Q&A: What Is an Exit Strategy, and When Should an Owner Think About One?

Every owner eventually leaves the business, whether by selling it, passing it on, stepping back or closing it. An exit strategy is simply a plan for how that will happen. Many owners avoid the subject because it feels distant or uncomfortable, yet the plan shapes decisions made years earlier. Here are answers to common questions. This is general information; an attorney, accountant and financial advisor should help with any real plan.

What does an exit strategy actually include?

At its core, an exit strategy answers a few questions: When do you want to leave? How do you want to leave? What do you need financially from the business when you do? What should happen to the company, its employees and its customers afterward? The plan then works backward to identify what has to be true for that outcome to happen, such as the business running without you or reaching a certain level of profitability.

What are the common exit options?

• Sale to an outside buyer. A competitor, a larger company or an individual buyer purchases the business.
• Sale to employees or managers. Key employees buy the business over time, sometimes through financing arrangements or an employee ownership structure.
• Family succession. Ownership passes to the next generation, often gradually.
• Sale to a partner. A co-owner buys out the departing owner, often under a buy-sell agreement.
• Bringing in an investor. An owner sells part of the business and steps back over time.
• Winding down. The business closes and its assets are sold. For some businesses, that is the most practical option.

When should I start planning?

Earlier than you think. Many advisors suggest beginning several years before you hope to leave. Making a business attractive to buyers or ready for a successor takes time: cleaning up financial records, reducing reliance on the owner, documenting processes, strengthening the management team and resolving legal loose ends. Tax planning around a sale is also often more effective when started well in advance. Even owners who never plan to leave should consider what would happen if illness or an accident forced them to step away suddenly.

How is a business valued?

Valuation depends on the industry, size, profitability, growth, risks and the type of buyer. Common approaches look at earnings, comparable sales of similar businesses and the value of assets. Buyers generally pay more for businesses with recurring revenue, diverse customers, strong teams and clean records, and less for those that depend heavily on the owner. A professional valuation can give you a realistic starting point.

What is a good first step?

Write down what you want: your ideal timeline, your financial needs and what matters to you about the business’s future. Then talk with your accountant, attorney and financial advisor. Next, identify the biggest gaps between where the business is now and what a buyer or successor would want. Closing those gaps tends to make the business stronger and more enjoyable to run, whether you exit next year or decades from now.