How to Create a Business Exit Strategy

One of the most important strategy pieces overall in business is its exit. All owners desire a seamless transition when stepping away. 

Whether exit comes from selling to private equity, passing the business onto a successor or family member, or closing operations completely, a well-structured exit strategy means the difference between a stress implode or a soft landing. 

Without a solid plan in place, it's easy to face financial issues, legal hurdles,and operational challenges.

Proactively preparing for an exit allows for greater control of the process rather than making rushed decisions under pressure.

Types of Exit Strategies

Business owners have several exit options. Understanding these options helps in selecting the most suitable path:

Initial Public Offering (IPO): 

The IPO takes a company public by selling shares of stock on the market. This can provide substantial capital, but you must go through rigorous regulatory compliance.

Strategic Acquisition: 

An acquisition takes place when you sell to a competitor or a larger firm that is looking to absorb your business. Here, it's all about your market share, brand, or technology. Businesses with better financial prospects are more poised to be acquired for greater valuations than those without. 

Management Buyout (MBO):

This includes selling to current management or employees, which ensures continuity and business stability. The great thing with an MBO is that you are selling to a trusted stakeholder who can effectively take over operations and who knows the ins and outs of the business. 

Succession Planning: 

In succession planning, the business is transferred to a family member or other successor. Succession planning wraps you up in a myriad of estate and tax planning. 

Liquidation: 

Liquidation is more of a last-ditch effort for a business that can no longer operate. It requires halting operations, selling off assets, and although fast will be the least profitable of the options. 

The right exit strategy is going to depend entirely on the business needs, market position and overall options presented. 

When is the Right Time to Create an Exit Strategy?

The best time to craft an exit strategy is surprisingly not right when you are planning an exit. An exit strategy should be prepared in advance, when the company's financials and operations are sound and market conditions are in good shape. When leaders are prepared, it is easy to draft a decent exit strategy. 

Here are some of the pieces of your business to qualify and quantify when formulating an exit strategy 

Business Performance: If your business has good revenue and profitability, this will attract higher valuations and potential buyers and investors. If your company's performance is subpar, increasing operational efficiency is a good idea to bolster your numbers before exit.

Market Trends: There is always a good time to sell and a better time to sell. Selling during high-growth periods in a given industry can significantly increase business valuations. In addition, in economic downturns, valuations may go down across the board. 

Owner Readiness: Ensuring emotional and financial preparedness for departure is vital. All owners must be on board with growth and ready for the plan. 

Operational Stability: A business with clear processes and leadership succession is more appealing to buyers. Those that seem pieced together, or shoddy, may scare investors away. 

Taking a cold, hard look at all these aspects is the first step to knowing where to begin and how to start crafting a strategy that works.

How to Create an Exit Strategy

#1: Define Your Exit Goals

The exit planning process starts with clearly defining your business and personal goals. What are you looking to do? Are you looking to maximize your financial goals, transition the leaders to a family member, or see your company live for many years to come? Setting these goals in advance puts you on a path to know exactly what exit road to go down. 

Here are some factors to consider:

• What is your desired financial outcome? What's your raw number, and how much do you need from the sale to support your future endeavors?
• What impact will the sale have on employees and leaders? How will you communicate these changes, and will you stay involved as an advisor for the time or break all together? 
• What legacy do you want to leave - are you ok running away with cold hard cash and letting whatever happens happen, or do you want your company to continue running under its current name and mission

Defining these short-term and long-term goals early allows you to shape a structured and intentional transition plan that aligns with your priorities.

#2: Prepare Your Finances

Financial preparedness is the foundation of a smooth and profitable business exit. Buyers and investors want a business with transparent financials, stable revenue streams, and manageable liabilities. Proper financial planning includes:

• Audit all financial records and ensure that financial statements are accurate, available, and documented
• Ensure profitability is at optimal levels by looking through the business and identifying cost savings and revenue generation opportunities 
• Clean up liabilities by addressing and consolidating any debts and improving cash flow basis
• Prepare for audits, financial due diligence, and other documents that will be needed, such as tax records and compliance reports potential buyers will ask for. 

Unlock Your Finance Potential

Empower your finance team with expert leadership and strategic support. Whether you need an interim CFO or help developing your current leaders, we're here to elevate your finance function.

Unlock Your Finance Potential

Empower your finance team with expert leadership and strategic support. Whether you need an interim CFO or help developing your current leaders, we're here to elevate your finance function.

Speak with a Fractional CFO

Feel free to reach out to us for a free consultation, no strings attached.

