Exit Planning Explained - Process, Strategy, and More

If you are a business owner, you may have wondered what will happen to your business when you decide to retire, sell, or transfer it.

How will you ensure you get the best value while exiting the business? How will you protect the interests of your family, employees, customers, and other stakeholders?

In this guide, we will explain the exit planning process, the different types of exit strategies, and the role of advisors in the exit planning process. We will also provide tips and best practices for creating and executing a successful exit plan.

Looking to hire exit strategy advisors?

Exitwise can help you find and hire the best M&A advisors to guide you through the complexities of selling your business and securing your business's future.

Book a consultation with us and get your dream M&A experts who suit your business.

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What is Exit Planning?

Exit planning is the process of preparing for the eventual transfer or sale of a business while considering the owner's personal and financial goals. It involves implementing various decisions and actions that enable a smooth and organized exit.

Exit planning is not a one-time event but a dynamic process that adapts to the business owner's and business's changing needs and circumstances. It requires a clear vision, proper assessment, and a strategic approach.

What Are The Benefits of Exit Planning?

Exit planning can benefit the business seller in many ways, from safeguarding their interests to facilitating a smooth deal when the time comes.

• By planning ahead, the owner can increase the attractiveness and profitability of the business and reduce the risks and liabilities that may lower the business's value. The owner can also optimize the timing and structure of the exit and take advantage of the tax incentives and exemptions that may apply.
• Business owners can ensure that their personal and financial goals are aligned with the goals and vision of the business and that they have a clear and realistic roadmap for achieving them.
• One can anticipate and mitigate the potential challenges and obstacles that may arise during the exit process, such as legal disputes, regulatory issues, and emotional stress. They can also prepare for the transition and the future by securing their income, assets, and lifestyle and exploring new opportunities.
• The owner can ensure the continuity and stability of the business by developing and retaining key employees and managers and transferring the knowledge and skills essential for the new ownership's success.
• One can achieve a sense of accomplishment by exiting the business on their terms and conditions. The owner can also enjoy a smooth, stress-free exit and a rewarding and satisfying future.

Whether you are planning to exit your business in the near or distant future, exit planning is a vital step you should consider.

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TL;DR - Overview of the Exit Planning Process

Exit planning is the process of preparing for the eventual transfer or sale of a business. It can be a planned event or arise from a contingency where a business owner wants to change ownership for some reason.

Developing a good exit plan that covers factors like tax compliance and stakeholder share is crucial, and a good M&A advisor can help both parties build terms and negotiate a fair deal.

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What is a Business Exit Strategy, and Why Does It Matter?

A business exit strategy is a comprehensive plan on how and when to sell your business. It outlines the specific actions you should take to leave your business and the exit options you will use to transfer ownership and involvement.

Here are 5 reasons why an exit strategy matters:

1. Attract Potential Investors: An exit strategy shows potential investors that you have strategic plans to grow your business, increasing their confidence in your ability to invest.
2. Maximize Returns: With an effective exit strategy, you can maximize your business value by optimizing finances and minimizing tax liabilities.
3. Mitigate Risks from Unexpected Situations: A well-planned exit strategy can help you minimize losses when unexpected events happen, such as falling ill, economic changes, and other market disruptions.
4. Allow Smooth Transition of Ownership: A defined exit strategy can help you provide a seamless process for transitioning ownership and preserving your business legacy.
5. Provide Clarity for Your Future: An exit strategy can help you define your goals, such as retirement or transitioning your company to your family successor.

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Business Planning Advisors vs. Exit Strategy Advisors: Key Differences

Business planning and exit strategy advisors often collaborate, but they have different roles in a business.

Our table below gives you a quick overview of each:

Aspect

Business Planning Advisors

Exit Strategy Advisors

Goal

Provides strategic insights and advice to improve your business operations and efficiency

Help business owners plan and execute the sale of their businesses

Role in a Business

Analyze your business's financial health, including the financial statements. They also enhance revenue and improve your financial health.

Set goals and craft strategies that enhance your business performance.

Identify business processes and suggest improvements to streamline your company’s operations.

Identify opportunities to help you with your business growth and expansion.

Craft your exit strategy.

