Exit Readiness: Why Business Leaders Should Plan for the Future
Some business owners may find themselves afflicted with a severe case of Santa Claus syndrome, a term coined by Stellar’s Managing Partner, Chris Dionne, to describe an owner’s sudden urge to exit their business and expect a hefty payout—all without a solid business exit strategy. Regardless of your business's scale, this approach simply will not work. Instead, what Stellar consultants recommend is to focus on preparing to leave your business.
Exit readiness is not achieved overnight; in fact, it involves multiple steps that will take time to fully accomplish. Some owners may take three, five, or even ten years to feel confident about finalising their departure. If you are looking to secure a substantial payoff and a seamless exit, then working toward exit readiness isn't just something to think about—it should be your main goal.
If you're grappling with a bothersome itch to pull off a hasty exit, let us explain why you can't simply slip out and collect your hard-earned, well-deserved payout without proper exit readiness.
Why do we need exit readiness?
There are strong reasons to back the importance of getting ready for an exit—here are our top three.
1. Exit readiness ensures a smooth transition of leadership
A seamless transfer of leadership roles is a huge concern for business owners considering an exit. Preparing to leave beforehand will allow you to devise and properly execute a succession plan. Going through this process will help identify and train high-performing employees who can step into leadership roles. This not only safeguards the interests of the business but also fosters a positive environment for employees and clients during the transition. Skip this, and you skip a smooth management transition which can negatively impact the business going forward.
2. It allows you to maximise business value
So you want to sell your business as soon as possible, but you also expect high returns. This may pose issues for business owners who have not invested enough in developing and improving their business asset. Enhancing the overall value of the business is a key part of exit readiness. Business leaders must not only assess but actively try to optimise key areas of the business, including, but not limited to, financial performance, operational efficiency, and market positioning. A well-prepared business exit strategy contributes to a more attractive and lucrative proposition for potential buyers or incoming equity holders.
3. It can help you manage your energy
For many small business owners, selling doesn't necessarily mean a swift exit. An earnout agreement, in particular, can tether you to the very entity you've parted with. Contingencies surrounding earnouts are tied to making the business work for the new owner, which often involves training and a handover period to acquaint the new owner with the business. This means that former owners usually have to stay deeply involved in post-sale operations. This transition period can span months or even years. While the agreement aims to align the interests of both buyer and seller, the lingering connection it entails can drain the seller's energy. If business owners choose to plan their departure ahead of time, such an emotionally taxing situation can be avoided altogether. Exit readiness allows a seller the opportunity for a cleaner getaway, where you can just sell and walk away.
Exit readiness in 2024
Given the current economic uncertainties, companies across different industries are in varying states of exit readiness. Grant Thornton's annual Dealtracker 2023 sheds light on a noticeable reluctance among SME owners to sell their businesses. The report reveals a substantial 13% decrease in business volumes and an 8% reduction in disclosed deals. Factors such as tightening interest rates, coupled with cost-of-living pressures, contribute to this trend as business owners strategically choose to defer the sale of their assets until a more stable economic climate materialises.
This case highlights a fundamental tenet of exit readiness: the need for a robust exit strategy that takes into account market dynamics and industry cycles. Especially during turbulent economic conditions, a hastily executed exit may not be the most prudent decision.
Interestingly, there’s a great contrast with how the real estate industry is appearing more resilient than ever. According to Macquarie Bank's 2023 Real Estate Benchmarking Report, there has been a consistent increase in business sale, exit, and succession activity since 2022, with projections indicating sustained strength. Despite the challenges posed by pandemic lockdowns and market volatility, agency owners in the real estate realm are actively pursuing their exit plans.
A noteworthy statistic from the report reveals that a substantial 55% of all real estate business owners express their intention to sell, either in full or in part, or at least reduce their day-to-day involvement in the business within the next two to five years. This data not only underscores the industry's exit readiness but also emphasizes the strategic foresight exhibited by agencies in preparing for transitions.
Exit planning vs. succession planning
Preparing for an exit involves two distinct approaches, as outlined by Macquarie Bank.
The first method is “exit planning,” which generally involves selling the business to another company looking to increase scale. However, this step can also mean having the owner remove themselves from day-to-day operational responsibility, without actually selling the business asset. Instead, what this creates is a more mature business asset that can provide the owner with increased flexibility in managing their overall wealth creation strategy.
The other method is "succession planning," which focuses on identifying and training high-performing individuals who can step into leadership roles – either promoting current employees or hiring promising individuals into the business. Succession planning may involve the sale of equity in parcels over a specific period or in a single transaction. The main objective is to ensure a smooth transition for everyone involved: the staff, clients, and the incoming equity holder.
How to gauge exit readiness
Evaluating how prepared you are for a business exit involves several key indicators.
You have ensured that your business is attractive and built substantial value. A strongly performing and well-resourced business is inherently more saleable.
You have made strategic investments in reassessing the business's structure and optimising resource capacity within the company. This reassessment ensures that the business operates efficiently and utilises its resources to the maximum extent.
You have successfully trained your team and instilled a sense of accountability, ensuring they are no longer overly dependent on your leadership.
You have a clear sense of priorities related to your exit. Consider how you personally weigh factors such as equity, control, and income in determining the strategic direction for your business transition.
Each of these aspects contributes to a comprehensive evaluation of your readiness for a successful exit.
Are you ready to exit your business?
In the broader context, the key lies not just in leaving a business but rather in leaving a legacy—a strategic departure guided not by haste but by thoughtful preparation.
As we've explored, a smooth transition of leadership, maximising business value, and managing personal energy are critical elements of a robust exit readiness plan. Succession planning stands out as a powerful tool for ensuring the continuity and success of a business beyond the current ownership, while an exit plan rooted in asset development secures a sure win-win by optimising the company's saleability.
As companies venture into the uncertain terrain of 2024, the message is clear: exit readiness is not merely a buzzword but a business imperative. It becomes a cornerstone for sustainable business leadership. By understanding the evolving landscape, embracing strategic planning, and nurturing personal energy, leaders can position themselves and their organisations for success in the ever-changing environment, even as they depart from their businesses.
To understand more about exit readiness and how to craft an exit strategy that works, download a copy of Building Equity Value and Exiting Your Business here.
