When you are launching a new enterprise, your focus is likely to be on the setup and running of your business rather than how you’ll leave it further down the line. However, exit planning is vital for any entrepreneur who does not envision being tied to the same business for the rest of their lives.
By planning your exit, you can make sure it happens smoothly and in the best interest of all the stakeholders involved. With this, you minimise the impact to your operations while maximising the value of the company – meaning you benefit from an increased sale price.
Further, your exit plan may dictate how your company is run in the much nearer future. In this sense, your exit strategy needs to be aligned with every other practice you have.
In this guide, we have detailed what exit planning is and why it matters so much.
- What is exit planning?
- How far in advance do you need an exit plan?
- Exit planning strategies
- What should an exit plan include?
What is exit planning?
As we have already touched upon, an exit plan is the route you intend to take when you leave your business – whether that is months, years or even decades away. Any privately held company should have an exit in place.
Exit planning encompasses many elements, including the financial, logistical and legal sides of your enterprise. The specific goals of the company may change. For example, some owners may focus on maximising share value or cash proceeds. In contrast, others may have other non-financial or altruistic outcomes they want to achieve before moving on.
There are a few shared goals that every exit plan should aim for:
- Maximise the value of the business at the point of the exit.
- Enable an entrepreneur to meet their personal goals before leaving.
- Allow for a smooth transition between ownership and create reliable management teams.
- Remove legal, tax and operational barriers that could cause disruption.
- Control the terms and time limit for the exit to take place.
Due to its nature, an exit plan is very much a long-term strategy. Even if you do not intend to leave your firm for several years, you will need to create the foundations that allow the plan to come to fruition. This means it needs to align with your other operational and business strategies, enabling you to maximise the results and ensure your enterprise is taking the right trajectory. It will also position you to bring investors and other stakeholders on board so that the strategy can run without obstacles.
How far in advance do you need an exit plan?
Although leaving your new company may be the very last thing on your mind, it is recommended to have an exit plan ready as soon as possible. This is because it gives you a set timeframe to work towards and allows you to fix the goalposts that you are aiming for in the ongoing running of your business.
If you have created a business plan, the likelihood is you will have pinpointed some long-term goals. Without realising it, you may have determined your exit goals by doing so. Generally, these are the things an entrepreneur wants to achieve before they feel fulfilled in their mission and ready to take on the next challenge.
An exit can happen at various stages, which may determine the longevity of your plan. Some people will only leave their company when it comes to retirement – in which case, their focus will likely on finding suitable owners to take over while reducing the disruption to the company and allowing their legacy to continue.
Alternatively, an entrepreneur may wish to leave when they feel they have achieved their goals and maximised the value of the enterprise. In this case, they will want to sell on the business for the right price (providing them with a healthy profit) and move onto their next idea. Entrepreneurs may also want to have an exit strategy for when things do not go according to plan so they can limit their losses and get away as unscathed as possible.
If you are a venture capitalist, you will also need to have an exit plan for the business you are investing in. Usually, this will happen after the company has reached its maximum potential and generated favourable returns on investment, allowing you to leave with a profit within the set timeframe.
Your exit goals will affect the span and objectives of your strategy, as shown above. Regardless, it is fundamental to have it ready in advance, so you have plenty of time to determine your desired outcomes and implement measures that facilitate them.
Types of exit strategy
There are many types of exit strategy, depending on the context and goals of the exit. These are:
- Liquidation – the most straightforward strategy, which involves closing the business and selling its business assets. While it allows for a quick exit, it offers lower returns than other forms of withdrawal.
- A management buyout – where the employees (often an executive committee) buy out the owner to retain control of the company. Equally, a partner may buy out another partner to gain full control.
- Acquisition – this is where you sell your enterprise to another owner, such as a competitor. This works mainly for high-growth businesses that provide value, in which case you can receive a healthy profit upon the sale completion.
- Stock market flotation – another option for high-growth businesses, is where a private company becomes public. This could offer great profit but is a complex and expensive process.
Understanding the different strategies will help you to weigh up your options and choose the route that works best for you – as well as plan ahead to make it a reality.
What should an exit plan include?
When starting to craft your plan, there are a few things you must consider to ensure you have captured everything that needs to be considered.
Firstly, you need to define your ultimate end goals. These are the things you want to achieve before you step away from the business and could cover various parts of your operations. For example, you might wish to generate a certain amount of annual profit or achieve a particular return on investment. You may want to create a reputation for your company or introduce a set amount of products to your catalogue. You may even want to have several locations or hire a pre-determined amount of people. Whatever your dream result is, it is essential to define it and then tailor your strategy accordingly.
Next, you need to document what measures you will implement to accommodate your goals. The likelihood is this will affect several areas of your firm, so you need to clearly outline what processes are in place, who the key stakeholders are and how it will contribute to your broader plan.
Thirdly, you need to set the timeframe for the plan, as this will enable you to stage out the different measures and understand what needs to be done when. This doesn’t mean you need to pinpoint an exact date for your exit, but it is wise to have an approximation of how many years into the future you intend to leave. As mentioned, this may vary depending on your intentions. You may even have plans for different scenarios – for example, one for if your business operates at a loss and one for if it succeeds.
Finally, be prepared to reassess your plan over time. Many unexpected challenges and opportunities may come up during the lifespan of your enterprise, so it is natural to manoeuvre in reaction to these. By continually revisiting your plan, you will remain flexible and give your business the best chance of maximising its value, even as circumstances change.
Get advice
Despite how far away your exit may seem, it is crucial to have your plan ready from the off. This means outlining your intentions, crafting a strategy that allows them to be realised and identifying a route and time for an exit that minimises disruption and maximises result.
If you have not considered your exit plan yet, or need help in tailoring one that works for your unique goals, it is worth utilising support.
At Pegasus Funding, we offer exit planning guidance for businesses of every shape and size, regardless of the end outcomes you wish to pursue. We can also take you through the steps of an exit strategy to help you put a considered and practical plan in place.