Planning for Life After Your Business: Developing a Successful Exit Strategy

Photo by Alex Holyoake on Unsplash

Business owners pour themselves into running their companies; sacrificing time, investing capital and putting their blood, sweat and tears into a business they can be proud of. 

Even with a carefully thought out business strategy and development plan, a lot of entrepreneurs neglect the final chapter of their story: the exit strategy. 

According to a 2018 UBS report, 48 percent of business owners have no exit strategy in place. What’s more, most of those surveyed in the study don’t fully understand what it takes to develop one. 

Truth is the vast majority of business owners are so busy building their companies into viable entities and addressing day-to-day operations that they postpone the critical task of planning their inevitable exit, and often fail to take into account what a stressful, sensitive process it can be. 

For purpose-driven brands and conscious companies, the exit strategy process may be even more important — especially if the owners want their business to continue on in its mission after their exit, which requires the transfer of ownership and leadership. 

A successful exit strategy — one that provides appropriate compensation, offers peace of mind and a sense of accomplishment — is dependent on forethought. Having a solid plan in place early on can help ensure a favorable future for you, your business and your employees. 

How to Develop a Successful Exit Strategy

While your exit strategy may be dependent on external factors, like the economy, personal finances and family matters, preparing in advance can help you avoid what’s referred to as a “forced sale” — selling because you don’t have any other options and won’t be able to continue operating  if you don’t. 

Start by exploring the options available to you and your business. Consider the following steps as you develop your exit plan: 

1. Plan Ahead 

Here’s the thing about exit strategies  — they often require a lot of preparation to implement. A successful plan can take anywhere from 5 to 10 years to implement all the identified steps, procedures and processes necessary to allow an owner to exit on their own terms. Getting an exit strategy in place early on can help you identify which actions you can complete along the way and what will need to wait. 

2. Know Your Worth 

Do you know what your company is worth today? It’s important to prepare and understand the state of your finances — both personally and professionally — and their market liquidity. Acquiring a formal business valuation can help you estimate the economic value of your interests in the company.

3. Consider Your Options

This step is especially important when your goals are to protect your company and its mission, vision and values. Knowing how you plan to exit will dictate how you get to that point. Are you trying to sell the company for the highest profit? Do you want to transfer it to a family member? Do you want to take the company public? Different exit strategy options have their own set of hurdles that you’ll need to maneuver to reach your goal. 

ESOPs
For owners who are concerned with preserving key facets of their business — like company culture, independence management teams and employees — Employee Stock Ownership Plans (ESOPs) are a viable option. 

ESOPs not only provide retirement contributions to participants but they can create a liquidity event for owners, defer or avoid capital gains, reduce or eliminate the company’s future income tax liability and can generally be a powerful tool in succession planning.

CO-Ops
Another option for business owners who wish to prioritize their workers, communities and core values is converting their company into a cooperative. 

Co-op conversions are similar to ESOPs in that they are employee-owned and have comparable tax benefits but they are less expensive to restructure. Additionally, co-ops are built around employee engagement through governance and profit sharing.

Perpetual Purpose Trusts
Another alternative for business owners planning their exit strategy are perpetual purpose trusts (PPTs).  A purpose trust has no beneficiaries; rather the beneficiary is the mission of the business itself. 

Through acquiring common stock, PPTs prevent the business from being sold, making it permanently independent while also removing pressure to maximize short-term profits and exit value for shareholders. 

Private Equity
At EPOCH Pi, we help business owners with minority control find and vet aligned private equity investors. Often, purpose-driven companies are reluctant to engage private equity firms and investors because selling into private equity means relinquishing majority control. 

In addition to legal documents surrounding the sale, moral clauses can be included in the transaction structure to help safeguard mission, company leadership or corporate culture. 

4. Set Achievable Goals 

Depending on how you plan to exit, you will need to set measurable personal and business objectives to arrive at your desired result. Understanding what your retirement goals are and what you need to do to reach them will be an important personal step towards a strategic exit. On the business side of things, getting your company ready to hand off to the next owner will be crucial — set realistic, time-bound targets to hit in the months and years leading up to your departure. 

When building a business is your life’s work, it can be tough to think about what will happen to your company without you at the helm. But what’s even harder is trying to put together a successful exit strategy in a pinch, when you finally feel ready to step back. Developing a sound exit strategy is an essential step to achieving clarity and peace of mind as you begin the process of moving on to new endeavors.  

The exit process isn’t an easy one, and whether you’re looking to sell, merge or create an ESOP, EPOCH Pi can help you identify your best options. As a B Corp investment bank, we take a values-driven approach to every corporate transaction, helping conscious companies survive and thrive even after the deal is done. Contact us to discuss your exit strategy today.