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The Importance of a Written Exit Plan

The Importance of a Written Exit Plan

| November 13, 2019

It’s very useful to create a written business plan when starting a business or growing a business once it is established and profitable. Creating a written plan forces the business owner to think about goals and the steps necessary to accomplish those goals. It’s equally useful to have a written plan when exiting the business, so it’s unfortunate that more business owners do not focus more on the planning part of a business exit.

Without a written plan for a business exit, unintended outcomes can occur in three different aspects of the sale: money, time, and business succession. Here’s how each of these can be affected by a failure to plan ahead.

A Written Plan Helps Limit Financial Risk

One reason creating a written exit plan is perhaps even more important than creating a business plan is that many owners are moving towards the retirement phase of their lives when they think about exiting their business. As people age, the risk goes up for unexpected life events like illness, disability, or death. It’s also true that aging can affect how well owners can adjust to a changing or challenging business environment like a recession or a rapidly changing industry. Every owner should consider what would happen to their company if they were to experience an unexpected life event, and then plan for it in writing. This is a very good way to make sure that the company – and the people who are employed by it or will manage it – can survive and thrive.

If an owner fails to adequately plan for an exit, unforeseen circumstances can also affect his personal finances. A sudden illness or death could leave family members in a real financial bind if no one has been trained to assume leadership.  If the owner intended to sell the company and retire on the proceeds but didn’t address any glaring weaknesses the company has, it might never sell at all. This is true even if the owner is alive and healthy.

Planning Helps Owners Maintain Control of their Time

Going into the exit process, few owners really understand what they are facing. They may not realize how much their company means to them personally. Or they might decide they want to leave their business a lot sooner than they’d planned. Without taking stock of their situation, it’s hard to know how an exit will feel.

Without any planning, the process of selling a business can quickly get outside the control of an owner. For example, he may find that his company is too owner dependent and will not receive offers that will enable him to retire without a significant downgrade in lifestyle unless he remains with the company during the transition. For owners who wait to sell until they are completely burned out or have physical restrictions, learning that they will have to continue to work even after the sale – without being “the boss” – is a shock and a hardship.

Sometimes owners get into the exit process and decide that they do not want to leave. Planning is still valuable. Many owners can, with some time and effort, divest themselves of duties they don’t like and keep the ones they do so that owning and running the business is less stressful and more enjoyable for them.

A Written Plan Can Help Maintain a Legacy

For owners who want to determine who will be running their companies after their exits – such as parents who want to pass leadership onto their children – planning is vital. Often the next generation needs to be mentored and groomed to take over. That can take years. For an owner who has a strong emotional investment in the company and it’s legacy, it’s worth it. That legacy may involve family. It can also mean ensuring employment for loyal workers or keeping a business that’s vital to a local economy going.

No one can guarantee that their company will be run the way that they would run it after they have left. An owner who spends time putting good management into place, ensuring that key positions are filled with capable people, establishing policies and procedures that every employee knows and follows, and making the company profitable is much more likely to see the company succeeds into the future. Training people with similar values and goals to lead helps too.

Creating a written plan is the first step of the long process of positioning a business for a successful sale. It’s a crucial step, however. No owner should skip it. Once an owner has carefully considered his goals and determined what his business is worth, he can work with an exit advisor to design strategies that will strengthen the company, secure management, and grow its value. If an owner wants to navigate a sale process with as few surprises as possible and realize the highest possible sale price, planning is essential.

If you are a business owner who is considering an exit and would like to see how exit planning can help limit risk and increase value, contact us today. The sooner you begin, the more control you will have over the outcome. We can help navigate you through this challenging process.