Identify and qualify the right buyers.

Help in the valuation of your business.

Help you with the business sale negotiation process.

Time

Although they are involved throughout the lifecycle of the business, they are crucial during your growth stages.

Although they should be involved from the start of your business, they are crucial in its mid- and later stages.

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What Role Do Advisors Play in the Exit Planning Process?

Rightly known as Certified Exit Planning Advisors, these professionals can provide expert advice and guidance to the business owner during exit planning. They can help the owner with various aspects of the exit planning process, such as:

• Assessing the current situation and identifying the objectives and preferences of the owner
• Exploring and evaluating the different exit strategies and options
• Developing and implementing a customized and comprehensive exit plan that meets the needs and expectations of the owner
• Coordinating with other advisors and stakeholders involved in the exit process
• Monitoring and adjusting the exit plan as needed to respond to changing circumstances and opportunities

Exit planning advisors often work with a team of other professional who help in the process, who may include:

• Accountants: They can help the owner with the financial and tax aspects of the exit, such as valuing the business, structuring the deal, minimizing the taxes and fees, and preparing the financial statements and reports.
• Lawyers: Lawyers can help the owner with the legal aspects of the exit, such as drafting and reviewing the contracts and agreements, protecting the intellectual property and confidential information, resolving disputes and claims, and complying with the laws and regulations.
• Brokers: They help with the marketing and selling aspects of the exit, such as finding and qualifying the potential buyers, negotiating the terms and conditions, facilitating the due diligence and closing, and maximizing the price and value.
• Bankers: Bankers can help the party with the financing and funding aspects of the exit, such as securing the loans and equity or arranging escrow.
• Consultants: They can help the owner with the strategic and operational aspects of the exit, such as improving the business's performance and sustainability.

Advisors can play a vital role in the exit planning process, providing the owner with the knowledge, skills, and resources necessary for a successful and satisfying exit. The owner should pick suitable advisors, maintain control and responsibility over the exit planning process, and make the best decisions for themselves and their business.

Exitwise can help you find the right advisors for your exit planning and build the right M&A team for a successful team. Check out our detailed explanation of how our process works and how we can help create your dream M&A team.

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How to Choose the Right Exit Planning Advisor for Your Business

An exit planning consultant can make all the difference when you want to sell your business, pass it on to your family, or explore other exit options.

Below is a step-by-step process for choosing the right exit advisor:

1. Assess Your Needs

You should assess your needs and goals for the exit process. Some of the financial and non-financial goals you can consider for your exit are:

• Minimize tax implications.
• Maximize the sale of your business.
• Ensure financial security for your family and yourself.
• Preserve the legacy of your business.

2. Consider Communication and Compatibility

Choose an exit advisor with whom you’re comfortable talking and who can explain complex concepts. Some of the factors you should look for in an expert are:

• They should listen to your needs and answer your questions.
• You should feel comfortable working with them and trust their judgment.

3. Check their Expertise and Experience

Consider business planning advisors who have experience working with businesses in your industry. They should also:

• Be familiar with specific exit opportunities and industry challenges.
• Have references from past clients.
• Have a track record of successful exits.

4. Ask the Right Questions

During the initial consultation, you should ask the right questions to assess your potential exit planning advisors and their fit for your business.

Some of the questions you can ask are:

• How will you tailor your exit planning services to meet my business needs?
• What is the approach you take with clients in my industry?
• How much do you charge for your services?

5. Make Your Final Decision

After the initial consultation, it’s time to make your decisions by considering the following steps:

• Review the proposals and the fee structures from each exit planner.
• Consider how they align with your needs and goals.
• Trust your instincts by going for the advisor you feel most confident with.

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5 Key Steps in Developing an Exit Plan

Developing an exit plan helps you achieve your personal and financial goals and ensure a smooth and successful exit from your business.

Here are five key steps that you should follow to create and execute an effective exit plan:

Step 1: Establish Your Objectives

Identify your reasons and motivations for exiting the business and your desired outcomes and benefits. Consider your personal, financial, and professional goals and your family, lifestyle, and succession preferences.

