Exit Strategy in a Business Plan

A business plan is a written documentation of which describes the business, the objectives of the business, its strategies, the market of which the business is in and the financial forecasts. The business plan has many functions, from securing external funding to measuring the success with the business itself. It essential when starting up a business for a business to have a realistic working business plan.

The last portion of any business plan is the exit strategy. It may seem strange to develop a strategy this soon to leave the business, but potential investors will want to know the long-term plans. The exit plans need to be clear in your own mind because they will dictate how you operate the company. For example, if it is your ultimate aim to get listed on the stock market, then you have to follow certain accounting regulations from day one.

The sequence of steps involved in the exit strategy in a business plan are;

  1. Timing and the market.
  2. Estimation of business worth.
  3. Improving business value.
  4. Selling the business.
  5. Concluding the sale.

1. Timing and the Market

During last decade, capital markets around the world became abundant with funds. These funds primarily got accumulated through a decade of economic growth and prosperity. Low interest rates and low yielding traditional investments have driven the fund managers to seek alternative investment strategies that would maximize their returns.

Whether through expansion strategies of large corporates, consolidation strategies of private equity managers or purely direct investment, this money is finding a home in middle market privately owned businesses. No such opportunity had existed for business owners to accelerate their succession planning and consider the future of their equity. But now, such a thing has become common.

2. Estimation of Business Worth

Perhaps the single biggest factor that determines of the value of a business is its current and recent profit history. It represents the return to the business owner, and of course, the future business owner. The second major determinant of the value of a business is the “future risk”. It is an assessment of the probability that the profit of the business will be maintained or increase. Factors to be considered in assessing this risk include:

  • the dependency of the business on the promoters
  • sustaining the competitive advantage
  • intellectual property of the company
  • growth and profit trends & projections
  • business practices
  • culture and professionalism of the company
  • the market in which the business functions

While there is something called “profit” and “risk” trade-off, the ultimate factor that determines the value is the strategic position of a buyer. Factors such as economies of scale, innovation of products and markets, market domination or even fast tracking of growth, can see particular buyers pay more for acquisitions than an accountant’s valuation.

3. Improving Business Value

Business owners should consider similar steps when preparing to sell their business. Many businesses view their businesses as their “Golden opportunity” . It represents a one-off opportunity to convert a lifetime of efforts into wealth. So often, the majority of the family’s wealth is tied up in the business, invariably all at risk and highly dependent on a successful exit outcome that is of course, after tax, after debt repayment if any. Clearly a strategy must be set to maximize value. The main aim is to get the business investment available.

Enough attention must be focused on those attributes of the “future risk” described before. We can take an example, what must be done to reduce the perception that the business will no longer prosper without the promoter of the business? so, what are the implications for the management structure, policies and procedures, reporting, ongoing innovation and creativity and ultimately, the drive behind the business? By taking factors such as these, the business becomes more mature and will usually be in a better position to grow and prosper without the business promoter’s influence.

4. Selling the Business

The whole selling process is a procedural methodology structured to attract the right buyer who is prepared to pay a good price for a business which clearly demonstrates strategic advantage through acquisition. It must be capable of withstanding a due diligence process without any material concerns. Armed with an Information, an investment ready business owner can commence the next phase of selling identification of a buyer. Not surprisingly, in around 60% of cases, business owners already know their future buyer. It may be a competitor, a supplier or even a client. A list of known suitors is easily assembled. Attracting the other 40% requires a sales program using mass marketing .

The various options that are available are;

  1. IPO
  2. Acquisition
  3. Merger
  4. Liquidation

5. Concluding the Sale

For most of their lives, business promoters have risked most of their wealth to be in this once-in-a-lifetime position. They know how to run a business, but how can they make the transition from a risk taker to that of custodian? Sadly, too many business owners get this bit wrong! What does this “pot of gold” represent? It represents the future security, income and lifestyles for the business owner and their dependents for the term of their lives. It represents the opportunity to pass wealth to the next generation and beyond.

How can investments be structured to provide good returns but mindful of the risk profile of the family? How can taxation be legally minimized? How can the estate planning be properly structured to incorporate superannuation, insurance, wills and trusts? How can the owner remain mentally challenged? A comprehensive wealth management strategy should bring together all of these components. Importantly, like planning for the sale itself, it should not be left to the last minute.

The Right Strategy – Exit Strategy

Include an exit strategy in the design of any new project, the manner in which a company wishes to leave its corporate site behind after its departure determines the manner in which it develops a project, even if the departure date lies several decades ahead. Engage communities in discussing impacts and planning closure. Talk with affected communities about the present and the future. By planning together, the community will understand the process, and can have buy-in on decisions made. Solicit a range of perspectives and views in order to assist groups in appropriate ways. Companies can identify surrounding communities views of the future by engaging community members in planning closure. Use care when choosing language and framing exit strategies. The ways in which a company’s key events are presented and discussed will influence how those events are perceived.

Closure is no exception. Use tangible and visible short-term objectives that build toward goals for departure. While long-term vision is necessary, companies risk overlooking concrete, short-term actions that will be necessary to reach future goals.