Having built a successful company, many owners are ready to leave their business and take on the next challenge. However, many do not have an advanced plan for doing so while ensuring their assets and legacy are secured and protected. In fact, 48 per cent of business owners in the UK have admitted to having no exit plan at all.
With the time, money and energy that goes into creating a business, it’s vital that owners have a proper strategy in place when it comes time to move on, to maximise both company value and to ensure a smooth transition.
So, while there are no drawbacks for a business owner to have an exit strategy, there are several key benefits. Below, we explore why exit plans are vital, the benefits they bring, and what yours should consist of.
Why you need an exit plan
The rapidly evolving needs of a typical business landscape can create unpredictable environments, meaning business owners looking to leave their business must anticipate potential scenarios involving their exit, and ensure their own interests are protected.
Without a plan, owners may be left in a vulnerable position. For many, a large proportion of net worth is tied up in their company. This means that once a decision is taken to exit the business, owners may find themselves in a precarious financial situation without the proper planning to unlock that value and ensure financial stability post-exit.
Aside from financial security, there are many other reasons why an exit strategy should be in place, including circumstances such as partnership dissolution for either personal or professional reasons, changing market conditions, or simply other unexpected business or financial setbacks. In such scenarios, a codified exit strategy sets out a roadmap that safeguards both you as the business owner, as well as other parties involved.
As with anything in business, it pays to plan ahead. Considering the possible future scenarios around your eventual exit from your company, however unappealing, and then planning for the worst means that the business, you as an owner, and all those involved can more easily navigate potentially challenging circumstances. In addition, effective exit planning can avoid costly, protracted and risky legal battles over disputes that might make a smooth, seamless exit impossible.
By building a proactive exit strategy, risks and potential pitfalls can be more easily identified. With contingency plans built around these risks, whether financial, logistical or legal, owners can better position themselves and their interests to mitigate these challenges.
While ensuring a smooth transition and therefore preserving the legacy of your business is of utmost importance, from a business owner perspective, a clear exit plan also helps to extract the maximum value from your investments into the business.
In creating such a strategy, proactive, positive steps can be taken to increase the value of the business and in turn better position it for a successful, smooth exit, while allowing you to maximise your returns. In such cases, a good plan may not only include ways to increase the value of the business, but also the necessary measures for identifying and vetting potential buyers or investors, and steps for conducting a valuation of the business.
What makes an effective exit plan?
A good exit plan should of course determine the factors that are likely to trigger the need for your exit as the business owner, which might be based on personal goals, financial factors, or something else entirely. In identifying these triggering factors, business owners are better positioned to know when and how to take action.
Clearly defining the procedures during your exit is likewise necessary for ensuring the transition is successful in minimising potential conflicts or disputes. This might also include additional agreements or contracts, such as confidentially or non-compete agreements.
In all cases, the exit plan should clearly and specifically detail how the business and its assets will be valued and distributed, ensuring your interests are properly protected during your exit.
Effective exit planning is a complex process, not only in building an initial plan, but also in ensuring it is kept up to date with changing goals and circumstances. It is therefore advisable to work with a specialist in such matters, who can ensure your goals for personal financial freedom are met while preserving the legacy of your business. Along with these obvious financial benefits, a robust, up-to-date exit plan provides priceless peace of mind to business owners, creating a roadmap for mitigating risk and safeguarding your interests.
Yulia Barnes is founder and managing partner of Barnes Law.
More on exit plans
Partial exits: a balancing act – If it’s done correctly, a partial exit can advance your company by introducing new people with different skills and experiences, all the while allowing you to enjoy some of the wealth you have generated