Ready to Move On? How to Create an Exit Plan for Your Business

Exit plans take into account not only the segueing business owner, but the customers, employees, and investors as well. — Getty Images/FG Trade

An exit strategy is an essential consideration for business owners, yet it is often overlooked until significant changes become necessary. Failing to plan an exit strategy can limit future options for entrepreneurs. To ensure the best outcome for your business, it is crucial to plan your exit strategy well in advance.

What is an exit strategy?

An exit strategy is not only a plan to end a business, but also a roadmap for long-term goals and a smooth transition to a new phase. It involves reimagining the business direction, maintaining financial sustainability, and overcoming challenges. A well-formed exit strategy takes into account all stakeholders, finances, and operations, outlining the necessary actions for selling or closing the business. While exit strategies vary based on business type and size, it is essential to recognize the true value of the business and establish a foundation for future goals and new directions.

If a business is performing well, an exit strategy should aim to maximize profits. Conversely, if a business is struggling, an exit strategy should aim to minimize losses. Implementing a sound exit strategy ensures that the value of the business is not compromised, providing more opportunities to optimize business outcomes.

Benefits of an exit strategy

Developing a comprehensive exit strategy well in advance offers several benefits to business owners:

Making business decisions with direction: By considering the next stage of your business, you can set strategic goals that align with your anticipated outcomes.
Remaining committed to the value of your business: Creating an exit strategy requires an in-depth analysis of finances, which provides a measurable value to determine the optimal selling situation for your business.
Making your business more attractive to buyers: Potential buyers place value on businesses with planned exit strategies, as they demonstrate a commitment to business vision and goals.
Guaranteeing a smooth transition: Exit strategies detail the roles and responsibilities within the business, ensuring that all employees and stakeholders are well-informed and facilitating a clear and expected transition.
Achieving business and personal goals after exit: Executing an exit strategy that aligns with your business’s value and potential can prevent unwanted consequences, such as bankruptcy, and allows you to fulfill your personal goals beyond the business.

Weighing your options: closing vs. selling

When considering your exit plan, you have two primary strategies to choose from.

Sell to a new owner

Selling your business to a trusted buyer, such as a current employee or family member, offers a smooth transition out of the day-to-day operations. Ideally, the buyer shares your passion and continues your legacy. In a typical seller financing agreement, the buyer pays for the business over time. This arrangement benefits both parties: the seller continues to generate income, while the buyer takes over without a significant upfront investment. The seller may also remain involved as a mentor to guide the overall business direction. However, selling to someone you know may lead to compromises on value and potential familial tensions in the workplace. Alternatively, targeting a larger company for acquisition can yield greater financial gains, but merging two cultures and systems may result in layoffs among current employees.

Liquidate and close the business

While it may be challenging to close a business you’ve worked hard to build, it can be the best option for repaying investors and still making a profit. Liquidating the business over time, also known as a “lifestyle business,” involves paying yourself until the business funds run dry and then closing the doors. With this method, you can maintain your lifestyle, but you risk upsetting investors and stunting the business’s growth. Another option is to close the business quickly and sell off assets. While this method is simple and efficient, the funds generated will be limited to the assets sold, and creditors must be paid before you can take a paycheck.

Regardless of the method you choose, certain steps must be taken before closing your business:

File your business dissolution documents.
Cancel unnecessary registrations, licenses, and business names.
Ensure compliance with federal and state labor laws for employee payments during closing.
File final taxes for the business and retain tax records for the recommended duration.

Steps to developing your exit plan

Planning a proper exit strategy requires time, diligence, and care. To create an exit plan that maximizes the value of your business, consider the following steps:

Prepare your finances: Begin by creating an accurate account of your personal and professional finances. Understanding your expenses, assets, and business performance will help you negotiate for offers aligned with your business’s true value.
Consider your options: Once you have a clear financial picture, assess various exit strategies to determine the best fit for your goals and aspirations. Consult with a business lawyer or financial professional for guidance if needed.
Speak with your investors: Approach your investors and stakeholders to communicate your intent to exit the business. Develop a strategy that outlines how they will be repaid. Having a thorough understanding of your finances will provide evidence to support your plans.
Choose new leadership: As you finalize your plans, begin transitioning some of your responsibilities to new leadership. Having well-documented operations in your business strategy will make this transition smoother.
Tell your employees: Once succession plans are in place, inform your employees and be prepared to address their questions. Approach the conversation with empathy and transparency.
Inform your customers: Finally, inform your clients and customers about the changes. If the business will continue under new ownership, introduce them to the new owner. If you are closing the business, provide alternative options for your customers.

Remember, the best exit strategy for your business is the one that aligns with your goals and expectations. If you want your legacy to continue, consider selling the business to an employee, customer, or family member. Alternatively, if a quick exit and a favorable purchase price are your priorities, targeting an acquisition or liquidating the company may be the optimal routes to explore.

CO— aims to provide inspiration from leading experts, helping you make informed business decisions. However, before making any decisions, consult with a professional who can provide personalized advice based on your specific situation.

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