Why Every Business Owner Needs an Exit Strategy

Why every business owner needs to plan an exit strategy

Natalie Roberts, CEO and president of iKadre, a mergers and acquisitions (M&A) advisory for women-owned businesses, emphasized the importance of establishing an exit strategy from day one. “Through my experience leading HP’s $13.9 billion acquisition of EDS and helping countless women entrepreneurs exit their businesses, I’ve learned that the most successful exits begin with the end in mind,” Roberts explained.

It may seem counterintuitive to launch or buy a business while simultaneously planning how to exit it. However, this approach brings numerous benefits, including the following:

• Helps define your goals: If you don’t know where you’re going, you’ll never know when you get there. An exit strategy helps define your business goals and establish what success looks like for you. It provides you with a timetable, complete with milestones toward your exit.
• Informs strategic decision-making: Without an exit plan, it’s easy to get caught up working “for” the business and resolving day-to-day issues. However, with a firm endgame in mind, you have the vision to work “on” the business instead. You can exercise the insightful business decision-making you need to achieve a successful exit that unlocks your business’s full value.
• Enhances your business’s value: Without an exit plan, your business might only have its basic, inherent value when ownership changes hands. You won’t have taken the strategic steps to build extra value, such as creating a self-sustaining operation, developing a strong management team and growing customer relationships.
• Provides a flexible template: Unexpected events — such as significant sales declines, divorces, deaths, staffing crises, health problems and other disruptions — can force businesses to pivot quickly. If you already have an exit plan in place, you can fine-tune it to fit the current situation.

Why you need two exit strategies

We’ve been discussing the importance of an exit strategy, but, in reality, you’ll need to prepare two plans: one for a voluntary exit and one for an involuntary exit.

With a voluntary exit strategy, you’ll know the following:

• Timeline: You’ll know when you want to exit the business — for example, in five years, 10 years or when revenue hits $10 million.
• Successor: You may have designated a new owner, a current manager or a family member.
• Payment details: You’ll already know how much money you want to leave with. Perhaps you’d like a lump-sum payment, a share of monthly profits for the rest of your life or a mixture of both.
• Response to potential buyers: When you have a voluntary exit strategy, you know how to handle unsolicited buyout offers.

An involuntary exit strategy helps you prepare as best you can for unforeseen situations, including the following:

• Illness: If you become ill and cannot work (or cannot work at your prior level), your exit strategy will identify who will take the reins. This individual must be trained and prepared for this eventuality.
• Financial failure: In the event of a catastrophic financial failure, you’ll need to know which positions can be eliminated and which business assets can be sold.
• Burnout: You may experience a business owner’s version of employee burnout and become unable to continue running the company. Your preset plan will designate an interim successor or detail steps to sell the business.

Voluntary and involuntary exit plans will both address the following factors:

• Employee training: Whether your exit is planned or sudden, you must invest in employee training to ensure someone can run the company in your absence.
• Staff reductions: Both exit plans will detail which positions can be eliminated if the business is suffering. This information can also show a new owner how to cut business costs to increase profitability when necessary.
• Asset sales: Both plans will outline what nonvital assets can be sold quickly for cash (or refinanced) in the event of a crisis. A new buyer will recognize these as surplus assets that can be sold to offset the purchase price of your business.

Sidharth Ramsinghaney, director of corporate strategy and operations at cloud communications firm Twilio, noted that an involuntary exit strategy is more than a crisis response plan; it’s a comprehensive risk management framework.

“Smart owners maintain updated data rooms, clean financials and documented processes not just for planned exits but as insurance against unexpected market shifts or personal circumstances,” Ramsinghaney explained. “This preparation typically reduces transaction timelines when speed becomes critical.”

Exit strategy factors you need to consider

Developing a well-rounded exit strategy requires close attention to the following.

1. Know when you want to leave.

For your voluntary exit strategy, set a date in the future and a metric you want to achieve, such as hitting a particular level of company revenue and profitability. If you reach the end date but miss your targets, decide in advance whether you’ll still want to proceed with a sale.

When you have a fixed departure date in mind, your approach to running the business changes. You’ll start thinking both short-term and long-term in your decision-making. You’ll be focused on navigating day-to-day operations successfully while also looking for ways to build more value in your business to make it as attractive as possible to potential buyers.