#3: Evaluate Your Options

Once your finances are in order, explore the available exit strategies to determine the best fit for your situation. Consider:

• What are the financial impacts of each option? Some exits, such as an IPO or a strategic acquisition, may yield higher profits, whereas a buyout is more about continuity of the business
• What is your level of involvement post-exti? Do you want to remain with engagement in the business? Do you want a clean cut? 
• What is the market demand and timing of the process? Certain industry trends and business cycles can impact the end result.

Evaluating your options ensures you choose the most strategic path for a successful transition.

#4: Determine Your Business Value

Understanding what your business is worth is critical in negotiating a fair deal. Business valuation involves:

• How is the company's financial health? What are the revenue, profitability, and growth levels at?
• What is the value of intangible assets such as brand reputation, customer loyalty, and proprietary technology?
• Where are industry standards at? Benchmarking against these ensures competitive pricing. 
• Do you have all of your financial documents in a row? Tax returns, company financials and operations records will be carefully scrutinized. 

A well-prepared business is more attractive to investors and can command a higher valuation in the market.

#5: Understand Tax & Legal Implications

Every exit strategy comes with tax implications and legal responsibilities. Company owners should:

• Do you have a trusted tax advisor to speak to about minimizing capital gains taxes from sales and exploring tax-efficient exit strategies?
• Have you had all legal contracts, partnership agreements, and employee contracts? 
• Have you had intellectual property rights reviewed?
• Are you in compliance with industry regulations? These can cause complications if violated during the transition process. 

Proper legal advice and tax planning prevents unexpected liabilities and protects your financial interests.

#6: Choose New Leadership

If transitioning leadership, it's important to have a structured succession plan in place. Steps include:

• Who is a good successor for the business, whether from within the management team or externally
• Who will have leadership over what responsibilities post-transition? This is essential to create stability 
• Have you correctly and directly communicated the transition plan to employees and stakeholders? Maintaining morale and confidence is key. 

A smooth leadership transition helps maintain business operations and reassures customers, investors, and employees.

#7: Post-Exit Financial Planning

Once the business sale or transition is complete, focus on long-term financial security. You're done, success! But have you:

• Developed a secure investment strategy that grows and protects proceeds from the exit? 
• Consider estate planning and wealth management solutions that will secure financial stability. 
• Set your personal and professional goals, whether those are for remuneration, new ventures, or philanthropy.

Post-exit financial planning ensures that the transition is not only successful but also sustainable for the long term.

Example 5-Year Exit Plan

Imagine you're a business owner preparing to exit your company in the next five years. Your goal is to sell your business for the maximum value and leave behind a legacy that continues for years to come. Here is what your 5-year roadmap to exit might be like. 

Years 1-2 

• Conduct a full financial audit of the business
• Identify all the areas you can improve profitability, streamline operations
• By and large, make your business more attractive to buyers
• Engage with a business valuation expert to help better understand your business 

Year 3 

• Evaluate your potential exit strategies 
• Start networking with potential buyers and investors 
• Ensure all legal contracts, compliance documents, and financial statements are in order

Year 4 

• Enter into negotiations with the most interested parties
• Begin consulting with a financial advisor on tax efficiencies 
• Finalize your leadership succession plan 
• Transition employees and stakeholders over seamlessly

Year 5 

• Ownership has been transferred, and it's time to manage the proceeds from the sale 
• Secure your long-term financial stability by meeting with a financial advisor
• Consider future investments, philanthropically or retirement plans.

By taking a structured and intentional approach, you ensure that your business is positioned for a strong exit, allowing you to transition on your own terms while maximizing financial gains.

How a Fractional CFO Helps with Exit Plans

Exit plans come with a lot of different values and scenarios. 

Getting it right can be the difference between targeting the right variables in the right ways. 

A fractional CFO is a trusted advisor who plays a crucial role in ensuring a seamless and profitable exit. 

How? 

• They provide financial expertise and strategic guidance at the same time
• They work hand in hand with you, optimizing financial performance, improving business valuation, and managing your due diligence process
• They ensure financial records are well-kept and accurate 
• They create a complete case for potential buyers and tie up loose ends
• They assist in structuring the exit strategy to tax and market conditions 
• They provide change management and leadership support and work with your successor. 

Beyond the sale, a fractional CFO also aids in post-exit financial planning, ensuring that business owners achieve long-term financial security and make informed decisions about their next steps. 

With their expertise, business owners can confidently navigate the complexities of an exit and maximize their financial return.

McCacken's CFOs Can Help You Plan a Successful Exit

At McCracken Alliance, our CFOs provide expert exit planning services to help business owners develop and execute exit strategies that maximize business value and ensure a smooth transition. 

Whether you're planning a sale, succession, or M&A deal, our team offers advisory services to help you navigate an exit with confidence.

Ready to start planning your exit? 

Contact McCracken Alliance today for professional financial guidance.