Not having an exit strategy for your business is risky. So why is it that less than 15% of small business owners have a plan to exit their business? In fact, most owners do not know the value of their business even though they plan to use the proceeds from the sale of their business to fund retirement. Not having an exit plan ccarries significant risk and put your future plans to exit your business successfuly in jeopardy.
Much like the goals you set for revenue or profitability, having a documented plan for exiting your business should be a part of your overall business plan. After all, eventually, the time will come when you exit your business, doesn’t it make sense to do more than give it an occasional thought?
If you still think that you are too busy or that your exit is too far out to take steps toward planning, here are just some of the risks of not having an exit strategy in place.
Risk: Not Taking Steps To Maximize The Valuation Of Your Business
It is very common for business owners to run their business to optimize for cash flow and tax mitigation. While that makes perfect sense today, this strategy can reduce the “enterprise value” which is what the business is worth to a potential buyer. Some business expenses, such as a car lease, can reduce the taxable income generated by the business however, it does reduce profitability which is a measure a buyer will use to evaluate the business.
Proper tracking of discretionary expenses is important and some owners choose to reduce or eliminate such expenses in advance of selling their business to help boost the business valuation. This does not mean eliminating these expenses, if you can identify them to a potential buyer then it should be a matter of adjusting the valuation inputs.
Documentation is an easy way to demonstrate value and the marketability of the business. A prospective buyer wants to know that the business can operate efficiently without you when they step into the role of leading the business. A transition period is generally helpful and something a buyer will request and having well-documented plans, basic information on employees, supplies, and equipment make this transition easier.
Taking these steps well before you plan to exit allows you to be thorough and thoughtful and have a clear understanding of the business metrics and resources that impact your business.
While 85% of small business owners do not have any form of an exit plan in place, 100% will eventually exit.
Risk: Not Finding A Buyer When You May Need One
Timing also is another key factor, selling when the market is strong may not coincide with when an owner wants to sell the business. The next 10–15 years will see an increase in small businesses seeking a buyer as baby boomers “age out” of their business. According to the U.S. Census Bureau by the year 2030, every one of the estimated 74 million baby boomers living in the U.S. today will be over the age of 65. This will have a massive impact on supply and demand – more small businesses will come onto the market allowing buyers to be more selective.
Knowing potential buyers and building those relationships before you are ready to exit may pay off when the time comes to exit. Networking with other business owners in your community and building relationships for those involved with places such as the Chamber of Commerce can help lay the groundwork.
Risk: Adding Stress To An Already Stressful Situation
Transitioning out of a business is a major life event that can be time-consuming and emotionally draining. If factors such as personal health, broader economic conditions, or a family crisis result in the need to exit a business, the compounding effects can lead to stress on top of stress. The result may lead to taking the first offer or a lowball offer in order to get something done and move on.
Exiting a small business is a process and there are a variety of options. Sometimes Plan B or Plan C is the best available option and that is okay. What is important is having something in place so you are prepared for unexpected events or have the opportunity to manage your business to the desired outcome.