This might seem premature, but I've been hearing more about business exit planning lately. I'm about three years into running my digital marketing agency, and while I'm not planning to exit anytime soon, I'm curious about business exit planning.
When is the right time to start thinking about business exit planning? Is it something you should consider from the beginning, or only when you're actually ready to sell?
What does good business exit planning involve, and what are the key things to consider? I'd love to hear from anyone who has gone through this process or knows people who have.
Business exit planning should start much earlier than most people think.
The best time to start business exit planning is when you're not under pressure to sell. Good business exit planning involves:
1) Building transferable systems (so the business isn't dependent on you)
2) Maintaining clean financial records
3) Developing a strong management team
4) Diversifying your customer base
5) Protecting intellectual property
These business exit planning steps increase your company's value whether you sell or not. Think of business exit planning as building a valuable, sustainable asset rather than just preparing for a sale.
I think about business exit planning from day one, but my approach might be different.
For me, business exit planning isn't just about selling the company. It's about creating options. Good business exit planning means building a business that could:
- Be sold to a strategic buyer
- Be sold to a financial buyer (private equity)
- Be passed to family members
- Be taken public
- Continue operating with you as a less active owner
The specific business exit planning steps depend on which option appeals to you most. But all good business exit planning involves making the business less dependent on any single person.
The most important aspect of business exit planning is understanding valuation.
Before serious business exit planning, you need to know what your business is worth. This involves:
- Understanding how businesses in your industry are valued (revenue multiples, EBITDA multiples, etc.)
- Getting professional valuations periodically
- Identifying value drivers you can improve
- Documenting everything that affects valuation
Good business exit planning also involves tax planning. How you structure the sale can have huge tax implications. Many people neglect this part of business exit planning and end up paying more taxes than necessary.
Business exit planning also involves personal planning.
What will you do after you exit? I've seen people struggle with this part of business exit planning. They sell their business, then feel lost without the structure and purpose it provided.
Part of comprehensive business exit planning should include:
- Financial planning for life after the sale
- Thinking about what you want to do next (another business, investing, philanthropy, etc.)
- Considering how the sale will affect key employees
- Planning for the emotional transition
Good business exit planning addresses both the business and personal aspects of the transition.