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The Importance of Planning an Exit Strategy for Your Business

Successful small business owners are extremely adept at being flexible, deriving innovative strategies, and overcoming obstacles in their goal to grow and expand their businesses. However, in focusing on the growth of their businesses, many business owners overlook a key aspect of business planning – having an exit strategy in place.

Every business owner must address the future of the business once he or she relinquishes control; therefore, the need for a workable exit strategy is essential. If an owner is unable to continue the business’s operations, failing to properly plan an exit strategy may result in a power struggle, poor decision making by unprepared subordinates, or the business stagnating in the absence of clear direction. After all the effort that goes into growing a business, an owner must avoid negative results caused by not having an appropriate exit strategy in place.

In planning a successful exit strategy, a business owner must first assess the options available. Based on the facts in a particular instance, such options may include the following: (i) transferring ownership to a business partner or family member: (ii) selling the business to an unrelated third-party buyer; (iii) grooming an internal successor; or (iv) dissolving the business and liquidating the remaining assets.

A business owner may choose to transfer his or her business to a business partner or family member. In many instances, such a transfer is based on the transferee’s current involvement in the business. Business owners who choose this option know the transferee personally and trust that person to foster a seamless transition for the company’s management. While many business owners prefer to craft business succession plans that place family members in positions of control, such planning is not always a viable option and may, under certain circumstances, prove detrimental to the business.

Identifying a third-party buyer to purchase the business may be a profitable exit strategy when the business is successful, demonstrates potential for future growth, or offers a valuable product or service. The practicality of this option largely depends on there being parties in the market willing to meet the owner’s purchase price. However, in dealing with a third-party buyer, a business owner may not be able to discern a buyer’s motivations. For example, certain buyers purchase a company just to have ownership of a market share or a particular product. In such an instance, the rest of the business may be closed and employees let go. A business owner planning to sell his or her business to a third-party buyer must be comfortable ceding control and forfeiting his or her involvement in the business’s future.

Selecting and grooming an internal successor is a long-term effort that requires identifying a talented candidate and training that person to manage the business. Ideally, a business owner will have several individuals from which to select a successor. Once a selection is made, the owner must commit to provide appropriate resources and training necessary to develop skills required to successfully run the business. It may also be effective to couple these efforts with appropriate employee incentive plans.

MendenFreiman has years of experience advising business owners about their exit strategies. We are especially adept at considering the unique aspects of a business in tandem with the business owner’s personal financial and estate planning objectives. Whether it is a sale of the business to a third-party or key person, or a tax-savvy transfer of the business to the next generation, MendenFreiman can help the business owner develop and implement the optimal exit strategy to achieve the owner’s objectives.

If you have questions about planning an exit strategy for your business, contact us today.

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