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.