What is an Exit Plan?
An exit plan is a comprehensive road map that addresses all of the business, personal, financial, legal, tax and value creation issues involved in transitioning a privately owned business. A comprehensive exit plan provides business owners with a clear strategy to help them exit their business, when and how they choose, to maximize their personal and business objectives.
Your exit plan should be focused on three main objectives: 1) maximizing your company’s value prior to your exit, 2) ensure you are personally and financially prepared to exit your business, and 3) plan for the third act of your life.
Most business plans speak to what a business needs to do to be successful. But the plans often leave out a definition of the end game and rarely incorporate personal objectives. Exit planning is a process, not an event. It should be approached as a way of business.
To be effective, your exit plan must include these six essential components:
- A concise statement of your business goals, personal goals and family/estate goals
- A detailed business valuation to establish a baseline value for the business
- A plan to help you identify specific ways to enhance the value of the business prior to your exit
- An analysis of the pros and cons of your different exit alternatives, such as a third-party sale, management buyout, family succession, or liquidation
- Suggestions to minimize any capital gains, ordinary income and estate taxes related to the exit
- An action plan that details the specific personal and business steps you must take in order to prepare for your exit
Exit planning is a great contingency tool—while no one likes to think about unfortunate life occurrences, a good exit plan includes contingencies for illness, burnout, divorce and even death. Without a well-thought-out survival plan, there could be very serious consequences to the owner’s family, employees and customers. A contingency plan shows the owner’s heirs and advisors what the owner would like them to do with the business should something unfortunate occur. Without continuity in leadership, the business most likely will fail.
Even if your business is in a high growth mode and you have no thoughts of retirement, you still need to deal with the contingencies of a forced exit. Having a plan in place will bring a sense of security to your family, employees and colleagues.