4 Necessary Exit Plan Steps to Keep In Mind

Exiting your business isn’t a decision to be made lightly. It may have been something you were considering before the COVID-19 pandemic hit, or it could have been something that you’ve had to reckon with because of shelter-in-place orders. Maybe your business had already been struggling, and you’ve had to come to terms with your financial struggles due to long-term closures and loss of revenue. Or perhaps you want to cash out of the investments you’ve made over the years, and reallocate your resources into something else before there are any other unexpected changes in the economy.

Whatever your reason, there is a lot to take into account when considering a business exit, not just when it comes to your money, but when it comes to your personal legacy as well. 

Creating an intentional exit plan will help you achieve the best possible outcome for yourself and your family’s finances, your reputation as a businessperson, and the business itself. Having a plan in place, even if you aren’t planning to exit anytime soon, can also help keep the business stable in case of your sudden death or disability. This is especially important now, when COVID is posing such a major threat to health.

Sell to Partners, Employees or Family Members

If you are hoping that someone else will carry forward your company’s mission, you will likely want to sell to someone who understands your business already.  If you have low turnover and devoted employees who know how to drive the ship, handing over the keys to one of them may not cause too much upheaval for the business itself. 

The employee could pay you in one lump sum by taking out a personal loan, though this is a riskier and higher-cost option. A more manageable choice for many is an “installment sale,” which means financing the sale of business and having the employee pay you in installments over time. Making an employee or family member a part-owner of the business over time could make it easier for them to complete a buy out when the time comes. 

Another option is to set up something called an Employee Stock Ownership Plan (ESOP), which means that every employee owns a share in the company. Anyone who leaves the company cashes out their shares when they go—that includes you.

Set Your Business Up to Be Acquired

To get the best return on the sale of your business, you will need to make it as attractive as possible to an outside company or individual who you think would be interested in buying it. This option may require a lot of work on your part, or else you may end up having to sell far below market value in order to make a quick exit. You will need to conduct market research, tighten your operations, and be able to prove your business’s profitability to any prospective buyer.

To implement any of the plans above, and to plan for an exit that maximizes your gains and preserves your legacy, you will want to consider hiring an attorney to help you take the following steps.

Exit Plan Steps to Keep in Mind

  1. Evaluate Your Business Systems: Whether you choose to sell to an outsider or be bought out from within the company, you will want to have your business systems evaluated from the perspective of “saleability” so you can identify what needs to be shored up for the business to be able to continue beyond you.
  2. Review and Amend Internal Agreements (If Necessary): If you have partners, hopefully, you discussed exit to begin with, and have plans in place for how to exit, transfer your interests, and split up profits and losses. If not, it’s time to get those agreements updated and documented now. This includes reviewing Partnership Agreements, Operating Agreements, Bylaws, and Buy-Sell Agreements (also referred to as Shareholder Agreements). 
  3. Write Up Provisions for Family Succession: If a family member will be taking over your business, be very clear about what that entails. Who will inherit ownership of the business? Who will inherit the actual duties of running the business? If there are multiple family members, such as siblings, who all may have an interest in the company, but who may not all be treated equally, begin to address those issues now.
  4. Obtain a Business Valuation: Before you consider exiting, look at the different valuation methods, and decide which one applies to your business. Obtaining an appraisal from a qualified appraiser can give you an idea of what an objective third party may value your business at so you know how to price it. It may also give you ideas of areas to improve your business to increase the purchase price. 

Even if your business is surviving and maybe even thriving as a result of the changes brought on by the COVID-19 pandemic, now is a good time to start thinking about the exit strategy for your business.

The following two tabs change content below.

Dahl Law Group

At Dahl Law Group, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning.

Latest posts by Dahl Law Group (see all)