Step 2: Determine the Value of Your Business

Estimate your business's current and potential value based on various valuation methods and market factors. Identify your business's value drivers, detractors, and the opportunities and threats that may affect the value. You can use our business valuation calculator for an accessible overview of your business's current value.

Step 3: Choose Your Exit Strategy

Explore and evaluate the different exit strategies and options available, such as selling, merging, passing, or liquidating the business. Weigh the pros and cons of each option and select the one that best suits your objectives, situation, and market conditions.

Step 4: Develop Your Exit Plan

Create and implement a comprehensive and customized exit plan outlining the specific actions and initiatives needed to execute your chosen strategy. Include a contingency plan, a timeline, and a budget for prompt execution.

Step 5: Execute Your Exit Plan

Execute your exit plan with the help of an exit planning advisor to ensure maximum compliance and value. Monitor and adjust your exit plan to respond to changing circumstances and opportunities and ensure success and satisfaction.

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8 Exit Planning Strategies Explained

Check out these different exit strategies, and you may get an idea of what best suits your business.

1. Employee Stock Ownership Plan (ESOP)

A strategy where the owner sells some or all of their shares to a trust set up for the benefit of the employees. The employees become the business owners, and the owner receives cash and tax benefits. This strategy can be used to reward and motivate the employees and preserve the business's culture and legacy.

2. Merger with Another Business

In this arrangement, the owner combines their business with another business with complementary or synergistic assets, capabilities, or markets. The owner receives shares or cash from the merged entity and may retain some control or influence over the business. This strategy can create value for both parties and increase the chances of success in the future.

3. Management Buyout (MBO)

MBO is a strategy where the owner sells their business to the existing management team, who may use debt or equity financing to fund the purchase. The owner receives cash and may retain some equity or involvement in the business. This strategy can be used to transfer the ownership to the people who know the business best and to ensure continuity and stability.

4. Initial Public Offering (IPO)

IPO is a strategy where the owner sells some or all of their shares to the public through a stock exchange. The owner receives cash and may retain some ownership or control over the business. IPO strategy can raise capital and enhance the business's reputation and visibility.

5. Selling to a Third Party

Here, the owner sells their business to an external buyer, an individual, a group, or a company. The owner receives cash and may negotiate the terms and conditions of the sale. This strategy can be used to maximize the business's price and value and exit the business quickly and thoroughly.

6. Family Succession

The business owner transfers the ownership or control of the business to their family members, who may be their children, siblings, or relatives. The owner may receive cash, shares, or other assets from the family and maintain some involvement or influence in the business. This strategy can be used to preserve the business's legacy and culture and maintain ownership in the family.

7. Recapitalization

It is a strategy where the owner restructures the business's capital structure by changing the mix of debt and equity. The owner may use the debt or equity issuance proceeds to pay themselves a dividend or reinvest in the business. This strategy can increase the return on equity and prepare the company for a future exit.

8. Liquidation

In liquidation, the owner sells the assets and liabilities of the business and distributes the proceeds to themselves and other stakeholders. The owner may receive cash or other assets and terminate business operations. This strategy can be used when the business is no longer viable or profitable or when the owner wants to retire or pursue other interests.

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Exit Planning for Small Business Owners: Special Considerations

Here’s what you should consider to effectively prepare for a seamless exit for your small business:

• Financial Preparedness: As a small business owner, your business might be your primary source of income and retirement. Therefore, your exit planning strategy should consider your post-sale needs carefully and ensure you can exit your business while making a profit.
• Post-Exit Intentions: Do you want to see your small business continue its operations without you, or do you prefer that you retain some level of control? You should consider these scenarios to decide whether your company should merge with another, be liquidated, or be transferred to family members.
• Emotional Readiness: You cannot overlook your emotional investment in your business, which can hinder you from making strategic exit decisions. You have to consider your mental preparedness to transition to the next chapter.
• Sales Options: Small businesses typically have a small pool of buyers. So, you should explore who are your right type of buyers to maximize your sale price.
• Legal and Tax Implications: Your small business might be a sole proprietorship, partnership, or LLC, which can determine its legalities and the transfer of ownership. So, you should ensure all legal documents, such as contracts and financial records, are accurate and in order. You should also plan for capital gain tax and potential deductions.
• Succession Planning: If you want continuity in your small family business, consider your succession plan. You should engage an exit strategy advisor to help you identify potential successors, train them for leadership roles, and guide you when faced with challenges that can jeopardize your legacy.

