Exiting a business involves a complex mix of strategic, legal, financial, and emotional decisions. For owners of small and middle-market businesses, this process can be particularly daunting—you are the experts on running your business NOT exiting your business! Effective exit planning is an educational process.
Through that process you learn what your exit options are, what steps you need to take to prepare your business for a successful and profitable transition, and how to be personally and financially prepared for this major life change. At the end of the exit planning process, you will be the expert on how to run your business AND the expert on how best to exit it.
Business Assessment & Valuation
- The foundation of a successful exit strategy is a comprehensive assessment to establish:
- The business’s readiness to transition and its current value,
- Ownership’s personal and financial readiness to transition their business, and
- Ownership’s goals.
Once those things are understood, an exit planning advisor can work with you to develop a tailored exit strategy and detailed action plan to achieve your transition goals.
Choosing the Right Exit Option
Understanding and selecting the exit strategy that best aligns with your goals is obviously a crucial step in the process. Generally, your options fall into the following categories:
- Selling to a Third Party: Often providing liquidity and competitive bidding, this strategy is suitable for owners looking for a straightforward exit with potentially higher returns.
- Family Succession: Handing over the business to a family member maintains its legacy and ensures continuity, although it may involve complex family dynamics and possibly a lower return.
- Merging with Another Company: This strategy offers strategic growth and operational efficiencies but may require concessions on control and cultural integration.
- Internal Sales: Selling to existing employees or management can be an excellent way to realize liquidity for the departing business owner and preserve the business’s ethos and continuity while ensuring the team remains motivated and invested.
Each strategy comes with specific benefits and challenges, and the best choice depends on personal circumstances, business conditions, and future aspirations.
Assemble a Transition Advisory Team
Building a Transition Advisory Team is a strategic step that ensures comprehensive guidance throughout the exit process. This team should consist of specialized professionals, each contributing unique expertise essential for a smooth transition. Core advisors include:
- Strategic Exit Planning Advisor: Acts as the quarterback of the team, coordinating all activities and ensuring that every aspect of the exit strategy is synchronized and focused on achieving the owner’s objectives. This advisor provides overarching strategic guidance and ensures that the contributions of other team members align with the overall exit plan.
- Business Broker: Specializes in evaluating potential buyers and maximizing the business's exposure in the market. They assist in finding suitable buyers and play a crucial role in negotiations, leveraging their understanding of market trends and business valuation.
- Accountant: Ensures that all financial records are accurate and up-to-date, aids in tax planning, and provides crucial financial insights during the sale. They are instrumental in presenting the financial health of the business to potential buyers.
- Lawyer: Handles all legal aspects of the transition, from overseeing contract negotiations to ensuring compliance with relevant laws and regulations. Their expertise is vital in protecting the interests of the owner and avoiding legal pitfalls during the sale.
- Financial Advisor: Provides advice on personal financial planning and investment strategies to secure the owner's financial future post-transition. They help in managing the proceeds from the sale and planning for the owner's next life stage.
By assembling this team, the business owner ensures that every component of the exit process is managed by an expert, reducing risks and maximizing returns. The Strategic Exit Planning Advisor plays a critical role in this setup by integrating the efforts of all team members towards a common goal, enabling a strategic, well-executed transition.
Preparing for Transition
At this point you have assessed transition readiness, clearly established your goals, targeted an appropriate exit option, and assembled your team. Now it’s time to create a detailed plan to get the business ready to successfully transition and to implement that plan into action. Here is what you can expect:
- Operational Improvements: Improving operational efficiencies is essential to enhance the business’s attractiveness and functionality. This involves streamlining processes, upgrading technology, and optimizing supply chain management. For example, implementing modern inventory management software or adopting lean manufacturing principles can reduce costs and improve production times, making the business more competitive and appealing to potential buyers.
- Performance Metric Documentation: Accurate and comprehensive documentation of performance metrics is vital for assessing the health and progress of the business. This includes detailed records of revenue growth, profit margins, customer acquisition costs, and employee productivity. By maintaining a robust data tracking system, an owner can provide potential buyers or successors with clear evidence of the business's success and potential.
- Strategic and Process Documentation: Documenting all company strategies and processes ensures that the business can continue to operate smoothly without the current owner’s direct involvement. This documentation should include business plans, marketing strategies, and detailed work procedures for each department. Creating thorough manuals and process maps helps in transferring knowledge to the new leadership, safeguarding business continuity.
- Create an Owner-Independent Business: To maximize value, the business should be able to operate independently of its current owner. This means building a strong management team and developing employee skills across the organization. Delegating responsibilities and empowering employees through training programs and decision-making authority ensures that the company does not rely solely on the owner.
- Personal and Financial Readiness for the Owner: Owners must also prepare personally and financially for the transition. This preparation involves planning for retirement or the next career phase, including assessing personal financial needs, exploring estate planning, and securing health insurance post-exit. Setting personal goals and ensuring financial security can ease the transition for the owner and their family.
- Get Buy-in from Family and Key Stakeholders: Communicate with your spouse, partners and employees about the changes they can expect to go through as the transition occurs. Choosing the right exit strategy means that disruption to your company's operations should be minimal. Just like you must be mentally prepared for this transition, your family, partners, and key personnel need to be prepared as well.
Finally, it’s crucial that the owner is prepared to verify all the aforementioned efforts to prospective buyers or successors. This includes providing financial audits, performance reports, and strategic documents during the due diligence process. Being able to demonstrate the effectiveness of operational improvements, the accuracy of performance metrics, the thoroughness of strategic documents, personal preparedness, and the independence of the business are all key to a successful sale or transition.
The experienced strategic exit planners and business brokers at ACRES can help you successfully navigate the business transition process. We provide you with the support, expertise, and education to make sure you remain the decision maker through your business exit just like you have been the driving force throughout your business’s development and success. Contact ACRES today to talk to one of our advisors.
