How to develop an effective exit strategy for your business
Adobe
First, the bad news: Only 20% to 30% of business owners who attempt to sell their business will be successful.
Why will the majority of business owners fail to sell? Because they didn't understand what buyers were looking for. They don't have a business exit strategy—or a clear exit strategy for business.
It takes focused effort to prepare a business that is attractive to buyers and ready to sell. Many owners mistakenly believe that because the business works well for them, it will easily sell. The statistics are clear—that's not the case.
An exit strategy for business isn't a simple transaction, like selling a house. It's not something you figure out at the last minute. It's a well-thought-out plan that starts years before you're ready to leave.
Here's the good news: Businesses that are attractive to buyers and ready to sell are usually:
- Healthy and profitable.
- Fun to run.
- Free from daily stress (well, most of the time!).
You can build that kind of business now, even if you don't plan to exit for another 10 years.
The three-legged stool of a business exit strategy
Peter Christman's concept of the "three-legged stool" is an excellent way to approach planning. It emphasizes creating the life you want—not just preparing for a sale.
#1 Personal plan and vision
This leg is all about you and your family. Ask yourself:
- What do you want life to look like while running your business?
- What are your goals after selling it?
Many owners vaguely talk about travel, grandkids, golf, and sailboats. But most entrepreneurs need a clear post-sale vision for where they'll channel their energy and creativity.
Pro Tip: Develop a clear personal vision for your "next chapter." Without this, the majority of owners will undermine their own sale when the time comes. Without a strong "pull" into the next chapter, an exit strategy for business starts to feel like a "push." And owners instinctively resist feeling pushed.
#2 Financial plan—define your 'freedom number'
What will the next chapter of your life cost? This is your Freedom Number—the financial amount needed to fund your post-sale goals.
Steps to take:
- Work with a financial planner experienced in business exits.
- Plan for tax mitigation (the IRS can take a hefty portion of your sale if unprepared!).
- Ensure your Freedom Number aligns with your business valuation.
#3 Business contribution
The third leg focuses on how your business supports your financial and personal goals. Key considerations include:
- Regular investments to build long-term value.
- Deciding whether you'll sell all at once or divest over time.
- Evaluating your business value through a professional valuation.
If your business isn't worth what you need, focus on the areas that will boost its value—such as diversifying revenue streams, improving processes, or reducing owner dependence. These are essential elements of a strong exit strategy for business.
Why timing is critical when selling a business
Selling a business typically takes longer than expected. Here's why:
- Timeline to sell: Finding a buyer and closing the deal takes 9-18 months.
- Earn out periods: Buyers often require sellers to stay on for 1-3 years post-sale to ensure smooth operations.
- In total, you could be tied to your business for 2-4+ years or more after deciding to sell. Proper planning gives you control over this timeline and makes the process faster and smoother. That's why timing is such an integral part of an exit strategy for business.
Exit planning timeline
If you're more than five years out, focus on strategic growth and long-term value creation:
Key tasks:
- Develop a strategic growth plan to increase your company's value over time.
- Implement systems and processes to standardize operations and reduce reliance on key individuals–most importantly yourself.
- Diversify your customer base to minimize risk and enhance your business's attractiveness to buyers.
- Advisors: Strategy consultant, financial planner, CPA, possibly a CFO/fractional CFO, HR consultants–all should specialize in working with business owners and exits. Strategic growth is the foundation of a successful exit strategy for business.
If you're three to five years out, focus on valuation and operational optimization:
Key tasks:
- Conduct a formal business valuation to get an accurate assessment of your company's worth.
- Identify and focus on key value drivers that will enhance buyer appeal.
- Optimize financial statements and operations to prepare for sale.
- Advisors: Same as above. Additionally, an attorney (M&A or corporate) and tax specialists (Attorney or CPA) who can review legal structure and tax strategy. Some of these strategies take a significant amount of time. Years in some cases, so don't delay. This stage of planning is pivotal to refining your exit strategy for business.
If you're less than two years to sale, focus on final preparations and execution:
Key tasks:
- Decide your preferred exit structure.
- Address and resolve any deal killers (typically owner dependence, poor financial record-keeping, or legal or regulatory issues).
- Implement strategies to boost short-term profitability without sacrificing long-term value.
- Organize all necessary documents for due diligence. Digitize if possible.
- Advisors: All of the above. Additionally, find an intermediary who can help find buyers and negotiate the transaction. This step ensures a seamless exit strategy for business.
Additional considerations
Regardless of the timeline, these considerations apply across all stages:
- Intellectual Property: Ensure all IP is properly protected and documented.
- Tax Planning: Consult with tax professionals early to structure the sale in a tax-efficient manner.
- Personal Readiness: Prepare yourself emotionally and financially for life after the sale.
- Contingency Planning: Have a backup plan in case the sale doesn't go through as expected.
Maximize your negotiating power
Many sellers leave money on the table during earn-outs. To strengthen your position:
- Build a strong leadership team that can run the business without you.
- Streamline operations to reduce buyer concerns.
- Negotiate earn-out terms early to align with your goals. A well-executed exit strategy for business can help maximize your earnings.
If you're willing to stay on as a consultant post-sale, make sure this arrangement fits your personal plans.
Secure your legacy and future
Exit planning isn't just about preparing your business for sale—it's about preparing yourself for what comes next. Whether you're years away from selling or ready to step away soon, the best time to start planning your exit strategy for business is now.
 | Christian Muntean is a seasoned expert in fostering business growth and profitability. With a Master's degree in Organizational Leadership and certifications as a Master Coach, Certified Exit Planning Advisor (CEPA), and International Mergers & Acquisitions Expert (IM&A), he guides entrepreneurial leaders through growth, succession planning, and exit strategies. He is an accomplished author of three books, including Train to Lead. Christian resides in Anchorage, Alaska, with his family. Learn More » |
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