Guide to Exit Planning
For most businesses, the “exit” phase may seem very far off, and while you’re busy enjoying running the business, you may not particularly want to exit. However, it’s important that you develop and plan an exit strategy.
- It helps others prepare. For example, your managers and employees want to know about the future of the business, so they can feel secure in their jobs and understand their roles. Your investors and lenders want to know how you will pay them back if you exit the business.
- It gives you a way out. You may need to leave the business for a number of reasons (e.g., retirement, burnout, or a medical emergency that leaves you unable to run the business). No matter what you’re facing, an exit strategy will give you a planned path out.
- It allows you to better plan your business. When you have an exit strategy, you’ll be better able to direct the business. You’ll have more time to prepare for the end.
Step 1
The very first step in exit planning involves preparing an accurate account of your finances both personally and professionally. Looking at how much you owe investors or lenders is important, and how they can best be paid back. Undertake valuation of your business (Quick introduction to business valuation).
Step 2
Planning an exit strategy involves deciding whether you plan to transfer your business (to family, employees, friends), sell the business, or close your business completely (liquidate your assets). There are pros and cons to all three options, but it is important to be certain about your decision before proceeding. For most businesses, the most realistic and common options are management buyouts, family succession, selling the business to outsiders, or liquidating and closing the business.
In deciding your exit options, consider the following:
- What are your priorities? What do you want to achieve? Would you rather keep things simple, even if it means losing some money, or are you willing to go a complex route to maximize profitability? Are you concerned with protecting your employees and managers?
- What are your financial goals?
- What is your business currently like? What is your business structure? Is it big or small? Flush with cash or in debt? Simple or complicated?
- How much time do you have? When do you plan to retire?
- How long do you want to stay involved in the business?
- Do you have investors or creditors to pay off before exiting?
- Do you have entrepreneurial family members or friends, or competitors that may be interested in the business?
- Are you willing to list your business for sale?
There are different options to choose from, each with their own strengths and weaknesses. There isn’t a single “right” exit strategy, so consider your options carefully, keeping in mind the answers to the questions just posed. You should also talk with your employees, partners, investors, and advisors to find the option that will serve you best. The best exit strategy for your business is the one that best fits your goals, expectations, and business. If you want your legacy to continue after you leave, selling it to an employee, customer or family member may be the best option. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition by a competitor or another business or liquidating the company might instead be optimal routes to consider.
Transferring ownership of the business such as to employees via management buyout or through family succession to a family member offers a way to transition out of the day-to-day operations of your business.
Management buyout
If you built a business that you want to continue, you can consider turning to your co-owners or employees. They have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work. This form of exit strategy is a good idea if you want to keep your legacy alive. |
Family succession
If your family members are quite knowledgeable about your business, then they may be the best people to pass it to. If you would like to pass on your business to your children or any other family member, you should make sure that they have the prerequisite skills, are competent and have the success and future of the business at heart. This will make it a lot easier to retire. |
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Cons:
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Management and family succession planning allows you to plan ahead for your exit by working with the potential new owners and take actions to prepare them and the business for the transfer of ownership. The more time you have to prepare all parties impacted, the smoother the transition. Use the ‘Succession Planning Worksheet’ (Appendix C) to help you work through key planning aspects for a management buyout or family succession.
Also consider the following advice:
- Start as early as possible.
- Set up your business so that it can run without you. Create processes that ensure you aren’t the only one with important information for running the business (e.g., accounts, passwords, supplier information, etc.). Identify staff who can assume your duties should you be unavailable for any length of time.
- Determine a time frame for exit.
- Open a dialogue with potential successors/owners - start talking about succession planning with employees and family members and emphasize how important it is to the future of your business. Making your own succession plan and then announcing it is the surest way to sow family discord or tension among employees. Discussing the plan helps to identify who might want to be involved directly and who is focused elsewhere. It also might help some family members find interest in the business they didn't know they had.
- Dedicate focused resources and time to the selection, training and development of the successor. How can you expect your successors to take over and run your business successfully if you haven't spent any time training them? Your succession planning will have a much better chance of success if you work with your successors for at least a year or two before you hand over the reins.
- Read more: Developing the next generation of leaders in your family business.
A buy-sell agreement is a sort of prenup that spells out how the business transfers to co-owners if one of the partners/owners dies, becomes disabled, or retires. A buy-sell agreement is a legally binding contract between two or more business owners outlining how the assets and equity in a business will be divided if an owner becomes disabled or dies. (More information about buy-sell agreements).
The buy-sell agreement can include purchasing life insurance policies for each owner to provide funding to purchase the business in the event of disability or death. Business partners buy life insurance on each other and name themselves as beneficiaries. If one dies, the surviving partner can use the life insurance payout to buy the late partner’s share of the business. The business pays for the monthly premiums and is always both the beneficiary and the owner of each buy-sell life insurance policy.
- Term life insurance typically payouts in the event of death.
- Permanent insurance has a cash value component that can also be used in the event of disability or retirement.
Determine the following as part of your exit plan:
- Who will purchase the policy?
- Who will be the beneficiary?
- Permanent or term policy?
- What will be the death benefit?
- For term insurance, what will be the term length?
