Why Every Business Owner Needs an Exit Plan

An exit plan may sound like something that a business owner needs to create only when he or she is ready to leave the business. It can be, but it is also necessary at other points in the business cycle. When a professional investor or private equity group buys or helps to start a business, one of the first things they want to know is “what is their exit?” They will not invest without an exit strategy.

Why then, is the exit plan often the last thing a business owner thinks about? Everyone is going to exit sometime… it’s just a matter of when and how.

The 5 D’s

Peter Christman, one of the icons in the exit planning business and the founder of the Exit Planning Institute, emphasizes the importance of becoming what he calls a “Master Business Owner” — someone with a “Master Plan.” To quote Peter, “The 5 D’s (Death, Disability, Divorce, Distress, Disagreement) can happen to anyone at any age. My advice is to follow the guideline: if you’re human, if you have a heartbeat and if you own a business… well, then you need to start Master Planning.”

Exit planning is the process of maximizing enterprise value, not just revenue. It is the process of de-risking your business so that if you decide to sell it is more attractive to a potential buyer. It is the process of preparing your business and yourself for the possibility of the 5 D’s. (A frightening statistic: 50% of businesses fail after the death of the owner.)

Improving your image

One other reason that an exit plan is important — competition among buyers is fierce, as baby boomers retire and try to sell 4.5 million businesses for a combined $10 trillion. As fellow Axial member, Gary Ampulski describes, there is nowhere near the amount of equity in the market to close so many deals. Only the best deals will get transacted. The rest will languish.

So how does your company look to a potential buyer? With a clear exit plan it could look a lot better, with a lot less risk. It can also be ready for sale at a moment’s notice — whether because of an unsolicited offer or one of the 5 D’s.

Crafting a “Master Plan”

So how does the business owner go from working in the business to a Master Business Owner who works on the business?

Think of it as a process that has 3 phases, each dependent on one another —much like a 3-legged stool. The stool cannot stand without all the legs.

Phase 1: Get a valuation

The first phase starts with getting market valuation for your company — what a willing buyer will pay a willing seller. It does not need to be an expensive multipage document; this is just a starting point.

In my experience, there is often a huge disconnect between the real value of a company and the business owner’s perceived value. Imagine how this affects someone who wants to retire next year and thinks his company is worth $5 million, but when he goes to sell all of the offers and the valuation are only $1 million. Can he retire? Probably not! So get a valuation! The best way to do this is to hire an advisor with experience in the process (the Exit Planning Institute can recommend someone in your area).

Phase 2: Maximize company value

This advisor will also ask you many questions about your business, with the aim of developing a plan to maximize your company’s value. Together with the advisor, you can develop a profile on where you stand compared to what buyers are looking for. Then you can act to improve any weaknesses and emphasize your strengths.

You might be able to do this yourself, but do you have the experience to know what the right questions are? And are you willing to take the time? Everyone operating a business needs to know the factors that add to business value and the factors that are dragging down business value. Studies show that working on these things can significantly improve the value of a business.

Phase 3: Get your personal financial plan in order  

The final phase is personal financial planning. This may include working with financial planners, estate planners, and tax advisors. Collectively, they will help put on paper what you will need in retirement and how to achieve it most efficiently.

Part of this phase is one many business owners ignore: the life plan. Wills are often neglected because the business takes all of the owner’s time or they do not want to face their own mortality. But it is critically important: People who refuse to form a will end up with someone else controlling the outcome of their estate.

There is going to be a lot of competition for equity dollars as the boomers decide to sell and retire. Do not be one of the 83% of business owners without a transition plan or one of the 49% who have done no planning at all. As the old joke goes, in the land of the blind, the cyclops is king. So start planning now and become a Master Business Owner in charge of your own destiny.