What is Exit Strategy Planning?

Business owners often put their life’s work into growing their business, taking immense pride in building an enduring legacy for their families and the many stakeholders involved along the journey. Yet when it comes to ensuring their business is prepared for a potential exit, many wait far too long to embrace an exit readiness mindset. Even if you have no intention of selling in the near term, being in a constant state of exit readiness makes you highly attractive to a buyer and helps influence premium valuations.

According to the Exit Planning Institute, nearly 80 percent of business owners have no written transition plan while 50 percent have done no planning at all. Yet at the same time, 99 percent agree that having a transition strategy is critical to the future success of their business. The reality is that all businesses transition; the question is whether the owner wants to dictate how it happens. Failing to prepare puts you at the mercy of unforeseen events like a health issue, untimely death, or heavy downturn in the business or industry. Improving your exit readiness now can help prevent being forced down a path you may not want.

If you’re reviewing offers, you’ve almost certainly missed your opportunity to implement meaningful strategies to increase your valuation, reduce your taxes, and fortify your legacy. Many of these strategies require detailed analysis between multiple professionals on your advisory team, not to mention potential legal structures that need to be in place prior to a sale.

Your transition advisory team

Building a transition advisory team takes time and shouldn’t be cobbled together at the last minute. It is advisable to have your team in place one to two years prior to any meaningful exit decision. Notable professionals to include consist of either an investment banker or business broker (depending on deal size), M&A attorney, estate planning attorney, CPA, and wealth manager. Each of these professionals has a critical role to play in evaluating your planning and helping maximize your exit. To ensure a smooth and collaborative process, it is important that your professional partners have open and clear communication lines, as well as mutually agreed upon roles and responsibilities.

Types of exits

Determining the optimal type of exit requires considering your goals and objectives, your family dynamics, and the priorities of other key stakeholders. Exit options typically fall into two categories: inside and outside. Inside exit options include intergenerational transfers, management buyouts, and sale to employees. Outside usually refers to a sale to a third party, such as a strategic competitor or private equity group. Each of these options carries pros and cons and may present conflicting tradeoffs. To identify the best exit strategy for your business, conduct a thorough analysis of your liquidity needs and acceptable valuation ranges, consider your desire to retain control along with the potential disruption to employees or clients, and ascertain whether you will need to offer seller financing.

Timing your exit

Timing plays a key role in exiting your business successfully. The aggressive rate hiking cycle the Federal Reserve embarked on to combat inflation is a recent event that is very much still with us. This rapid rise in interest rates materially impacted M&A markets and business valuations. Coupled with the many disruptions the pandemic caused, deal volume has been in a downward trend, although showing signs of improvement. Events of this magnitude are largely out of your control but must still be contended with.

The outlook of the economy, availability of financing, and current interest rates all directly impact the number and aggressiveness of potential buyers. While you cannot control these dynamics, you can consider them as you develop your plan. Have you diversified your client concentration such that your top customers do not represent a disproportionate amount of your revenue? Is the next generation of leadership being prepared to take over business operations? Can the enterprise function and retain its value without your involvement? Building maximum transferrable value in any economy begins with addressing these and more.

Start your exit planning now

It may feel counterintuitive to sell when your business is flourishing, but doing so recognizes that buyers demand credible growth prospects and realistic upside. Many business owners hold on too long, settling for a suboptimal exit and negatively impacting their aspirations. If you are approaching the end of your career and seek a successful exit to fund your retirement lifestyle, keep an open mind toward turning your greatest financial asset into the legacy that you deserve.

Reach out to your advisor to learn more about how Coldstream can help you find alignment between your business objectives and personal and family goals, help you build the right team of professionals, and maximize your transferable value.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP^®. CERTIFIED FINANCIAL PLANNER™ and CFP^® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. The Certified Exit Planning Advisor (CEPA^®) credential is issued by the Exit Planning Institute.