When Should Owners Develop An Exit Strategy?

Many times an owner of a business, particularly a family owned business, will question when they should develop an exit strategy from that business. It may sound counterintuitive, but the time to develop the exit strategy is when you acquire or go into the business, not at a later point in time when you have to sell due to health issues, and the like.

Most business brokers will tell you that most business owners have only a vague notion about what may happen to the company after they leave. They have no idea how to value the company and no idea what it is worth. They also have no idea of the tax consequences of a potential sale of the business.

An exit strategy may be an outright sale of the company or it may be the sale to key employees. If you have children involved in the business, it may involve some gifting of the shares over time or allowing the children to purchase shares.

However, if you do not know where you are planning to go or how you are going to get there, you are really operating in the dark. You will have no protection in place in the event that you die or are incapacitated and there is no protection for your family members that you may leave behind either. Without a strategy, would your family know if it is appropriate to sell your business or keep it? If selling the business is appropriate, whom do they approach to offer the business to? Do they use a business broker or not? Do they seller finance the deal or not? Is there anything to sell if you are no longer here? What is the most favorable tax method to sell the business?

These are some of the questions that your family would have answered if you developed an exit strategy. An exit strategy should be in writing and needs to be prepared at least five to seven years before an owner (or his or her family) decides to sell the business. This strategy involves shaping the business into a business that will sell and allow you to maximize your return from the business. The plan usually is done with your business lawyer, CPA, estate planning attorney, financial planner and business broker. Each can give you input that is invaluable to plan ahead, especially if you are forced to sell because of unexpected health issues or problems outside of your control.

If protecting your family does not give you the impetus to develop your exit strategy, remember that if you do not have an exit strategy in place, you (or your family) will most likely get much less than they expect for the business or may not be able to sell the company at all.