Planning Your Future: Establishing a Business Exit Strategy
Entrepreneurs thoroughly plan for the establishment of a new company. However, very often, little or no effort is put into the planning of one’s exit from a company.
Many entrepreneurs do not start planning until it is too late, resulting in an inability to achieve both personal and corporate goals. Failure to prepare a comprehensive exit plan may even lead to an inability to sustain one’s lifestyle after the exit, or may negatively affect the company’s performance.
It is therefore of utmost importance to plan your exit years before your planned date of leave, and to revisit and revise your exit plan whenever necessary.
What is Exit Planning?
Exit planning is the process of strategizing the exit of a privately held company. Exit planning covers the business owner’s goals and objectives in terms of company value, employees and market position, as well as personal aspects such as family and the community.
These factors are then combined to identify an action plan that will help the entrepreneur to achieve his or her goals, in business and in personal life, through exiting a business.
Why Do You Need an Exit Strategy?
Exit planning is not limited to business owners who are ready to step down and retire. It is recommended to have an exit strategy in place years before your planned date of exit to maximize the possibility of attaining all your goals.
These are some of the most common reasons that lead entrepreneurs and business owners to set up an exit planning strategy.
- New beginnings
Once an established business is up and running routinely, many entrepreneurs choose to leave their position as head of the company to start a new business.
- Planning for disaster
Natural, social and financial disasters can significantly impact business operations and may lead your business to shut down or to change in ownership.
- Ensure tax compliant
In order to leverage opportunities, a business owner should start planning its exit strategy years in advance to leverage tax reduction opportunities.
- Optimize cash flow
Similar to leveraging tax opportunities, a company owner can maximize cash flow post-exit by careful and timely exit planning.
Types of Exit Strategies
There is more to exit planning than selling a business. Entrepreneurs have many options when deciding how to exit their business, all with different consequences, timelines and preparation processes.
There are many different parties to sell your business to, from insiders and partners to competitors and strategic, financial or international buyers. The ideal buyer depends on the owner’s goals and vision for the company. To prepare a business for sale measures will have to be taken to secure sales bids and to increase the sales price. Capital and earnings improvements aid this process, but often require years to take effect.
An Initial Public Offering will allow you to sell shares of your privately held company to the public. While a great way to generate large amounts of money within a short period of time, the process of setting up your IPO will also incur millions in expenses and requires solid transparency.
- Mergers & Acquisitions
During a merger or acquisition, the owner sells his or her controlling interest of the company, but may still have some form of involvement in the business under established terms and conditions.
A method most often employed by companies struggling to pay its debts, a business can quickly cease to exist through liquidating its assets.
Business owners can give out shares or equity as gifts to family members and charities. Gifts are commonly used for tax planning purposes and may come with obligations for the recipient.
- Business Transfer
Business ownership can be transferred to trusted partners, employees or family members. When choosing to transfer a business over, succession planning will be necessary.
The Exit Planning Process
The following steps can help guide you through the complicated process of planning your exit strategy.
1. Start off with setting compatible personal and business goals
While these two are inherently different goals, they should be integrated. Oftentimes much of a business owner’s private wealth is tied up in the company, creating the need to think about the consequences of removing much of this wealth from the business.
2. Establish the value of your business
Knowing the market value of your business is important, as if it is not up to standard, necessary steps will have to be taken to grow the value in time for the sale. Even when selling a business is not your preferred method of exit, it is important to incorporate the company’s value in your decision-making process.
3. Identify and evaluate your exit strategy options
Weigh the pros and cons of each of the types of exit options available to you and decide which is best for you and the company.
4. Prepare a written exit plan
With the help of specialists, consultants and legal experts, develop a written plan that clarifies the future of the business after your exit, leaving no room for speculation.
5. Take the necessary steps to protect your business & values
If your chosen exit strategy is sale or transfer, ensure the continuity of your business by encouraging management and key employees to stay in place, using incentives such as value drivers and reward schemes.
6. Plan for your life after the business
Consider your lifestyle after your exit from the company. Ask yourself: will the proceeds of the sale or the effects of the exit strategy be enough to sustain the lifestyle you have grown accustomed to?
7. Plan your personal wealth and estate
The former business owner will have to prepare for their next step, as retirement or starting a new business require diligent financial planning. If the business was sold, its proceeds will have to be managed and invested wisely.
While the methods mentioned in this article are some of the most commonly used exit strategies, there are other methods of exit that may be more suitable to your personal situation.
Discuss with your preferred team of legal experts and business consultants to find out which exit planning method best suits your needs.
It takes a harmonized team of professionals with experience in corporate law, wealth management, taxation, financial planning and more to prepare for and execute the ideal exit strategy.
This article does not constitute and should not be construed as an offer or solicitation to sell or buy any securities, investment instruments or any other services. Information and opinions contained in this document are obtained from public sources believed to be reliable, but are not to be relied upon as authoritative or taken as a recommendation or investment advice or in substitution for the exercise of independent judgment by the recipient, and are subject to change without notice. BNP Paribas makes no representation or warranty, express or implied, with respect to the accuracy or completeness of any information contained in this article. You should seek advice from your own professional adviser regarding the suitability of any investments (taking into account your specific investment objectives, financial situation and particular needs) as well as the risks involved in such investments before a commitment to purchase or enter into any investment is made.