Why is an Exit Strategy Important for Business Success?
Do you have an exit plan? This is an update to an earlier blog post. Things have changed significantly over the last few years!
According to PricewaterhouseCooper, approximately 50% of all owners of small and mid-sized companies will exit their companies over the next few years. Others estimate that the exit rate will be closer to 75%.
This massive exodus from the marketplace will be driven by retiring baby boomers, who are now 60-78 years old. Unfortunately, of those small business owners who exit their business, only about 1 in 5 will actually sell their company. The remaining 80% are closing their doors with a big financial thud!
2020 Reality Check according to December 2019 statistics: Baby boomers own 2/3 of U.S. businesses, that’s millions of companies. Only 8% of this group plan on selling the business.
Business Owners Have No Exit Plan
Of all boomer business owners, nearly 60% have no plan for selling their business or passing it on to an heir or successor.
Why is this happening? There can be many reasons:
- Their business isn’t saleable because of its lack of profitability or it can only function with the boomer owner at the helm.
- Boomers are pushing out retirement because they haven’t saved enough
- These business owners are failing to look ahead at hard facts and figures or to set.
- Some business owners truly love what they do and want to do it forever.
Why Don’t Business Owners Do Exit Planning?
Business owners are reluctant to create an exit plan; it seems like planning for their own funeral. They are afraid to consider what life would be like without their business, so they do nothing.
I think most don’t realize the rewards they’ll get from having an exit strategy –peace of mind, and new opportunities — to cash out now and enjoy a secure retirement, or maybe to try something else like start another business or become a mentor, to travel or spend more time with family, to pick up a hobby or do volunteer work. Thinking about when and how you’ll exit your business can reap dividends:
By knowing when to reduce your inventory, training, or staff; when to stop investing in newer equipment, software, or supplies; and how much income you’ll need for a comfortable retirement
By grooming a possible replacement, you smooth the transition and by structuring the company well for takeover.
By gathering and then “selling” the benefits of buying an established company (saves a lot of work, heartache, and money).
By considering the needs of your staff, customers, and vendors and also by planning your exit with the people in mind who depend on your business will leave your mind and heart at rest.
You’ll leave a strong and respectable legacy by preparing ahead, by thinking about the effect on others, and by setting up your business for sale or passing it on to a heir.
An exit plan isn’t the end of your world. It will begin a new phase for you and everyone who’s been connected with it.
How to Prepare Your Business For Sale
Below are some things you can do to increase your chances of selling for big bucks:
Create an Exit Plan.
You know the drill – “those who fail to plan, plan to fail.” The problem with failing to plan is obvious. Hire an Exit Planning Coach to help you figure out the right window for retirement and the steps needed to reach it.
Plan Three to Ten Years in Advance.
Most experts say that you should have an exit plan when you start a business. At a minimum, you should develop your plan at least three years before an anticipated retirement.
Consider that life happens – illness, recession, technology changes, governmental rules and compliance, divorce – so thinking ahead helps you avoid a catastrophe.
Sell from a Position of Strength.
You can command top dollar for your business when it’s strong. Unfortunately, many owners wait until an economic turndown, burnout, or a health crisis forces them to sell from a position of weakness.
Know the Value of Your Business.
Every business owner should get an annual valuation on their business; this is the best indicator of a company’s performance and provides potential buyers with a view into its worth.
Get Revenues and Profits Up.
Your business should be growing; both top line and bottom line. Become the number one or two largest business in your market.
The top line refers to a company’s revenues or gross sales. Therefore, when a company has “top-line growth,” the company is experiencing an increase in gross sales or revenues. The bottom line is a company’s net income, or the “bottom” figure on a company’s income statement.
Develop Management Succession.
If you’re the only one who can run your business, who will a buyer have to help run the business after you leave?
If none of your family want to take it on, then consider offering it to a key partner or employee; perhaps sell it to the remaining staff.
This is critical to the health of your organization. If your competitors, customers, employees or vendors find out that you are selling, this could mean disaster for your company!
Addition: Silently plan your exit strategy – even to the point of having informed parties sign a confidentiality agreement.
Keep Focused on the Business.
Don’t let your business performance decline because you’re too focused on the sale of your business. Continue to work on your business as if you don’t plan to sell it.
Get Help From Professionals.
You will need an exit planner/business coach, a business broker, a wealth planner, a CPA, and a tax attorney on your team.
Local, state, and federal laws and regulations change frequently, so hiring an expert could pay for itself.
Get Your Books and Records in Order.
Have your financial statements and legal documents in order; this will give the buyer confidence in your business.
Planning your exit strategy will help you …. to make wise decisions now … to fashion your future and … to create a legacy for yourself, your family, and your community. For more information on this topic read this blog post: How to Succeed in Business Without Really Trying:
Even though only 20% of all small businesses are selling, it is possible to get yourself into that group. But it is going to take some planning and some more hard work to get yourself there. You should start today!
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