Exit planning should begin well before you intend to sell your business. A well-designed exit plan empowers you to leave your business when you want, for the money you need, selling it to the buyer of your choice. Every exit plan is different because no two businesses are alike. But every successful road map contains a couple of key elements. Here’s what you need to know as you draw up your exit planning map:
Value drivers are what make a buyer interested in the business in the first place. These give a business value even when the owner moves on. Though each business has its own unique set of value drivers, there are three that figure prominently in every successful exit plan:
- Quality management: The management team is a key driver of growth, especially in the absence of the owner. If your management team isn’t prepared to undertake daily operations, then you may need to work with your exit planning advisor to search for new management. To recruit, motivate, and retain your current team—or to replace them with better people—you must have a well-designed incentive plan that encourages them to stay following an exit. That plan should list key duties and goals, as well as compensation for managers who meet or exceed these goals. It should also include a cash or stock bonus, as well as a deferred bonus that vests over a period that extends beyond the owner’s departure date.
- The right operating systems: Cash flow must sustainably increase for your business to be an attractive purchase target. That means that you need the right operating systems in place. The right management team can help you devise and implement these systems, then ensure that they persist even after you leave. If you don’t have quality operations already in place, you need to work with an expert planning advisor to implement one.
- Diverse customer base: Businesses that depend on a single customer, a single type of customer, or a very small group of customers can quickly transition from high profitability to heavy losses when a customer or two departs. A diverse customer base protect your business from these risks. It’s also important that your customer base not depend on your involvement. Many small businesses have personal relationships with clients. When the owner leaves, these relationships may deteriorate. So ask yourself how likely it is that your customers will stay if you leave. What can you do to insulate your business against the loss of a few clients? And what can a new owner do to keep customers on board?
Ultimately, your exit plan is about reducing risk. In so doing, you slash the risks you undertake now, while you own your business, and ultimately reduce the risks a potential buyer faces. The goal here should be to build a profitable, sustainable business model that can function well even in your absence. If you’re uncertain how to do that, you need to partner with an exit planner who can help illuminate the path forward.