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How to Choose the Right Exit Strategy for Your Business

posted 2 years ago

 

An entrepreneur needs an exit plan to secure their financial future. But most business owners don’t think about developing an exit plan until they are ready to leave. Although an essential consideration for company leaders, it’s often overlooked until relevant changes are necessary. 

Without an exit strategy, entrepreneurs risk limiting their options in the future. So to ensure the best outcome for your finances and your business, plan for when you have to leave. Read on to know more about developing an exit strategy in this short guide.

 

What Is Exit Strategy Planning and Development?

An exit strategy is a business owner’s arrangement to sell their ownership to investors or another company. This move gives an entrepreneur a way to cut down or remove his stake in a business. 

If a business is successful, an exit strategy allows entrepreneurs to make a significant profit. But if it’s the other way around, it enables them to limit their losses. 

Investors, like venture capitalists, can also make use of an exit strategy when they cash out of an investment.

For some entrepreneurs, an exit strategy can be a plan to end a business. But for some company leaders, it can also be an arrangement that allows a smooth transition to a new phase for the firm.

If you are up for the latter, your exit strategy can involve changing the business direction or leadership. It may involve keeping the firm financially sustainable or gearing up for potential challenges.

A fully-developed exit strategy takes all business considerations into account. These include stakeholders, operations, and finances. It also comes with different key elements, one of which is business valuation.

Luckily, there are specialists that can help you examine your company’s financials to determine its fair value. You can also seek the help of transition managers who can help develop your strategy.

 

Exit Strategies to Get Full Value for Your Business

Planning an exit strategy could pave the way for retirement, a sale, or the closure of a business. And, pulling out of your company can come with several crucial reasons. These can be because of your health, age, or desire to pursue other life goals.

Every entrepreneur must have a business strategy, yet many business owners exit their companies without concrete plans. This may be due to the fact that entrepreneurs are more focused on starting and growing their businesses than on leaving them.

So below are some exit strategies you can consider when you are planning on leaving your company:

Succession Plan

Creating a succession plan involves thinking of the next line of leaders who will replace you when you leave. This can be a difficult and emotional process for entrepreneurs and their families. So it is recommended to start creating a design for this arrangement early on.

You may need to get professional advice for this so you can deal with unexpected issues. You can also avoid last-minute decisions, which could be costly for you and your company.

Although unique to every company, a succession plan should include a series of steps, including the following:

  • Determining your goals
  • Naming a successor
  • Handling legal and financial issues
  • Getting a valuation

Management Buyout (MBO)

Management buyout (MBO) involves the sale of a firm to its management team. This strategy comes with several advantages for entrepreneurs.

An MBO ensures that business operations are not disrupted because the new owners are already familiar with the company. They know the crucial processes in the firm, including investments, tax audits, and other operations.

Because of this perk, your firm may keep its existing business partners and clients.

Family Transfer

If you plan to transfer your business ownership to a family member, your entire family must fully know your plans. The members must have a chance to voice concerns and interest in running the business.

One obvious advantage of this strategy is that your family will benefit from your legacy. Additionally, family members who are already involved in the business may require less training and coaching.

Selling to Outside Buyers

Selling your company to outside buyers can be a more definitive process than other strategies. Additionally, it involves fewer variables compared to family succession.

 

Steps to Developing Your Exit Strategy for your Business in Canada

Leaving a company you built and worked hard to grow can be emotional and overwhelming. This is why planning an appropriate exit strategy requires diligence, time, and care.

To end up with the best exit strategy that provides maximum value for you and your business, consider the steps below:

Prepare Your Finances

Part of creating an exit strategy is preparing an accurate account of your finances, both professionally and personally. Understanding your business performance, expenses, and assets can help you determine an offer aligned with your company’s real value.

Consider All Options

Once you have a clear picture and understanding of your finances, consider several different exit strategies before deciding on what to do. Your decision should depend on how you see your life after your exit and how your business fits into your plans.

If you have trouble choosing a strategy, speak to your lawyer or a financial professional.

Talk to Investors

Meet with your investors and stakeholders to announce your intention to exit the business. Create a strategy that advises the investors on how they will get their investments back. If you have a detailed understanding of your finances, you can show your investors evidence that will support your exit plans.

Transfer Responsibilities

After talking to stakeholders, talk to the next leaders of your business. Start transferring responsibilities and provide coaching. You can do this step while finalizing other aspects of your exit plan.

If you have documented operations in practice in your business strategy, transferring new responsibilities to others can be less challenging.

Tell Employees

When your succession plans are finally in place, let your employees know. They may have questions, so be prepared to answer them. Remember to be transparent and empathetic.

Inform Customers

Finally, tell your customers about the change in leadership. If your firm continues with a new owner, introduce the new leaders to your clients. If you are closing your company, offer alternatives to them. This will show them that you care, even until the end.

 

Pro-Tip

“Whether you’re passing business ownership to a family member, your management team, or selling it to outside buyers, remember that you’ll need a business valuation that specifies a fair value for your company.”

 

Have Questions About the Exit Strategy Development for Your Business in Canada? Call Us Today.

There are tax implications to closing or selling your business. To avoid any legal hurdles, reach out to TaxPage.com and talk to our experienced tax lawyers. 

With our help, you can end up with the best exit strategy without worrying about the legal repercussions of leaving your business. Also, check out our blog for more essential information about paying your taxes in Canada.

 

FAQs on How to Choose the Right Exit Strategy for your Business 

How is an exit strategy for investors created?

There are several ways to develop a strategy. In its simplest form, you can create an exit strategy by following the steps below:

  • Decide on a target date for a change in roles 
  • Gain the perspective of a family member or a professional
  • Choose a strategy
  • Announce your plans to investors, employees, and clients
  • Implement the plan

How would I know if I need an exit strategy for my business?

If you want to leave your business for reasons like profit, retirement, or the desire to pursue other goals, then you will need an exit strategy. Other reasons can be death, disability, divorce, or other family circumstances.

What is considered a successful business exit? 

A successful business exit can be any of the following:

  • Selling your business
  • Selling the assets of your company
  • Merging the firm with another business through acquisitions
  • Selling shares in the business through an initial public offering (IPO) launch

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