You should engage professionals—exit planning advisors, accountants, and attorneys—to provide valuable insights and guide you through your small business exit planning.

Don’t know where to find these professionals? At Exitwise, we can help you interview, hire, and build your dream M&A team.

Partner with us, and we’ll help you maximize your business sale!

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What Are the Tax Implications of Different Exit Strategies?

Disclaimer: The information provided here is for general guidance only and does not constitute professional tax advice. You must consult a local tax professional before making any final decisions regarding tax matters.

The tax implications of different exit strategies can vary depending on the structure of your business, the nature of your exit, and the applicable tax laws. Here are some common exit strategies and their tax considerations:

Selling the Business

Selling your business can lead to capital gains and regular income taxes. Depending on how long you've held the business, capital gains may be classified as short-term or long-term, each with its tax rate. Additionally, you might be subject to depreciation recapture taxes if you've claimed depreciation deductions on your business assets.

Passing the Business to Heirs

Succession planning involves passing on your business to family members or other heirs. While this strategy can potentially lead to estate taxes, the tax implications can be minimized through careful planning, including using trusts and gifting strategies.

Liquidating the business

Closing down your business involves liquidating its assets and settling its liabilities. This process can trigger capital gains, ordinary income taxes, and potential taxes on any accumulated earnings in the business.

Merging or Acquiring

Mergers and acquisitions can lead to a range of tax implications, including taxes on gains from the sale of assets or stock, changes in ownership structures, and potential changes in tax attributes like net operating losses.

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Exit Planning Statistics

Let’s look at some exciting findings from recent surveys and reports on exit planning statistics:

According to the BEI 2022 Business Owner Survey, 16% of business owners plan to exit their businesses in fewer than five years, 37% plan to exit within 5–10 years, and 47% plan to exit in more than ten years. When asked how the COVID-19 pandemic impacted their plans to exit, more than 50% said it made no impact. Only 11% said it made them want to exit their business sooner.

The EPI 2023 State of Owner Readiness Research report says that 52% of business owners include written detailed personal planning in their exit strategy, compared to only 9% in previous surveys. This indicates that owners consider exit planning earlier in their ownership lifecycle and expect their advisors to support those efforts.

Data from the Gitnux 2024 Succession Planning Statistics estimates that only 30% of small businesses successfully sell, leaving 70% without a buyer or successful plan for what happens next. The report also suggests that owners with a formal succession plan are more likely to achieve higher business value, lower taxes, and greater personal satisfaction.

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Frequently Asked Questions (FAQs)

This comprehensive FAQ section will guide you through the answers to some common questions about exit planning.

When Should an Owner Start the Exit Planning Process?

Owners may have different objectives, timelines, intentions, and market conditions for their exit. However, a general rule of thumb is to start the exit planning process at least 3 to 5 years before the desired exit date. It allows enough time to assess the current situation, explore the options, develop and implement the plan, and execute the exit strategy. Starting the exit planning process early also helps increase the business value and reduce the risks and uncertainties.

How Does Exit Planning Affect Business Valuation?

Exit planning can positively impact the business valuation, as it can motivate the ownership to improve the business's performance and sustainability and enhance its attractiveness and profitability for potential buyers or investors. Exit planning can also optimize the exit's timing and structure and take advantage of the tax incentives and exemptions that may apply.

Can Exit Planning Help in Reducing Business Risks?

Exit planning can help reduce business risks, as it can help anticipate and mitigate the potential challenges that may arise during the exit process, such as legal and regulatory issues, market fluctuations, and operational disruptions.

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Conclusion

Exit planning is a vital process for any business owner who wants to maximize the value of their business and achieve the best potential deal for their exit. There are various benefits of exit planning and several strategies to carry it out. It all depends upon the buyer's and seller's preferences and objectives.

Let us help you with your exit plan if you need more assistance. We will help you create a team of experienced and professional M&A advisors who can guide you through every step of the exit planning process. Contact us now to schedule a consultation.