When to Start Planning Your Business Exit

November 22, 2016Exit Strategies

As an entrepreneur, I know that we are a different breed. Where others see a punch clock, we see ourselves entering into a battlefield ready to seize the day. This ability to be ready at a moment’s notice, constantly trekking out to see another fight through, creates a life where we are living from week to week, month to month. Where this constant drive to move forward eventually drives the business forward, it leaves a gap in long-term planning.

Bottom line: planning for both the extended future and eventual exit of the business is challenging.

This is one of the many reasons I founded Exit Consulting Group (ECG). My team and I walk business owners through the process of creating a comprehensive exit strategy. While many businesses come to us with a year to sell, some with even less time, the most successful businesses start much earlier. I wanted to take a few moments to address the best time to start planning your exit, as well as the additional factors that play into creating a successful exit during that time frame.


Ideal Timing: 3-5 Years

When possible, I recommend business owners start planning their exit three to five years prior to leaving. Family businesses should start even sooner. It’s likely this far ahead exceeds your expectation. Many owners only start broaching the subject once they are ready to exit, possibly giving a year cushion.

Point blank, it’s too late to maximize that sale at that point.

Most business owners want to sell their business for the highest number possible. In order to do that, three things need to align. The owner needs to be ready, the business needs to be thriving, and the market conditions have to be right. While simple in theory, each aspect creates countless additional variables. Businesses have seasons. Markets run in cycles. Timing becomes a crucial component.

The businesses that have flexibility in terms of timing can choose the most opportune moment for the owner, market, and business. In my experience, that opportune moment typically adds substantial value to the sale price.

In this time frame, four additional, often-overlooked aspects need to be completed.


1) Defining Success

Success looks different to everyone.

At the end of the day, no consultant, colleague, or relative can walk in your shoes and define what a win looks like for you. Sure, my team at Exit Consulting Group can go through all the key considerations, but at the end of the day this important decision comes down to you.

If it were as easy as writing down a SMART Goal, more business owners would have a cut and dry definition of success. In my work, there are several different factors that play into a unique definition of a successful exit.

First, you have monetary goals. The majority of business owners rely on the sale of the business to fund anywhere from a partial to a majority of their retirement. It’s not uncommon that an exiting business owner comes to us with a specific sale price tied directly to funding the next phase.

Next come goals for the business. This ranges from wanting it to survive for years following the exit to passing it down to family members to giving employees more of a voice in the decision making to continuing to service key clients. Some companies spend decades building up a distinctive culture that owners want to preserve through the transition. In truth, goals for the business are as diverse as the owners themselves.

Both of these play into financing options, pay out timeframes, how the deal is structured, and the ideal buyer.


2) Educating Yourself on the Process

Once business owners understand what they want to achieve, it’s imperative to understand the process of getting there. The closest comparison the market has to selling a business is selling a home. Just as first-time homebuyers fare better in the process after homebuyer education, so does the business owner who invests time into understanding the selling process.

Unfortunately, selling a home pales in comparison to the complexity and tax implications involved in selling a business.

Because such a small percentage of Americans sell a business, the information out there on the sale is quite limited. In truth, my own personal frustrations with this lack of resources led to creating ECG. Our consulting firm helps bridge the gap. In addition to partnering with a consulting firm like ECG, interview other business owners who went through the process.


3) Design an Exit Strategy

One of my favorite sayings is, “A dream without a plan is a wish.” Just as you created a plan to build your business, you will need a plan to exit it. It doesn’t happen all on its own.

With your goals in tow, together we can start building out a plan to achieve your version of success. This does not mean that you need to exit today, in three years, or even in five years. All it means is that there is a plan in place, and you are taking steps to give you the option to exit when you want to.

You will exit someday. When that day comes, it’s better to have a plan.

If you want to have your children take over, it’s important to start grooming them now. For companies looking to sell, you need to identify your ideal buyer today. All these factors come into play in the exit strategy.

In addition to preparing the business, which I go more in depth into below, one of the key aspects we start building into this plan is vacation time. As odd as it sounds, we start testing out what the business looks like without you. This helps to build out management structures. I recommend starting out with a two-week trial and over time slowly increasing the time.


4) Preparing the Business

Just like the homeowner who has grown accustomed to the squeaky door and window that doesn’t open, you’ve overlooked a few corners of your business. Much like the preparation to sell a home, the business needs work before hitting the market.

Rather than adding a fresh coat of paint or applying WD40, making a business appealing for prospective buyers proves to be an intensive process. In order to achieve top dollar, the business needs to be in its prime. We need to find all those places that need the business version of WD40 and get them performing at a high level again. This means an honest talk about organizational strengths and weaknesses.

Once we complete foundational work, we start to position the business to appeal to the ideal buyer. Depending on the assets important to your ideal buyer, this could include implementing value drivers, acquiring other businesses, or diversifying clientele.

Other common components of preparing the business consist of working on the organizational structure, fostering leadership within management, and working on financials. Ultimately, the better bow we can put on the business, the better it will do at market. In the business world, this equates to removing as much risk as possible and packaging the business well.


Account for a Business Partner

It’s a likely possibility that you are planning to run this business from your grave. Despite the reality of that happening, many business owners have the zeal and passion to carry them on for a long time yet.

That doesn’t always play out the same for your partner.

In order to protect your investment, it’s essential to have an exit plan in place in the event one of the business owners wants to bow out. There are countless instances that turn a thriving partnership into a bitter dispute in the blink of an eye.

When you add a business partner into the equation, it becomes crucial to address exit scenarios. This starts with a comprehensive buy-sell agreement. It continues with an outlined plan of what would happen if one of the partners needed to exit the business.

Not having this in place leaves everyone at risk, not to mention destroys countless business relationships every day. Dig into more about buy-sell agreements here.


Thinking About Your Business as an Investment

Despite all of this, some business owners will still be hesitant about planning their departure. As an entrepreneur, I know that optimism and hard work make the seemingly impossible possible every day. The thought of leaving behind all that you have created seems improbable.

I’m here to tell you that someday, you will exit. It will either be due to health, unfavorable circumstances, or the sudden realization that you are done. I know because I work with individuals who fit each of those scenarios every day.

My goal is to help you realize that sooner rather than later.

By partnering with ECG in the early phases of planning your exit, we can help you define your success and build a plan to achieve it. Contact us today to see what that can look like for your business.