Why You Need a Business Exit Plan
By Pauline Muindi | February 3rd 2021
When you’re starting a business, especially if it is something you’re particularly passionate about, it can be difficult to fathom ever leaving it. Planning your exit can feel counterintuitive. This might explain why as many as 72 per cent of small business owners have no exit strategy, according to a study by Securian Financial.
But believe it or not, one of the best things you can do for your business is planning an exit strategy right from the beginning, especially in today’s fast-paced business world. In fact, experts recommend that you incorporate an exit strategy into your initial business plan.
A business is like any other asset and as such, a smart entrepreneur knows that they can sell it for profit when the time is right. But exiting your business doesn’t necessarily mean selling it – that is just one strategy. Other exit strategies include passing it to a family member, merging with another business, going public, selling it to an inside buyer (management buyout), or liquidation.
With that in mind, here are a few reasons why an exit strategy is an important part of a business plan:
1. It gives your business direction
Without an exit plan, you don’t have a clear end game for your business. Operating a business without an exit strategy is like getting into a bus with no destination in mind. You will end up going in circles. Similarly, you can easily get caught up in the day-to-day tasks of running a business with no specific direction or destination. An exit plan is a crucial tool for guiding your business path.
After defining an exit strategy, every business decision is tuned accordingly. For instance, if you are aiming to merge with another company, you will think about their interests. If you plan to pass the business to your children, you will start preparing them for the role as early as possible.
An exit plan also comes in handy when unexpected events happen. For instance, if you suffer severe injury or illness that forces you to depart early, you can easily ensure the exit strategy is activated without causing the business to lose value.
2. It attracts investors
For entrepreneurs seeking investors, having an exit plan is especially important. Almost all investors will ask what your exit strategy is before they can put their money into your business. The answer you give them can make or break your ability to get an investment. Investors tend to shy away from ventures that do not have an exit plan as it might be an indicator that the entrepreneur is more interested in building a lifestyle business rather than building a potential high-growth venture.
To an investor, an exit plan is an assurance that they will get a return on their investment. This is especially so when an investor is buying equity in a business, not just giving the business a loan. Equity in a business has no market value until the company goes public, is sold, or merged with another company. If you have no exit plan, investors get worried that you might be reluctant to buy them out or provide the return on investment they’re looking for.
Investors also ask founders about their exit strategy to gauge their flexibility and ability to make hard decisions when thinking about risk and return. They want to know if you’re capable of imagining possible scenarios and have a grasp of the business landscape.
3. It attracts buyers
An exit strategy also makes your business more attractive to buyers, which is important if you decide to sell for any reason. Buyers want companies that have a clear vision and end game, and where the founder has adequately planned for their departure from the business. An exit plan also shows buyers that you’re truly committed to selling and are unlikely to change your mind in the midst of transactions.
Additionally, your exit plan will help you identify the ideal time for selling your company for maximum returns. You are also be more psychologically prepared for the transition, have a thorough evaluation of your business’ market value, and negotiate the best deal for yourself and your investors.
4. It helps relieve stress
An exit plan gives you a firm grasp and framework of your expected business lifecycle. This makes decision making much easier for you whenever you hit a roadblock or feel overwhelmed by the daily stress of business operation.
Having an exit strategy also helps business owners to relinquish control and delegate tasks that they don’t like or aren’t skilled at. Exit planning focuses on developing a next-level management team that can take over the reins when needed. This gives the owner more time to focus on the parts of business operations they like or excel at. Business owners also have more time pursue personal goals and avoid burnout.
5. Provides a safety net
Whether you plan to sell the business in a year or die at your desk, having an exit plan assures you that your business will be well-taken care of in case of your untimely demise or incapacitation. This is especially important if your family relies on the business to maintain their current quality of life.
An end game strategy is also important if you would like to create a legacy that outlives you. If you’re worried that your children or significant other aren’t capable of running the business properly, you can put a management team in place for a smoother transition.
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