Alternatively, you may decide to sell your business to an outsider or another business. Selling the business is a way to potentially make more money off of the business, and if selling to a competing or complementary business, can also create a merging of businesses.
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After careful consideration, you may decide to sell your business. Sound planning can help ensure you cover all your bases. Use the ‘Succession Plan Template’ to help you work through key planning aspects for selling your business.
Also, review the following resources:
It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and lenders and still make money. If you liquidate your business, however, you lose your business concept, reputation, and your customers. Your business will not live on like in other exit strategy options.
Liquidating your business over time allows you to pay yourself until your business funds run dry, and then closing up shop. You are taking funds out of the business instead of reinvesting them back into the business.
Pros
- You will still get a paycheck to maintain your lifestyle (until assets run out or business funds run dry).
Cons
- Stunts business’s growth, which makes it less valuable if you change your mind and decide to sell.
- This may upset investors and your employees who are not benefitting from business reinvestment.
The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.
Pros
- Relatively simple exit method.
- Depending on the type of assets, the closure can occur quickly.
Cons
- Money you make only comes from the assets you are able to sell such as real estate, inventory and equipment.
- If you have creditors, these people must be paid off before you can pay yourself.
Before liquidating your business, you should make sure you’re following the right procedure for selling your assets, paying back all debts, letting go of employees, and finalizing all legal and financial commitments.
Your exit plan should address both asset liquidation and closing the business. As part of the asset liquidation component, the plan should include the steps below:
- Preparing an inventory and determining assets for sale
Make a list of the physical property your business owns, as well as any money owed to the business in the form of rent, security deposits, and unpaid bills (accounts receivable) you still expect to collect. Your list should include:
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- business equipment, such as computers, phones, cash registers, and credit card machines
- office furniture, art, and supplies
- vehicles
- real estate
- security deposits with landlords, utilities, or taxing agencies, and
- prepaid insurance premiums you can get refunded to you.
For physical property, write down a description of each item or category of property, the condition of the property, and who technically owns it (what money was used to purchase the property—your personal funds, a partner's personal funds, or business funds). In addition to tangible property, you may be able to sell intangible property that your business owns, such as:
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- contracts with suppliers at below-market rates
- works in progress that could have some value
- your customer list and your company name (essentially, the goodwill your company has built up)
- intellectual property such as copyrights, patents, and trademarks, and
- remaining accounts receivable (accounts receivables will be much less valuable after your business closes, so put early effort to collect them now. Alternatively, you can sell them to a factor or debt buyer, who will either buy your accounts receivable at a fraction of their worth or, for a fee, pay you a certain percentage of the debt up front and the rest when they collect it).
- Securing physical property and other assets.
- Selling property and assets, by considering the following:
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- Set liquidation value of assets with a qualified appraiser
- Use different sale options: negotiated, consignment, internet, sealed bid, retail, etc.
- Hire an auctioneer, dealer, broker, or other expert to conduct the sale
- Use a non-recourse bill of sale so buyer accepts the associated risk
- You’ll likely get no more than 80% of an assets value, at most. If you have items that will be hard to sell, consider donating them to charity for a tax deduction.
- Cast a wide net for buyers. Use your business contacts, including appropriate suppliers and competitors, to find buyers. Competitors may also be interested in buying your intangible assets (trademarks, copyrights, customer lists, company name, product name, etc.) and any works or jobs in progress. You might find buyers for fixtures, furniture, and equipment by listing them on websites like eBay, craigslist, or bid4assets.com. Also search for websites that specialize in auctions for your industry (some sites specialize in restaurant equipment, industrial machinery, high-tech equipment, construction equipment, etc.). If you have numerous assets with significant value, contacting a business broker or professional auctioneer or liquidator might be a good idea.
- Keeping good records. As you liquidate your assets, you'll want to record how you tried to sell each piece of property (save copies of ads or Web listings), who ended up buying it, and the amount you received. Keeping good records of your property and what happens to it will protect you in case a creditor later questions your liquidation of assets or in case you have to file for bankruptcy. You will also need this information for your tax returns.
Include the following steps in your exit plan under the business closing component (Read more from https://www.sba.gov/business-guide/manage-your-business/close-or-sell-your-business):
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- If you have partners or co-owners, formally document the decision to close the business via a written agreement signed by all co-owners.
- File dissolution documents if needed. Failure to legally dissolve a partnership, LLC, or corporation with the state will expose you to continued taxes and filing requirements. (You can find appropriate dissolution documents from the Virginia State Corporation Commission).
- Cancel registrations, permits, licenses, and business names. Protect your finances and reputation by canceling any of these that you no longer need, including your trade name.
- Resolve financial obligations. Handle final returns for income tax and sales tax. Follow this checklist from the IRS and follow appropriate processes with the Virginia Department of Taxation.
- Maintain records. You may be legally required to maintain tax and employment records, among other files. Common guidelines advise keeping records for anywhere from three to seven years.
Step 3
Execute the exit plan.
- Speak with your investors and creditors. Approach your investors, creditors, and other stakeholders to share your intent to exit the business. Create a strategy that advises investors and creditors on how they will be repaid.
- Choose new leadership. Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans.
- Tell your employees. When your succession plans are in place, share the news with your employees and be prepared to answer their questions.
- Inform your customers. Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.