2. Pinpoint the most likely buyers for your business.

Develop buyer personas — documents that detail the type of person or company likely to buy your business. (These are similar to customer personas, which are developed to identify your ideal customer.) Here are a few examples of buyer personas for various business types:

“By building your business to appeal to multiple buyer types, you create competitive tension that typically delivers higher valuations,” Ramsinghaney explained. “I always advise clients to structure operations and reporting with this endgame in mind.”

3. Develop assets that are valuable to other businesses.

Don’t limit your company’s selloff potential by only considering buyers in your specific field.

Consider this example: You’re an e-commerce retailer; you’ve developed custom software that places your products in prominent search positions on third-party sales platforms. That, of course, would be of great value to a purchaser in your sector.

However, that software may hold even greater value to a technology company, and you could make significantly more money selling or licensing it than selling your business. Additionally, if your company encounters financial difficulties, you could sell the rights to the software to raise cash quickly.

4. Continually improve your business performance.

Keep looking for ways to improve operations and profitability, bringing more customers to your e-commerce or brick-and-mortar store. For example:

• Consider switching suppliers if you’re offered a similar quality product or service that does the job for a lower price.
• Expand your distribution channels to reach more customers.
• Enhance your delivery services.
• Find ways to cut business costs without impacting the customer experience.

Your goal is to add value to your assets and remain efficient. Your competitors can give you some ideas. Where are they doing better than you, and how can you match or beat them to stand out from the competition?

5. Focus on profitable growth.

Achieving profitable growth will impress potential buyers. To do this, experiment with your advertising and marketing methods to achieve lower per-sale costs and boost successful conversions. Your goal is to show future buyers that your digital marketing ROI continually helps you achieve your goals.

Promote deals to customers through email marketing campaigns and short message service messaging, and aim to make as much money as you can on each sale. Always keep your future buyer in mind when setting prices and pursuing new business opportunities.

6. Make customer loyalty a top priority.

Customer loyalty is key to both voluntary and involuntary exit plans. Any potential buyer will value your loyal customer base. And, if a crisis arises, you can raise money quickly with one-time sales to loyal clients.

To establish and retain loyal customers:

• Keep them informed about new products, and give them a chance to purchase before anyone else.
• Use email marketing to follow up with satisfied customers and request positive reviews.
• Encourage user-generated content submissions online.
• Use your social media channels to connect with customers, respond to comments and proactively address problems.

Use customer tracking tools to calculate customer lifetime values and annual spending. Buyers typically look for those types of metrics. They also prefer companies with robust opt-in email marketing lists and text subscribers.

7. Ensure employees can handle running the operation.

The hardest types of businesses to sell are mom-and-pop shops and one-person operations. To a buyer, it’s like buying a job, not a company. It’s also challenging to sell businesses where there are 10 to 20 employees, but the owner is still firmly in charge. It’s like buying the job of a senior manager.

To avoid those situations, ensure an able management team can run things in your absence. Ramsinghaney noted that building a business that can thrive without its current owners will improve your exit strategy and grow profitability.

“This means investing in systems, processes and people that make the business transferable,” Ramsinghaney explained. “Businesses with strong infrastructure and documented processes consistently command valuation premiums over comparable companies.”

Here’s some advice:

• Delegate: Invest in employee training to ensure your team can handle essential tasks and gradually delegate an increasing number of responsibilities to your employees.
• Empower your employees: Empower your staff to make decisions in your absence. If a buyer asks, “Have you spent time away from the business?” you want to be able to confidently and truthfully say something like, “I spent three months in Hawaii and got one update email from the team a week. Everything ran like clockwork.”

Is your exit involuntary, perhaps due to an illness? Then having these measures in place ensures you can step away for a while and still draw money, thanks to your responsible and empowered staff.

8. Consider whether you’ll pass responsibilities to family members.

Some business owners intend to pass their company on to a family member, such as a child. If this is your plan, focus on creating a clear path for bringing them into the business and setting them up for success.

That’s exactly what Justin Eugene Evans, founder and CEO of EvansWerks, intends to do. His son has shown an interest in and aptitude for business, and Evans has a long-term plan for handing over control and stepping down.

“I think one of the worst mistakes that most leaders make is [not knowing] when to let go,” Evans explained. “It’s not about me and my ego, although I have one. I try to keep it in check and remind myself that … I am merely a temporary steward of something bigger than me.”

