What is Exit Planning and How is it Essential for All Businesses Right Now

Exit planning is more than setting a date to retire or sell your business. Done properly, exit planning is about optimizing the value of your business so that when you are ready to exit, whether you decide to sell or succeed it to the next generation of family ownership, you receive the maximum value for the company you have worked so hard to build.

To do this, you need time. Exit planning should begin at least five years before you plan to sell or retire, and ideally up to 10 years in advance. Some advisors tell business owners they should start exit planning as soon as they start a business, since the exit goals, to some extent, may guide how the business is managed.

Why Do You Need So Much Time?

Imagine you are selling your house. If you put it on the market tomorrow you would get a price for it that reflects its current condition. Perhaps plumbing repairs have been delayed, the roof is reaching the end of its useful life or the kitchen and bathrooms are outdated. Buyers will take all that into account and discount their offers accordingly.

But if you created a five-year plan to make all those repairs and updates, the offers you received for your house after the improvements were made would reflect the maximum market value.

Starting your exit planning with five years or less leaves you time to focus on the hot spots and make short-term improvements that will add a minimum amount of marketplace value to your business. But having seven to 10 years gives you the ability to do long-term planning and work on systemic issues that could potentially add significant value and help you get the maximum possible price for your business.

Business Valuation

Just as you would want to get a market assessment of your house before all the improvements are made and then again when it goes on the market, obtaining a baseline business valuation as you begin exit planning will help you gauge the impact of the improvements you make over five to 10 years. It also will help you plan which improvements to prioritize.

The beginning business valuation should be augmented by a financial assessment and benchmarking analysis. Many business owners know how their own companies are doing, but they have no idea how they are doing in comparison to others in the same industry. Besides overall revenues and income, benchmarking analyses can help you identify key metrics that may require attention to help you maximize value. If your revenues are similar to your largest competitor’s, but the competitor is getting product to market faster and achieving sales with a smaller sales force, the competitor’s bottom line income is probably much healthier than yours. You need to find out how you can improve operations to achieve the same – or better – results.

The Personal Picture

Besides strengthening a business and maximizing its sale price, effective exit planning helps the business owner personally plan for retirement or other long-term personal needs. It is about reaching the best possible outcome.

If you would like to get the ball rolling on exit planning for your business, please contact us. We’d like to have a conversation with you.