Common exit strategies
1 – Sale to market (third party)Let’s start with the most common exit strategy that business owners pursue. Selling to an external/third party buyer. Most business owners choose this exit strategy due to its simplicity.
It consists of finding a business broker, establishing a market value of your business, putting it on the market to sell and then finding a potential buyer.
It’s important to take note that most businesses that go on the market might not actually sell. The ABS reported in 2018 said that of the 2,313,291 businesses in Australia there was a 12.5% exit rate (about 289,000 Businesses). The number one reason that businesses are not sellable is because the owner did not plan their exit effectively.
Understanding the selling process, what potential buyers are looking for, how to position and package your business can certainly improve your chances of a successful sale.
Creating a successful sale requires a well-prepared exit strategy, planned well in advance. This takes time, effort, and experience.
2 – Employee or management buyoutsMany business owners don’t consider a potential source for a buyer to be an existing employee of the business. An employee or management buyout can be one of the best ways of preserving the legacy of a business and ensuring a smooth change over process.
For many business owners, safeguarding the future of their business and its employees is an important objective when selling.
It’s a very effective way of organising your exit. It’s usually less disruptive to the current business operations than other alternatives and ensures your business continues running during the takeover process.
3 – Selling your business to a family memberThis exit strategy is common among business owners who are looking to retire and exit the business they have created. They wish to pass their legacy to their children or another family member. This is a simple exit strategy if younger family members are interested in keeping the business going.
A recent survey by the Australian Centre for Family Business at Bond University found that 40% of family businesses are hoping to transfer either wealth or operations to someone else in the next five years but many don’t have an actual succession plan in place.
If this is your preferred exit strategy then succession planning needs to be in effect well before you even start thinking about exiting your business.
4 – Initial public offering (IPO)There is debate as to whether an IPO is an exit strategy in the true sense, or a funding event. An IPO allows the company’s founders and early investors to sell a portion of their shares. This helps them maximise profits from their private investment.
This is of course if the IPO goes to plan, attracts interest and achieves a healthy share price.
Taking a business to an initial public offering is also known as ‘going public,’ and involves selling a portion of shares of the company on the public stock market. In the small business sphere, this exit strategy option is rare and it certainly isn’t for everyone.
The main reasons are the expense and the extensive regulations required not only to launch an IPO but in running the company once it goes public.
Because most IPOs are usually underwritten by investment banks, your business needs to be in tip top shape, in every sense.
An IPO requires an extensive, well-prepared, and well executed exit strategy.
5 – Closing the business (Liquidation)This business exit strategy is usually a forced exit strategy. In a business liquidation sale, the owner has usually run into trouble and needs quick access to cash to pay debts.
Generally, the business does not hold much value and therefore cannot be sold for much profit. The owner, therefore, needs to liquidate the business assets to generate cash.
There are many things to consider when liquidating your business. Creditors still need to be paid. Staff still need to be paid, including leave and sick entitlements.
Employees will lose their jobs, vendors lose business, and a community may lose an important employer or iconic business.
A liquidation sale is usually the simplest form of exiting a business as it is a quick, simple process that allows access to immediate cash. However, the cash return is a lot less than other exit strategies.
3 Important questions to ask yourself when creating your business exit plan
When it comes to planning your business exit strategy, where do you start?
Any decision regarding your exit plan will come down to your individual situation and personal goals.
To help you, here are some questions you can ask yourself when developing your business exit strategy.
1. How much is my business worth today?
Often what you think your business is worth is very different to its actual market value.
Understanding the current market value of your business will heavily influence your selling decisions. These decisions will formulate your exit strategy.
2. Is my business in demand?
Consider the demand for businesses in your sector or niche market.
Is your market trending up or down? Are there any major threats?
Market conditions can change quickly, so it’s important to understand how the nature of the current landscape could affect your potential sale.
3. What are my personal & financial goals?
This is perhaps the most important question of all.
Do you want to remain involved in the business after the sale?
What will your life look like after you walk away from your business?
What do you intend to do next—retire, become an investor, or launch another business?
Or do you wish to leave your wealth to your family?
Your personal or financial goals help determine important exit planning parameters, such as what price you need to sell at, when should you exit, conditions of the sale and what is the best exit strategy to achieve your goals.
For example, the decision to move on to the next chapter of your life as soon as possible may require more funds upfront. A management buyout might not return the best cash out results and take longer than an upfront sale.
It’s never too late to create your business exit strategy
You’ve sacrificed blood, sweat, tears, life savings & years to build your business.
Aren’t you curious to know its true potential?
Are you planning on …
➡️ Selling your business
➡️ Attracting investment
➡️ Expanding or franchising
➡️ Future proofing (retirement)
➡️ Are worried you will sell for a fraction of your company’s true value (like most people)
➡️ Have capped out at your current experience level
➡️ Want to turn your business into a valuable asset
➡️ Want a clear pathway to find the best buyers and negotiate the best price
We can help! We have over 25 years of experience.
We help small business owners just like you build a structured exit roadmap to maximise their business valuation and sell for maximum profits without a hefty price tag charged by most other consulting firms.
Where to start?
Let’s begin by discovering what your business is worth with our quick and easy, no-obligation FREE Business Valuation Estimate. There’s no obligation or complicated questions, and your information is completely confidential.
As always I wish you all the best.