Not every child or relative will want to take over your business, and they will not necessarily have your skills and aptitude. However, if they’re willing to see how good a fit they are for the business and business management, bring them into the business as soon as you can.

9. Pay down company debt.

Try to pay down as much business debt as possible. If another company takes over at some point, business equipment loans and factoring service agreements cannot be novated. In other words, your debts must be settled by “completion day” (the day you sell your business).

Normally, whatever you owe creditors is subtracted from the agreed-upon price you sell your company for, so you want less debt to subtract. Paying down debt also reduces your monthly servicing costs, resulting in more profit.

10. Set money aside for future fees.

Selling your business can be costly — incurring lawyer fees, accountant fees, professional service fees, broker commissions and more. For a business with $1 million in annual revenue, expect to pay up to $150,000 for a successful sale. If a deal is agreed upon but falls through, you’ll still have to pay your outside advisors and experts.

If your business is struggling financially, having sufficient savings gives you more time to delegate day-to-day tasks to staff and raise cash by selling assets. Reducing payroll costs and finding other ways to save will help buy you even more time.

11. Find ways to reduce risk for the buyer.

Roberts emphasized the importance of conducting a gap analysis to reduce risk for the buyer — whether the exit is voluntary or involuntary.

A gap analysis helps you identify weaknesses or gaps in your business that could lower its perceived value or discourage buyers. By addressing these gaps and reducing risks, you can increase the attractiveness of your business and potentially boost its sale price.

“When the risk is reduced, the multiple goes up,” Roberts explained. “That is a key item on how to create more value. It is not always about the EBITDA. If you can increase the multiple for a client and they listen, then it works the best for the seller.”

Exit strategies for startups vs. established businesses

Startups and established businesses typically choose different ways to exit.

Exit strategies for startups

• Initial public offerings (IPOs): IPOs are a popular exit strategy for startup owners, especially tech businesses that have already gone through a few rounds of funding. With an IPO, your business becomes publicly traded, and you and your investors should all make substantial returns. However, bear in mind that you’ll need to deal with numerous regulations and governance hurdles when preparing for an IPO.
• Strategic acquisitions: Most startup owners sell their companies to larger competitors in the same or related industries. Selling your shares to an acquirer results in a complete transfer of ownership. Startups are often bought for unique assets or innovations rather than profitability or market share.
• Management buyouts (MBOs): In an MBO, your management team raises funds to buy you out. While you may not receive as high a payout as you would with a strategic acquisition, you can rest assured the company will remain in capable hands.

Exit strategies for established businesses

• Merger or acquisition: Established businesses with good profitability and an impressive market share could potentially merge with or be acquired by another company. You may be able to stay involved if you negotiate to keep a seat on the board of your business or the merged company.
• Liquidation: Liquidation is a quick-exit option. It sees you sell off assets, settle existing debts and receive the remaining residual value from your business as income. However, liquidation is typically much less lucrative than a sale or merger.
• Bankruptcy: Bankruptcy is a difficult decision but can be an option if your business faces insurmountable debts. While the process is challenging, you can get financial relief and a path toward recovery. Additionally, some specialist venture capitalist and private equity firms specialize in purchasing bankrupt or near-bankrupt companies.
• Spin-offs: If your business has multiple divisions — whether by geography or activity — you can spin them off into separate entities and sell them. This approach offers a payout while reducing your responsibilities.

Tips for executing an exit strategy

Follow these tips and best practices when executing your exit strategy.

1. Bring in outside expertise.

Your buyer will likely have an advisory team, and you need one, too. You want people on your side who know the intricacies of selling companies and can help protect your interests.

Consider hiring part-time chief financial officers or fractional chief marketing officers well before putting your company on the market. Bringing in experienced, proven talent with broader business connections to your C-suite can help you improve the organization. They’ll be invaluable when executing your exit strategy and demonstrating the hidden but exploitable extra value in your firm.

Ramsinghaney believes a savvy team is crucial in a successful business sale. “Today’s M&A market demands more sophisticated exit preparation than ever before,” Ramsinghaney explained. “Buyers have become increasingly diligent about operational integration risks, making clean operations and strong management teams essential.”

