Exiting a business is one of the most important events in an entrepreneur’s career. After years of hard work building a company, deciding when and how to exit requires thoughtful planning and preparation. A successful business exit allows owners to maximize their valuation, transition smoothly to the next phase of life, and leave a positive legacy.
While every exit is unique, most follow a similar strategic process. Here are 10 key factors business owners can develop a tailored exit plan to meet their goals:
Table of Contents
Clarify Personal and Financial Objectives
Before determining the exit strategy, business owners should spend time getting very clear on their vision for life after exiting their company. This includes reflecting deeply on personal lifestyle goals, such as desired leisure activities, travel plans, and time with family. Understanding the motivations behind the exit helps select the optimal approach.
Additionally, owners should have clear financial objectives for the sale. Working closely with financial advisors and accountants, they should model out expected net proceeds, wealth transfer strategies, and tax optimization plans. Having clear financial objectives in terms of target sale price, deal structure, and net gains is crucial. Advisors can help assess business valuation and project sale proceeds and identify ways to maximize after-tax wealth.
Consider Exit Alternatives
Business owners should carefully weigh the pros, cons, and implications of various exit paths, including a sale to a strategic acquirer or financial buyer, management buyout backed by private equity, or public offering. Additionally, some owners transactions for growth or exit to strategically leverage assets, secure stronger market positioning, or collaborate with industry peers. This approach can offer a unique blend of maintaining business momentum while also securing future exit prospects.
The exit option that best aligns with the owner’s personal, financial, and business continuity goals should be selected. Owners may consider a blend of options, such as selling a majority stake while retaining an ownership interest. An experienced M&A advisor can outline the alternatives and help determine the optimal exit path.
Understand Business Value Drivers
Business valuations are based on both quantitative financial performance and qualitative factors that influence value. Owners should understand key value drivers buyers will assess, including revenue growth, profitability margins, customer concentration, brand reputation, and intangible assets like patents, trademarks, and proprietary technology.
In the 3-5 years leading up to exit, owners should focus on initiatives to boost revenue, improve profitability, strengthen intangible value drivers, and mitigate potential risks. This could include strategies to diversify the customer base, streamline operations, implement scalable systems, and deepen the leadership bench. Undertaking a strategic evaluation of value drivers well in advance enables owners to proactively enhance areas buyers will scrutinize.
Build an Advisory Team
A strong advisory team is essential to maximizing exit outcomes. This includes an experienced M&A advisor, business attorney, wealth manager, and tax professional. Their expertise will be invaluable across all aspects of the exit, including deal structuring, valuation, due diligence, negotiations, wealth planning, and minimizing taxes.
The M&A advisor can guide owners through the sales process, help identify the optimal deal structure, assist with marketing the business to potential buyers, and negotiate the most favorable terms. The attorney can review deal contracts and agreements. The wealth manager can develop a financial plan for managing and investing proceeds. The CPA can advise on deal structure, tax considerations, and strategies to optimize after-tax wealth.
Optimize Business Structure
The current corporate structure may not be optimized for exiting the business. Converting to a C-corp or S-corp, undertaking an entity reorganization, and revisiting shareholder and operating agreements should be considered. This can allow more flexibility in deal structure, provide tax advantages, and maximize valuation.
For example, buyers may prefer a C-corp structure. The advisory team can assess restructuring options well in advance and ensure the corporate structure is aligned with exit goals. Navigating legal entity changes can be complex, so allowing time to execute is key.
Clean Up the Balance Sheet
Buyers will scrutinize the quality of earnings and liabilities as part of due diligence. Business owners should work closely with their CPAs and advisors to “clean up” the balance sheet in the years leading up to exit. This includes paying down debt, collecting receivables, liquidating obsolete inventory and equipment, and writing off intangible assets.
Eliminating unnecessary liabilities and assets that may not transfer provides a clearer picture of profitability and value. A clean balance sheet helps maximize valuation and prevents buyers from discounting offers due to perceived risks.
Get the House in Order
To ensure a smooth transition post-acquisition, buyers want to see organized records, documented processes, and a solid leadership team. Owners should invest time and resources into financial reporting systems, codifying intellectual property, standardizing operating procedures, and implementing talent development initiatives.
Deals have fallen apart due to poor record-keeping and lack of operational transparency. If business knowledge and processes primarily reside with the owner, buyers will discount for potential disruption. Implementing robust systems and expanding management capabilities demonstrates a business poised for future growth.
Time it Right
While owners cannot time the market perfectly, prevailing economic conditions, industry trends, public valuations, and financing dynamics do impact the deal environment and outcomes. Monitoring key indicators can help determine when conditions may be favorable to exit.
For example, exiting during strong economic growth and ample capital availability may maximize valuation. Owners should be prepared to act opportunistically when the business cycle, M&A environment, and market conditions align with goals. This may mean patiently waiting for the optimal time to go to market.
Manage Confidentiality
Keeping the exit plan highly confidential is critical to retaining employees, customers, and suppliers and minimizing business disruption. Owners should have broad non-disclosure agreements in place well before going to market. Only essential members of the advisory team should be involved in discussions and planning.
Premature leaks or rumors can damage morale, cause uncertainty, and erode value. Maintaining confidentiality avoids tipping off competitors and enables owners to control the timing and messaging around an ownership transition.
Negotiate the Optimal Deal
Even with proper preparation, exiting a business can entail highly complex negotiations with many intricacies involved in valuation, deal structure, contracts, and legal matters. Avoiding DIY approaches, owners should leverage experienced M&A advisors to negotiate the most favorable terms that align with financial and personal goals.
Their specialized expertise in areas like structuring earn-outs, navigating legal agreements, and running competitive bid processes enables advisors to secure optimal deal terms and valuation for the owner. Relying on professional negotiators increases the chances of a successful exit on the desired timeline.
Conclusion
Exiting a business is a defining moment in an owner’s financial life and legacy. While challenging, proper preparation and planning enable maximizing valuation, optimizing taxes, and smoothly transitioning to the next phase.
By being clear on objectives, understanding value drivers, assembling the right team, and following a strategic process, business owners can reap the full rewards of their entrepreneurial endeavors. With the proper exit strategy, owners finish strong and realize their dreams for the future.
