As Benjamin Franklin said, “If you fail to plan, you are planning to fail!” Would you start a business planning to fail?
Most business owners start their firm with a plan to secure start-up capital, find qualified employees and attract new customers. However, few owners plan their exit. Whether you call it a succession plan (how the business will continue) or an exit plan (how you will exit your business), the concepts are virtually identical. A successful exit requires a successful succession. For simplicity, I will refer to both of these plans as an exit plan. Whether the exit plan is for your business or your client, there are three main concerns.
Why Should a Business Have an Exit Plan?
Unless you intend to work as hard as possible until that fateful morning you wake up no longer able or willing to continue, you need to anticipate your departure and make the necessary plan. Not only will a plan provide a roadmap for your exit; it will also provide a framework to establish the date or event that precipitates your departure. In the absence of a plan, chance, not you, will control your fate, and chance may not be as generous as a plan in determining your future.
Like a champion boxer who fights after his strength has waned, you should not continue as the primary driver of your business when your heart is no longer in the game. If you wait too long, you will become a shepherd driving your business down the tortured road from profitable to break-even as your employees and clients head toward greener pastures. In the absence of a plan, it is likely you will continue to work, hoping for a sign that will only be apparent in hindsight.
A successful exit can be more complex than a successful start. This is particularly true given the reality that health issues or other unanticipated events can always intervene to truncate or even nullify the implementation of an exit plan. It is not enough just to make a plan; it must be structurally integrated to ensure it can be activated at a moment’s notice should a crisis occur. Failing to make an exit plan is to make a journey without a destination. Not only will you never know when you’ve arrived; you may forget why you started.
When Should a Business Have an Exit Plan?
When should you make an exit plan? Now. Why? Here are five reasons why:
- Personal health: Regardless of your age, health issues and other unanticipated accidents and crises are potentialities that can strike at any time, forcing a premature retirement. If that were to happen, you need a concise exit plan ready for activation.
- Commonality of interest: The time when stakeholders of a business have the greatest commonality of interest is when the business starts. After that, stakeholders generally retreat into their own silos. It is easiest to have consensus at the beginning of a business rather than later.
- Time required to implement: It takes time to structure a business to successfully continue after a key person leaves. Whether a business is sold to an outsider or transferred to an insider, the succession of control, direction and image must be accomplished for you to successfully leave without upsetting employees, customers and vendors. How much time is required depends on the nature of your business, how well it’s organized and how connected it is to you. Your business must be in a position to operate without you. If you are the repository for all important information, that needs to change. If your clients look to you as the business, that needs to change. If policies, procedures and systems only work with your guidance, that needs to stop. The day you can stay home and your business continues without a hitch is the day your business has worth to a successor.
- If not now, when: Unlike most plans, the catalyst for an exit plan is a future event disconnected from any definitive time constraint. However, if you don’t have a plan in place when you are ready to leave, it may be difficult, if not impossible, to implement a plan that maximizes your return.
- Clarity: An exit plan facilitates an effective retirement plan. It provides a basis for determining the potential stream of income from your business. It makes any decision to leave less impulsive and less arbitrary, introducing a degree of certainty into an otherwise chaotic event.
What Goes Into an Exit Plan?
A good plan anticipates uncertainty and provides a touchstone for the structural changes required to maximize transferrable goodwill. An exit plan has three major components:
- Preparing for the exit: Articulating the ultimate objectives and goals of the plan, combined with a strategy for managing the expectations of all stakeholders, is the first step. Next, you must evaluate your business with objective honesty to determine its current condition. Finally, you need to determine the structural changes needed to accomplish your objectives. These structural changes include written policies and procedures, stable and motivated staff, up-to-date computer systems and software, organized customer files, and clean financials. A new owner must see the value in your business. It must be clear how the business will make money. The new owner wants a revenue stream, not problems.
- Monetizing the exit: How well you have prepared for your exit will directly affect the amount you can expect from a sale. The plan should provide the mechanics for valuing your business interest. It should provide the framework to determine how you will realize this value over time.
- How to exit: The final component is the “how.” What are the options? The business can be sold to an insider, including another co-owner, employee or family member. It also can be sold to an outsider, such as a competitor. Finally, it can simply shut its doors.
An exit plan is a living document. It must maintain flexibility to change as circumstances dictate. It must be reviewed periodically and modified. It must reflect the changing realities of your business, internally and externally. Only you know when the time is right to exit your business, but the most important aspect is to be prepared!
Editor’s note: Be sure to check out the other articles in our Intuit® ProConnect™ Tax Pro Center’s life changes series.