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3 Reasons Your Exit Strategy Isn’t Written Down

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Business Person Standing in a Maze

Whether you want to sell your business or pass it on to family, the whole process can be excruciating, but it can be a lot easier with the right planning and the right people around you providing help. Facing the reasons why you’ve been procrastinating might help you get started with putting your exit plan on paper.

1. It’s overwhelming
Where to begin? My accountant? My lawyer? Obviously, a lot needs to happen to get a company ready to sell. As a result, the inclination for many business owners is to do nothing, which is a huge mistake. By taking action – just set aside an hour or two each week to start – you get more control over achieving your goal.

Many advisors will say you should’ve started planning this years ago, which doesn’t help much if you need to make a move sooner than later. Whether you need a plan quickly or have more runway, get started today building your exit strategy (aka. a plan on paper with scenarios and contingencies). The more of a head start you give yourself, the better for mapping out and anticipating different scenarios.

If you haven’t done this before, we suggest not going it alone. Part of getting started is building a solid team around you – an Exit Team. An accountant and lawyer experienced in exit strategies is critical, but you should also consider involving your banker if she or he has the right mentality, perspective, tools, and willingness to work with you closely one-on-one.

2. This is going to cost me a lot to figure out
Yes, your professional consultants might be expensive, so make sure you get a clear statement of costs and deliverables. Giving you a valuation of your business is good, but will they help you delineate 3-year or 5-year scenarios that take into consideration changes in the economy? Or what if your business hits a rough patch in the next couple years? Choosing the right banker for the valuation analysis and financial modeling could make this part of the process cost-free and a lot less laborious. Explore your options thoroughly.



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3. Misunderstanding the
company's value
If your company funds your lifestyle and that’s the end of your ambitions, you’re likely not concerned with getting an Exit Strategy down on paper. There’s nothing wrong with that. Just be clear that depleting your company’s value with each withdrawal for a fancy trip (or your kids’ college) should lower your expectations for a positive valuation of your business when you decide it’s time to retire or move on to other pursuits.

However, if you’re a serious entrepreneur and building a company to last beyond your years, then you may already know that a company’s value is largely determined by the free cash flow it generates. But it’s not just the cash flow snapshot today; more importantly, the predictability of your future cash flow is what a buyer will be willing to pay for. And the business will command a premium price if you can show that future cash investments will generate an even better return.

This is why you need a full financial model and analysis to map out projected what-if scenarios. For example, what if the company hits a rough spot in a growing economy? Or, what if the economy shifts significantly over the next 5 years, and you can show how your business is insulated from those short-term market influences? Or, how much capital do you need to invest now in growth, so the business will be valued at some multiple when you’ll be ready to sell? And in what area should I invest that capital? This is all part of sell-side due diligence, for which you’ll need help developing by your Exit Team.

Business bankers aren’t all the same.
To exit or not to exit? When? Under what conditions? And for how much? You need insights. Your accountant and lawyer will be on your Exit Team and you should consider leveraging the insight and wisdom of your banker. In generations past, bankers used to serve as close and trusted financial partners. They had an interest in their Client’s success, and they had the experience to guide wise decisions. Today, unfortunately, many “big bank” bankers are little more than human credit scorers, plugging information into a system that spits out predictable answers. They don’t take the time to listen to their clients’ vision, analyze their options, and offer insightful solutions. True banking partners are a rare breed these days, but they do still exist. 


Learn more about getting started with a customized, no-cost financial analysis and model for sustainable growth.

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Pacific Mercantile Bank

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