2. Keep your accounts up to date and your accountants close.

Inform your business accountant that you want to be in a constant state of readiness in case you receive a purchase offer unexpectedly or decide to put your company on the market. Once you’ve identified the financial areas of greatest interest to your buyer type, ensure your accountant updates financial reports weekly or monthly and maintains accurate records.

“Potential buyers will scrutinize your financials, so they need to be more than just good — they need to be great,” business lawyer Justin McInerny cautioned. “This means partnering closely with your accountant or bookkeeper to ensure your records are not only current and accurate but also presented in a way that highlights your business’s strengths and profitability.”

3. Hire a corporate lawyer.

Retain a business lawyer, preferably one with M&A experience. Your buyer’s corporate lawyers will vigorously defend their interests. They’ll also try to use the information you provide about your business during the due diligence process to lower the selling price. You need someone on your team to advocate on your behalf.

“Get a good M&A attorney to represent you personally,” Matt Brubaker, chairman and chief executive of human capital advisory firm FMG Leading, advised. “Your firm, your PE firm and others in the deal will have perspectives that are adjacent but not identical to your needs. Take the time to learn the structures and waterfalls and get grounded in what you’re stepping into.”

4. Hire a business broker and M&A advisor.

Opinions differ on the effectiveness of business brokers and M&A advisors for companies with an annual revenue of less than $1 million. If you’re confident enough, it might be worth forgoing an advisor and handling the process yourself.

Still, brokers perform vital functions, like:

• Marketing your business
• Handling initial inquiries
• Verifying potential buyers’ funds
• Helping negotiate price
• Handling bidding wars between interested buyers

Brokers may also intervene during the due diligence stage. During due diligence, the buyer’s lawyers and accountants will ask for detailed information about your company, often over a period of 3 to 6 months. Their job is to help the buyer understand exactly what they’re buying.

Tempers often become strained during due diligence for various reasons. When this happens, brokers often act as go-betweens to smooth relations and keep the deal on track.

5. Create your own data room.

In years past, a buyer’s lawyer would enter a private room at your lawyer’s office called a “data room.” Here, they’d inspect financial and employment records, as well as documentation regarding intellectual property ownership and previous and ongoing legal disputes. Today, most data rooms are virtual, with the buyer and seller’s teams typically exchanging documentation via email.

Create your own online data room as soon as possible and ask your accountants, lawyers and managers to submit updated reports every month. Delays in providing information can frustrate buyers — something you want to avoid.

6. Ensure your current commercial lease is dealt with.

Ensure your current lease will fit into any deal to sell your company. McInerny cautioned that a commercial lease with unfavorable terms can ruin a deal. “A favorable lease can significantly increase your business’s appeal, while a problematic one can kill a deal,” McInerny explained.

Most leases need the written consent of landlords before a lease transfer or reassignment to the business’s new owner can be made. “Landlords often have broad discretion in granting or denying consent,” McInerny noted. “This means your potential buyer needs strong financials and a solid credit history to be considered. Start thinking about this early in the process.”

Short leases can also be problematic and may even devalue your business. “If you’re serious about selling, a long lease term is essential,” McInerny advised. “This might mean negotiating a renewal, even if it means committing to a longer term initially. The understanding is that the new owner will assume the lease.”

7. Support the new owners.

After selling your business, you may want to stay involved for a while to help smooth the transition. The new owners may welcome this involvement to better understand current systems and processes and decide what needs to be changed.

However, returning to a workplace you no longer run can feel strange. Your former team may even look at you differently. That’s OK and completely expected — it’s all part of the transition.

Brubaker emphasized the importance of being seen as the new owner’s most enthusiastic and vocal supporter. “Dogmatic assertions — and, even worse, sabotaging new owners by commiserating with your former team about how ‘out of touch’ [they] are — destroys value 100 percent of the time,” Brubaker warned. “Be part of the future — your earn-out depends on it!”

Running your business like nothing else is happening

Once you’ve settled on an exit strategy, limit your focus on it to no more than 30 minutes per day — even if you have a deal on the table going through due diligence. Instead, concentrate on running your business as effectively as possible to retain and build on the value you’ve already created. Buyers expect this, and they’ll be monitoring the updated information in the data room to ensure their interests are protected.

“Leaders should continue to run their organizations as though they intend to run them forever with an eye on long-term, sustainable value creation,” Brubaker explained.

In other words, keeping business as usual while preparing for the future is the best way to be ready for a voluntary or involuntary exit.