Guest Post from Don Brown: Smart Exit Strategies Begin with Early Planning

When planning and creating your exit strategy, you should focus on three factors:

1.Short — and long-term objectives. Do you really want to leave the business? Can it survive without you?

2.Stakeholders. Take a look at your employees, investors and any family members who may be involved in the business. What is the talent pool? What does that imply for your exit options?

3.Industry trends and your business model. Are you a business funded by your founders or by profitable operations? Or have you used an outside investor to meet growth objectives? How might industry trends influence the type of exit opportunities available to you?

In today’s global, technology-driven economy, change is rapid. Undoubtedly this change will affect your plan. However, a well-developed exit strategy is carefully connected to your overall business strategy. If you successfully execute your business plan, the opportunity to grow in a manner that is attractive to buyers will create the opportunity to exit — in a number of ways.

Options for exiting a business

There are two avenues for exiting a business. First is internal. Internally, you can gift or sell your business — or do a combination of both — to family members; enter into a buy-sell agreement with partners; sell to current management or senior employees; or liquidate and sell assets. The second exit option is external. Externally, you can sell to either a competitor or third-party buyer; sell to an investor group; or have an initial public offering of stock.

The valuation of your business is extremely important. It can fluctuate over time, due both to circumstances unique to your business and to macroeconomic factors, but it is imperative that you have a good handle on your business valuation. This is especially true if you are planning to retire and will largely base your exit decision on income needs. There are also tax implications for both parties to a deal, and valuation is something the IRS closely scrutinizes.

It is also important that your estate plan and exit strategy be integrated and work in harmony with each other. Too often business owners make the decision to exit a business, put a succession plan in place and have their lawyer draft a buy-sell agreement… only to find out that their exit-strategy documents and estate-planning documents are working in opposite directions.

Deciding when to exit

Planning an exit for a closely held business is challenging for a number of reasons. Timing matters. If you sell when your company is at peak performance, you are most likely to receive the highest valuation. Stability is also important. Are core employees going to be retained, and is the business viable as an ongoing entity? If you are gifting or selling the business to family, can you find a way to be fair to family members without necessarily being equal when it comes to assigning ownership and management responsibilities?

Also, in advance of any plans to sell or retire your stock, and before any agreement or letter of intent is signed, you should establish a trust.

These are just a handful of the considerations business owners face when planning an exit strategy. There are many more, which is why entrepreneurs should consult with a professional early and often in the business planning process, because working with an expert in tax, legal and family issues at the start of your business will make your business that much more valuable at the end.