Why Your Business Needs an Exit Plan
If you fail to plan your exit strategy, you plan to fail. Your business is an asset that will support your future, so it is important to protect it. When the future of your business looks secure, it can be hard to take a step back and consider what would happen to your company if you weren’t there.
Exiting your business is inevitable. Whether your ready to retire, have family commitments or want to begin a new business venture; it is never too early for your exit strategy. Planning early gives insights into your company and allows you to plan for the future and depart on your terms, for the right time and the maximum value.
What is an exit (succession) plan and why is it important?
Currently, it is estimated by the Exit Planning Institute that 50% of business exits are due to bankruptcy, liquidation or forced closing. This could have been prevented with a succession plan.
Exit plans are about planning your exit/sale/succession of your business and able to increase the sale price of your business while ensuring the business continues to thrive once you have left. To achieve a successful exit and maximise profit, the owner and their finances must be prepared to exit the business at the same time.
Benefits to the Owner (Seller)
As an owner, you will want to extract the maximum value for your business when exiting to secure your retirement or future. Starting your exit plan when you take over or start your business allows you to plan for what you are trying to accomplish, whether that be furthering capital, funding your retirement or passing your business onto your family.
Exit plans will provide you with a detailed and documented plan that acts like a blueprint to cover every aspect of your business, including: business analysis and due diligence. Buyers are impressed when your financial records are in order and your business processes are clear and automatic.
Exit plans allow your business goals to be reached while allowing the people in your business to develop and grow to ensure the business can survive without the owner. This frees up the owner’s time to complete other tasks, which are often overlooked when you are working in the business rather than on the business.
Analysis of your business will allow you to evaluate your company’s value and determine whether you are on track with your financial goals and therefore make changes required to enhance your company’s value and guide your company’s future. This is impressive for potential buyers and investors, as this indicates your business is valuable and well run with strong management that isn’t dependant on one person.
Additionally, exit plans also place your business in a better position for receiving a loan, as it indicates your business is a solid investment that is thriving, efficient and profitable.
Exit plans allow you to capitalise on an active market that could be missed if you were only beginning to get your affairs in order when the market is at its strongest. This allows you to sell your business whenever you are ready for the amount that suits you. When a buyer presents you with an unexpected offer, your previous planning will enable you to maintain the balance of power with a clear idea of your goals and expectations for the sale.
You should also consider the benefits of exit planning for your potential buyer also, as these ultimately benefit you too.
Benefits to the Buyer
Your business is more transferrable when you have an exit plan in place. The buyer may not purchase the business if the owner is taking critical specialised knowledge with them. Exit plans also reassure the buyer that any customer relationships that exist in the business will be transferred to them if they buy the business. Without this, the buyer is at a disadvantage and will assume the business is riskier. By spreading the company’s value across a number of different employees or automated processes will mitigate some of the risk for the buyer.
Exit plans are appealing to buyers because they indicate the seller is committed and has considered their options and are therefore less likely to back out of a transaction at the last minute. This wastes the buyer’s time and may mean that they miss out on another business opportunity. Exit plans ensure that the paperwork (due diligence, confidentiality agreements and letters of intent) is organised for when the changeover occurs. This saves time, money and frustration for both the buyer and seller. Exit plans indicate that you have been planning for your future and have been growing your business to achieve these goals.
Why do they fail and how to fix it?
Owners Are Unaware of Their Options
For many owners, selling a business is about more than money. It is about preserving their legacy and looking after their staff and customers after they leave. But when it comes to selling a business, it is difficult to understand what options you have. Strategic planning allows you to identify the opportunities available to your business and maximise your potential profits.
PGH Corporate are able to work with you to formulate an exit strategy that is suited to your business, for example: management buy-in, company merge, private or public sale, family succession, private equity, sale of client base or employee stock ownership. Your options are endless.
Planning to Sell Too Fast
Businesses are well known to the owner, but not to the employees, stakeholders or suppliers. This unknown situation can cause stakeholders to feel uncomfortable and are therefore more likely to force action without proper planning or implementation, which can be very costly to your business. Consequently, many owners attempt to complete the succession process too late and only allow for three to six months to implement the plan. Successful exit plans should take three to five years to fully implement. This gives you business the chance to streamline your business processes to make your business profitable and easier to manage for your future buyer.
The business value and saleability can be limited if the business is dependent on the owner and lacks efficient, automatic systems and/or processes. To leave the new owner in the best position with peak profitability, the processes should be documented so the new owner can run it as soon as they walk in.
It is also important to remember that the business and owner’s finances are often tied together and difficult to separate. The Exit Planning Institute estimates that 90% of the owner’s wealth is tied to their business. This also needs to be resolved before an exit can occur to allow retirement funds to be secured.
Maximising value takes time but it is worth it on multiples. Business owners list these businesses with a broker for sale, without proposing appropriately and potentially leaving a significant amount of money at risk. Review our blog on how maximising financial performance and minimising risk can multiply the value of your business.
PGH Corporate Can Help
You only get to leave your business once so it pays to get it right. Start planning your exit strategy today rather than waiting until you have to exit, as this risks losing your financial legacy that you’ve worked so hard to secure.
PGH Corporate provide a strategic and comprehensive approach to creating an exit strategy and building the value you deserve. Contact us today to find out more.