Navigating the Business Exit Strategy Maze: Dos and Don’ts for a Smooth Transition

November 1, 2023

Navigating the complex process of exiting a business you’ve spent years building up can feel like you’re trapped in a maze with no clear path forward. In Woodbridge International’s 30 years selling mid-sized businesses, we’ve seen first-hand how not having a clear path ahead can cause massive stress, frustration and even derail the sale of your business.

You can avoid the common pitfalls and make informed decisions every step of the way by crafting a smooth transition for your business exit strategy from the outset. We’ve put together this guide to help you do just that.

Why Have a Business Exit Strategy Before You Sell Your Business?

Whether you’re retiring, pursuing new opportunities, or simply ready for a change, having a well-defined exit strategy before you put your business on the market is crucial. Without a business exit strategy, you risk leaving money on the table, encountering legal and financial obstacles, or facing an uncertain future for your business and its employees.

Having a clear plan in place also allows you to maximize the value of your business, ensure a smooth transition, and protect your personal and professional interests. For mid-sized businesses in particular, it is important to have a plan in place to reduce the business’ dependence on you, the owner. Ultimately, knowing that there is a clear roadmap to guide you through this process provides peace of mind for you, your employees and stakeholders.

The Different Types of Business Exit Strategies

When it comes to exiting your business, there are various options to consider. The right choice will depend on various factors, such as your goals, financial situation, and industry dynamics. Here are some of the most common types of business exit strategies:

1. Selling Your Business: This is perhaps the most straightforward exit strategy. It involves finding a buyer who is willing to purchase your business. Selling can provide a significant financial return, especially if your business is profitable and has a strong market position.
2. Merger or Acquisition: Joining forces with another company through a merger or acquisition can be an attractive option. This strategy can provide synergies, economies of scale, and access to new markets. It can also be an opportunity to secure a leadership position in your industry.
3. Succession Planning: If you have family members or employees who are interested in taking over the business, succession planning might be the right choice. This option allows for a smooth transition and the preservation of your business’s legacy.
4. Initial Public Offering (IPO): For businesses with high growth potential, going public through an IPO can be a viable exit strategy. This path allows you to raise capital, increase liquidity, and provide an opportunity for investors to participate in your business’s success.
5. Employee Stock Ownership Plan (ESOP): If some or all of your employees have indicated they would like to have an ownership stake in the company, ESOP may be a viable option. ESOP essentially gives workers ownership interest in the company in the form of shares of stock. A massive benefit of ESOP is that it incentivizes employees to “give their all”, as they literally have a stake in the business and will reap financial rewards if they outperform. If structured properly, there are significant tax benefits for the shareholders and ongoing operating company.
6. Liquidation: In some cases, liquidating the business and selling off assets may be the only option. This strategy is typically chosen when there are no buyers or viable alternatives available. While it may not yield the highest return, it allows you to wind down the business in an orderly manner.

Dos and Don’ts For Planning Your Business Exit Strategy

Planning your business exit strategy requires careful consideration and attention to detail. To ensure a smooth transition, here are some dos and don’ts to keep in mind:

Dos:

1. Start Early: Begin planning your exit strategy well in advance. Ideally, you should start preparing at least three to five years before you intend to exit. This gives you enough time to address any weaknesses, increase the value of your business, and attract potential buyers.
2. Seek Professional Advice: Engage with experienced professionals, such as business brokers or mergers and acquisitions specialists, and their lawyers and accountants who specialize in business exits. These professionals can provide invaluable guidance and help you navigate the complexities of the process. If you’re not sure whether you need a business broker or M&A specialist, or what the difference is between the two, read ‘Business Broker vs. Mergers and Acquisitions Specialist: Which One Do You Need?’.
3. Conduct a Business Valuation: Understand the value of your business by conducting a thorough valuation. This will help you set realistic expectations and gain an understanding of fair market value. Consider both financial and non-financial factors, such as market conditions, intellectual property, and customer relationships. Most importantly, understand and know how to calculate your business’ EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which is the key financial metric buyers and private equity groups use to measure a company’s profitability and cash flow. Remember that M&A experts can assist with a business valuation for your company, including calculating your business’ EBITDA. Woodbridge International offers free business valuations for businesses with an annual revenue of $5million-plus (find out more here).
4. Maintain Confidentiality: Keep your plans to sell or exit your business confidential, at least until it is officially up for sale. Prematurely disclosing your intentions can create uncertainty among employees, suppliers, and customers, potentially leading to negative consequences.
5. Focus on Financials: Ensure your financial records are accurate, up-to-date, and well organized. Buyers will scrutinize your financials during due diligence, so it’s crucial to have clean and transparent financial statements. Seek the assistance of an accountant to ensure compliance with accounting standards and tax regulations.

Don’ts:

1. Neglect Your Team: Your employees play a vital role in the success of your business. Don’t overlook their concerns and needs during the exit process. Once you’ve announced your intention to exit the business, be sure to communicate openly, address any uncertainties, and provide support to ensure a smooth transition for both your team and the new ownership.
2. Rush the Process: Exiting a business should not be a hasty decision. Take the time to explore all available options, weigh the pros and cons, and make informed choices. Rushing the process can lead to costly mistakes or missed opportunities. However, once you start the sales process it is crucial to stick to a timeline because “time kills dills”. This is why Woodbridge International has a strict 150-day deal timeline in place. Hear why this strict timeline is so beneficial directly from our clients here.
3. Overestimate Your Business’s Value: While it’s natural to believe your business is worth a substantial amount, be cautious of overestimating its value. Conduct a realistic valuation and seek professional advice regarding fair market value. Unrealistic expectations can deter potential buyers and prolong the exit process. This is why it’s best to have a value assessment done by an experienced M&A firm. If your company has an annual revenue of $5 million plus, you qualify for a free valuation from Woodbridge International. Book your appointment now.
4. Forget About Tax Implications: Taxes can significantly impact the proceeds from your business exit. Consult with a tax advisor to understand the tax implications of different exit strategies and identify opportunities for tax optimization. It’s important you have an understanding of net proceeds from the transaction after taxes and fees.
5. Neglect Post-Exit Planning: Don’t forget to plan for your life after exiting the business. Consider your personal goals, financial security, and potential involvement in new ventures. Creating a post-exit plan ensures a smooth transition into the next phase of the business owner’s life and provides financial stability. This is why Woodbridge International works with wealth management experts, who assist our clients to manage the financial aspect of their retirement or next venture after selling their business.

By following these dos and don’ts, you’ll be well on your way to crafting a successful business exit strategy. However, there are still several crucial steps to consider in more detail, from choosing the right time to exit your business to setting up your business for post-exit success. We cover all this and more in our follow-up article “Business Exit Strategy: The Key Steps To Take Once You’ve Decided To Sell Your Business”.

Need more advice on how to start planning your exit strategy? Make an obligation-free appointment with one of our expert M&A experts here.