Why Do Business Owners Need an Exit Strategy?
Running your own business or being in the position of an entrepreneur is not an easy status to work towards. From managing financial pressures to dealing with a lack of resources, the challenges are endless, especially in the early days. In fact, a 2023 survey revealed that 21% of business owners main concern was “seeing the business failing”. With the current world not being the easiest time to run a business, here is why it is essential to have an exit strategy.
Challenges Facing Business Owners
Business owners today face numerous challenges that make running a successful business truly difficult.
The financial pressures of early-stage businesses can be intense, and there is little margin for error. Revenue must exceed expenses, and cashflow management must be a priority. For 21% of entrepreneurs, this is the greatest threat to their survival. These issues are made worse by the macroeconomic uncertainty of the past few years. Interest rates and inflation are biting hard on small businesses and nudging many UK companies to put their exit and succession plans on hold. One in five small business owners who anticipate selling their business within the next five years says their biggest financial concern is a valuation downgrade caused by the current economic environment. Even a moderate downturn can return a valuation below what it would have been years ago, reducing potential exit proceeds.
Many business owners, especially those who started their company in their garage, see their business as their child. It can be hard to let go even when it’s doing well, and the emotional nature of the business influences the decision to create and implement a business exit strategy.
Why an Exit Strategy is Essential
However daunting it might be in reality to put an effective business exit strategy in place, here are five reasons why you will need it:
- Financial Security
An exit strategy develops a blueprint for selling or transferring the business to successors. If you plan to sell someday, you will be able to enjoy the most possible value from the business when you’ve decided it’s time to go. Having a plan can guarantee your financial security and give you the peace of mind that you will reap the rewards of your years of work.
- Smooth Transition
This is where an exit strategy for your business comes into play. Careful advance planning puts your workers, customers, and the rest of your network at ease. It lets them know they’ll have a say in the transition, ensures suitable successors to the business, and provides a smooth path forward—whether or not you are in the picture. Where family members are involved in the business, succession planning takes on an emotional life of its own. - Market Timing
Differing market conditions might make your business worth more one year than the next, and an exit strategy lets you time your exit when the market is favourable, maximising your return. Without a plan to maximise a favourable return, you might find yourself forced to sell when the market is not so favourable.
- Reducing Risks
An exit plan allows you to watch out for things that might go wrong down the line. Whatever problems there are, you can identify them early on and tackle them while it’s still easy. This will reduce the likelihood of problems arising when you decide to exit, saving you time, money, and stress in the long run.
How to Develop an Effective Business Exit Strategy
Creating a business exit strategy involves several key steps:
- Define Your Goals
Whatever your ambition for your exit – whether it’s to put money in the bank, to ensure the business is in good hands, or to pass the business onto your family – having a clear idea of your objectives will inform your exit strategy. - Assess Your Business Value
Know the current valuation of your business. Hire a professional valuator to help you determine what your business is currently worth so that you know what’s realistic and what’s not. This will be very valuable in helping to create a vision for what your business is worth before you exit. It will also help you understand what steps you need to take to create additional value. - Plan for Succession
Identify the individuals who could be your successors in your business. You may want them to be your family members, current or future employees or outside prospects. Always start succession planning to have a smooth transition. - Consider the Timing
Watch market conditions and other economic factors that might influence your exit and time your exit when the market conditions are best to get the most bang for your buck. - Consult with Experts
Enlist the assistance of financial planners, lawyers and business brokers, who can help
Every business owner should think of a plan to lighten their future load. This improves their financial stability, ensures a smooth transition, ensures market timing, and reduces risk to some extent. Even if your business is emotionally attached to you, you need to plan ahead and make some strategic decisions about the future of your business.
To speak to a professional about the exit strategy for your business, contact us today.
