How to Create a Small Business Exit Plan

Even if a business sale is not within a small business owner’s foreseeable future, it is still of great importance to create an exit plan. With a strong exit strategy in place, the business owner will be able to more seamlessly sell the company to a new owner when the time comes. Not all business owners begin a startup with plans to sell their business, but an exit strategy is still beneficial in the event that something unexpected occurs. An exit strategy will also assist in creating heightened business value when these tactics are implemented. In a perfect world, an exit plan would be built into the business plan of every new venture. Should an attempt at selling the business be unsuccessful, not only will there be a huge loss of profits, but loss of personal wealth as well, since most small business owners have a majority of their money tied up in their business.

The following guide illustrates how to create an exit plan that will prepare for a business sale as well as improve the overall health of the company. It is recommended that exit planning be applied as soon as possible, whether the business was recently launched or is long established.

1. Write it Down

It is one thing for a business owner to consider the possibilities of what they would do in the event of passing the business on to a successor. However, the owner is does not make a full commitment to the exit plan unless it is written down on paper. Create a physical exit plan that can be referred to by others, and confer with all of the business’s owners when writing the plan.

As things within the business change, this document may be amended. It will always be there no matter what the circumstances, and acts similarly to a Will in the business plan.

2. File Under a Certain Entity

Should the company run into financial trouble, it is possible for a business to go bankrupt and then cause bankruptcy to its owner as well, depending on the type of legal entity. Typically, when a business operates as an LLC or corporation, the owner is exempt from being personally affected by a bankruptcy. Avoid filing as a sole proprietorship in order to avoid personal responsibility for the business’s financial well-being. It is beneficial to have a plan in place to exit the business unscathed should anything go wrong.

3. Become Obsolete

One of the best ways in which a business owner can improve the attractiveness of their company to potential buyers is to set up a strong managerial team—that does not include the owner. While the owner may have begun as a vital element of the business, this should not be the case forever. The more that the owner works to make themselves obsolete by setting up a great team beneath him or her, the easier it will be for the buyer to take over the company post-closing, therefore increasing the value.

Along with employing solid managers, it is beneficial to create some sort of incentive for employees to remain with the business even after it is acquired by the buyer. One of the risks that the buyer takes in acquiring a business is whether or not employees will stay. If everyone leaves after they take over the company, then its worth will inherently dive and they will lose money. Therefore, be sure to create an incentive program to ensure that the buyer may retain key employees after the sale.

4. Stay Organized

By staying organized, the new owner will be able to take over with less chaos. Especially because many small business acquisitions are a sale of assets, it will be helpful to the buyer for all due diligence documents to be in order. Making everything as simple as possible for the buyer can cause the value of the company to improve.

5. Get the Business Evaluated

When it comes time to actually sell the company, the brokerage process cannot truly begin until the business’s numeric worth has been evaluated. Consider getting a yearly valuation for the business, so not only will potential buyers know its worth, but the business owner will also be able to gauge important financials. Adding to the business value will only improve profitability, and this can often be done so through such tactics as creating recurring revenues. A professional valuator will know which methods to use when appraising the business, and a quality valuator will also provide suggestions on how to improve the company’s worth.

6. Taxes

Selling a business has tax consequences, oftentimes causing owners to stray away from choosing to sell. However, tax strategies will lessen this burden. Depending on the business structure and the nature of the assets being sold, there may be two tiers of taxes, or only one. Corporations are usually subject to these two forms of taxes, while sole proprietorships, LLCs, and partnerships are typically only taxed once. It may be beneficial to speak with an accountant to determine which tax breaks may benefit a future sale and how taxes may be lowered in the meantime.

7. Invest in a Retirement Plan

Define goals for one’s retirement plan and the exit. Whether a 401(k) may be obtained through the business or the owner decides to put money into an IRA, saving for retirement is vital to creating an exit plan. In order to retire comfortably, one should begin saving for retirement as early as possible, and not dip into any of the savings until the day that one retires. Having some form of income ready will reduce stress during the time of the business sale.

With the exit strategy be built into the day-to-day managing of the company, the goal is to have offers already in the pipeline. When the time finally does arrive to sell the business, the owner will have to do little work seeking out a buyer. With the right strategies in place, the small business will improve in both value and desirability. If you would like to learn more about creating an exit plan or selling your small business, please contact George & Company in Worcester, MA. We are one of the top business brokerage firms in New England, and we would be happy to answer any questions that you may have.