Thinking about exiting your business should not stir up doubt and trepidation. With a solid exit plan, you can head into the next chapter of your life with confidence, ready to take on whatever comes. We understand that exit plans can be enigmas if you have never considered one before, so let’s go over some questions you may have.

Why Do I Need to Have an Exit Strategy?

Having a plan is important for a few reasons. When you exit your business, you will need to think about income, capital gains, and gift and estate taxes, and a good strategy can help you minimize those cash outlays. An exit strategy can also improve your investment outcomes. If you know when you’ll be leaving the business, you can plan your long-term investments with that deadline in mind. An exit strategy can also help you boost your business valuation. You and your advisors can implement operational changes, sell assets, negotiate debts or do anything else that will enhance your business value.

When Do I Need to Create an Exit Strategy?

Ideally, you will begin strategizing for your exit the day you start your business. For those already in business, we recommend you have your strategy outlined and operational a decade before your anticipated transition. This will give you time to build value, find a successor, discuss the changes with clients, tie up loose ends and mentally prepare yourself for what is to come.

How Will My Business Be Valued?

Your business can be valued in many different ways. Some methods look to the value of your underlying assets. Others focus on earnings. Others compare your business to industry benchmarks, and others look at cash flows. If you know how your business will be valued, you can focus on what truly matters to the calculation to ensure the best result. The best valuation method for you will be the one that most accurately reflects the economic value of your business, and your tax advisor can help make that determination.

What Factors Should I Consider When Exit Planning?

You and your business advisor should take into account the following factors when establishing your exit plan.

• Timing

Know when you want to leave your business. You and your advisor can then reverse engineer objectives that will help you reach that conclusion.

• Desired Outcome

When the time comes, will you want to walk away with no ties to the organization? Will you want to stay on in an advisory role? Would you prefer to slowly transition ownership over many years? Your exit plan should begin with the end in mind.

• Business Cycle

Pay attention to your business cycle. If you exit when business is trending up, you can demand a higher valuation.

• Market Desires

If mergers and acquisitions are common in your industry, you will have plenty of buyers to choose from and may be able to demand a high selling price.

• Flexibility

Your exit strategy does not need to be written in stone, but some strategies will function better if you see them through to the end. If you think your goals or financial needs may change, opt for an exit strategy that is more forgiving.

• Feedback from Others

Get feedback on your plan from your co-owners, your successor, your employees and your trusted business advisors. Their buy-in and input will help ensure that the exit goes smoothly.

• Your Post-Sale Needs

What adventure will you be embarking upon once you exit your business? Your exit plan should address your future cash needs and future tax position.

How Do I Determine the Optimal Exit Strategy?

There are countless ways to exit a business, and each method will produce different financial outcomes. If you want to pass your business on to the next generation, consider gifting your ownership interest to your children or grandchildren. If you want to bring others on board as you slowly transition out, you can consider an ESOP or an Initial Public Offering. If you want a quick exit, you can liquidate your company or sell it to an interested buyer. Only you and your business advisor can determine the best path forward, so do some digging now to ensure that you’ll be ready when the time comes.

Landmark offers business advisory services and performs business valuations to prepare small business owners for their exit. If you’d like to learn more, reach out to us soon. We look forward to hearing from you.