Exit planning is essential if you want to maximize the value of your company prior to an actual sale or transition. Business owners should also have a formal exit plan in place to ensure there is a contingency plan in place in the event of death, divorce, disability, dispute, departure or natural disaster. Look no further than the current COVID-19 pandemic and its impact on so many businesses around the world.
Having a formal exit plan in place provides you with the control to determine how and when you exit your business. It can also provide you with an action plan during unexpected and uncontrollable circumstances such as the recent pandemic.
All businesses will eventually experience a transfer of ownership. It could be an internal transfer to another shareholder, family member, management team or employee group or it could be an external sale to an independent third party financial or strategic buyer. This is where expert exit planning advisory services can help you chalk out an effective blueprint to reduce stress and ensure your personal, business and family goals are met.
The following questions will help you understand why you should be emphasizing the importance of having an exit strategy in place:
- When do I plan to exit my business?
- To what extent is my business attractive to an outsider?
- What risks are my business vulnerable to and is there a risk mitigation process in place?
- Is my strategic business plan focused on short-term revenue growth or long-term business value?
- Am I underestimating or overestimating the value of my company (in the eyes of a potential purchaser)?
- Do I understand the sale process and am I prepared to endure and persevere?
While business valuation supports the exit strategy of your company, here’s how creating a formal written exit strategy can assist you in times of crisis:
Timing your Exit
Thinking about when you plan to exit your business and taking steps towards preparing for that exit will allow you to maximize value before an exit. This will also put you and your business in the best possible condition in the event of an unforeseen incident occurring.
Smooth Operations
Part of having an exit plan includes ensuring that the business has well defined and documented policies and procedures in place. Clearly defined roles and responsibilities for all team members will ensure clear communication and smooth business operations during the transition phase. This will also prove beneficial in the event of an unforeseen crisis situation.
Detect Potential Gaps in Future Value Expectations
As part of an exit strategy, an independent business valuation can help you bridge the gap between what you believe the value to be and the perceived value of your company by a third party buyer. Having an understanding of valuation methodology, key value drivers and various risk factors will arm you with the information required to negotiate the maximum price with a potential purchaser.
Increases Shareholder Wealth
An exit plan with a risk mitigation plan in place will help the business survive and thrive during times of uncertainty. The ability of a business to manage risk, especially in times of uncertainty, will also contribute to maximizing value and increasing shareholder wealth.
Minimizes Tax Impact
Having an exit plan that addresses the tax implications of each exit option (e.g. sale of assets or shares) will allow you to minimize or defer tax liabilities and maximize the net proceeds in your pocket on an eventual sale. Tax planning must be done well in advance to allow for the time necessary to implement all strategies effectively (e.g. meeting the criteria to utilize your lifetime capital gains exemption).
Help Avoid Potential Legal Disputes
A formal exit strategy that involves stakeholders (e.g. business partners, family members, etc.) discussing and agreeing to the value of the business each year will help minimize the risk of a dispute over business value in the event of a potential shareholder buyout/dispute or matrimonial separation.
It is never too early to be prepared for a future transition of your business interest, especially given the potential for unforeseen events occurring such as death, disability, divorce, dispute, departure or disaster. Get in touch with our team of business valuation and exit planning professionals so that you can reap the benefits.