If you’re planning on selling your business in the future, a comprehensive exit planning process is crucial to maximizing your outcome. Exit planning should be top of mind for all successful business owners, but it’s a topic that’s overlooked by many entrepreneurs. 

Even if you currently don’t have any plans to sell your business, the exit planning process should begin sooner rather than later. Having several years to plan for your eventual exit allows you to maximize your business’s value. Compare that to reaching retirement age, deciding you want to sell, and then effectively being forced to take whatever deal you can find. It could be a difference of millions of dollars.

Every business owner will eventually exit his or her ownership position. Taking the right steps to prepare for that eventuality can make a huge difference in the outcome. In this guide, we explore exactly what those steps are and offer practical tips that business owners can adopt today to start preparing for a successful exit of their business. 

What is Exit Planning?

An exit plan is a strategy that an owner has to relinquish their ownership position in their business. This can be done in several ways, from selling to a third party, transferring ownership to family members and/or employees, or liquidating the assets of the business.

Exit planning can also be referred to as succession planning. Whatever approach you decide to take to exiting your own business, a careful, considered approach with plenty of planning is key to ensuring a successful outcome.

Why is Exit Planning Important?

For most business owners, the sale of their business is the biggest transaction of their lives. If you’ve been successful, the sale of your business will significantly outweigh the sale of any house or vehicle, potentially setting your family up for generations to come. Effectively planning for your exit doesn’t just maximize the value you’ll be able to realize when selling your business – it also minimizes the potential taxes you’ll be liable for.

Beyond these financial elements, many business owners have an emotional attachment to their business. You likely have employees who have worked for you for years that you want to see looked after. You might have years-long relationships with customers and care deeply about how they will be supported on an ongoing basis.

Ensuring a smooth transition for all stakeholders involved, while maximizing the financial rewards you receive for your years of hard work, demands a comprehensive exit planning process.

So, what’s involved in this process? Let’s explore the key steps to planning for a successful exit.

5 Steps to a Successful Exit

Here are some key steps to consider when creating an exit plan for your business:

1. Set Clear Goals

Before you create an exit plan, it’s important to define your goals. Every business owner has different aims. Some might want to sell their business to a strategic buyer or private equity firm for the highest price, whereas others may prefer to transfer ownership to family members or key employees.

Take the time to decide which approach you want to pursue for your business. You also need to consider your own goals after the sale. Do you want to start a new business, enjoy retirement to the max, or something else? Determine what your lifestyle will look like and assess the cash needed to live it – this will inform how you approach any transaction.

2. Assess the Value of Your Business

You might have an idea of how much your business is worth, but ultimately, the market will decide. Your business is worth as much as someone is willing to pay for it.

To determine this value, you will need to consult with qualified business valuation professionals. They’ll help you understand the market value of your business by providing industry benchmarks, typical valuation multiples, and more.

But perhaps even more importantly, they’ll help you identify areas of your business that you can work on to improve your business valuation even further, whether it’s diversifying your revenue base or cleaning up your business’s bookkeeping.

3. Identify Potential Buyers

Depending on your goals, you may need to identify potential buyers for your business. The types of buyers that will potentially be interested are driven by the nature of your business.

This could include strategic buyers within your industry, private equity firms, or individual investors. Or, as noted above, you may consider selling the business to key employees or family members.

Having experienced advisors with existing connections goes a long way in helping you identify potential buyers for your business. Look for firms that are active players in the local business community and have relationships with a rich network of entrepreneurs and investors.

4. Develop a Transition Plan

Once you have identified a potential buyer and have started the negotiations for the sale of your business, it’s important to develop a transition plan that outlines the steps involved in transferring ownership of the business.

Selling your business involves far more than just handing the new owner the keys. You need to pull together a timeline for the transition, as well as figure out a plan to transfer knowledge and responsibilities to the new owner.

In some cases, you may be required to continue working in the business for a period after the sale to ensure business continuity. Many contracts include earn-out periods of two or three years where you have to hit certain performance milestones to realize the full value of the sale.

5. Minimize Tax Liability

Remember, the sale of your business is likely the sale of your biggest asset. It’s probably a multi-million dollar deal. Unless you include proactive tax planning in the exit planning stage, you could be left facing a sizable tax bill after the sale closes.

Work with a tax professional to minimize your tax liability when exiting the business. This may involve structuring the sale in a certain way or taking advantage of tax breaks and other tax planning strategies. Every situation is unique, which is why it’s so important you find an experienced tax advisor you can trust.

Start Planning for the Sale of Your Business with LBMC

Exiting planning is an important topic for all business owners – even those that have no plans to sell anytime soon. By taking the time to plan ahead, you can achieve your financial goals and leave a lasting legacy for your employees and customers.

At LBMC, we’re proud to have advised entrepreneurs and family business owners across Tennessee, Kentucky and Indiana for over 40 years. We’ve been involved in countless exit planning processes and our team loves nothing more than helping successful business owners achieve life-changing exits for themselves and their families.

With a range of advisory, tax, and business valuation services, LBMC is well-equipped to guide you through the exit planning process. Interested in learning more? Contact an advisor today.