Why a Business Owner Needs an Exit Strategy

Why a Business Owner Needs an Exit Strategy

If you don’t have an exit strategy, Uncle Sam has one for you!

It is estimated that over the next five years, nearly 500,000 small family-owned businesses will change hands. Private businesses are the economic engine representing nearly 75% of all jobs in the United States - nearly 1/3 of the Gross National Product.  Over the next 20 years, equity in businesses expected to change hands represents more than $10 trillion in personal wealth. This trend is not driven by the economy or by government regulatory changes, but by aging baby boomers.  

Business owners of this particular generation find themselves in one of three camps:

  • They have orderly succession plans to pass the reins of their businesses on to their children.
  • They have children who are not interested in the family businesses.
  • They have no heirs. 

In all three cases, the implications of transition can be daunting.  

Compounding the challenge is the fact that many of these owners have no specialized advisors to guide them through the legal and tax issues surrounding succession planning.  And all too often, the necessary planning either never happens, or is begun too late to be effective.  

Entrepreneurs typically possess “type ‘A’ personalities” – traits that are valuable in business, and perhaps even necessary for success.  However, when the “A’s” decide to sell their businesses, they often want the changes to take effect immediately.  

Unfortunately, most are two to five years away from fulfilling those desires.  In their enthusiasm and passion for starting and building their businesses, they often fail to consider the possibilities of their exits.  

When advisors do not formally address exit strategies in the formation of their clients’ businesses, they do them a tremendous disservice.  Most business people devote considerable thought toward determining the sharing of responsibilities and profits.  However, most give little deliberation regarding catastrophic events such as the death or divorce of a partner, or even the dissolution of a partnership.  Any of these events could jeopardize a business; failure to plan for the possibilities of these events could be devastating.   

Having an exit strategy is essential for any business owner or investor. Here are five reasons why having an exit strategy is important:

1. Financial Planning: An exit strategy allows the owner to plan and maximize their financial gains from the business or investment. It helps determine the best time to sell or exit to ensure a profitable outcome. By setting clear goals and timelines, the owner can work towards achieving the desired financial returns.

2. Changing Circumstances: Business and market conditions are subject to change. Having an exit strategy provides a proactive approach to adapt to these changes. It allows the owner to evaluate the business's performance regularly and make informed decisions based on market trends, personal circumstances, or other factors that may influence the business's viability or desirability.

3. Mitigating Risk: An exit strategy helps mitigate risks associated with business ownership or investment. It provides a contingency plan in case the business doesn't meet expectations or faces unforeseen challenges. By having an exit strategy in place, the owner can minimize potential losses and protect their financial interests.

4. Transition Planning: An exit strategy involves planning for the transition of ownership or management. It ensures a smooth and orderly transfer of the business to new owners or stakeholders. Whether the exit strategy involves selling the business, passing it on to family members, or taking it public, having a well-thought-out plan can help minimize disruptions and ensure a successful transition.

5. Personal Goals and Lifestyle Changes: Business ownership often comes with personal goals and lifestyle aspirations. An exit strategy allows the owner to align their personal objectives with the business's trajectory. It provides an opportunity to evaluate how the business fits into their long-term plans, including retirement, pursuing new ventures, or making lifestyle changes. By having an exit strategy, the owner can proactively work towards achieving these personal goals.

An exit strategy is crucial for business owners and investors to plan their financial gains, adapt to changing circumstances, mitigate risks, facilitate smooth transitions, and align business ownership with personal goals. It offers a proactive and strategic approach to business ownership and helps ensure long-term success.

If you would like to speak to an expert about a customized exit strategy for your business, contact CAPSTONE business advisors.