As a business owner, you've likely poured years of hard work, dedication, and passion into building your business. The prospect of transitioning out of your business—whether through retirement, selling to a third party, or passing it on to the next generation—can be exciting and daunting. This is where exit planning comes into play and why having a well-thought-out strategy is crucial for a successful business transition.

Why Exit Planning Matters

The phrase “Can’t see the forest for the trees” often applies to business owners who are deeply immersed in the daily operations of their company. While managing the day-to-day decisions is essential, it's equally important to step back and consider the bigger picture—especially regarding your exit strategy. After all, one of the main reasons you're in business is to eventually realize the financial rewards of your efforts.

However, research from the Exit Planning Institute shows that “only 20%-30% of businesses that go to market actually sell, leaving up to 80% of those without solid options to harvest their wealth and ensure economic continuity into the next generation.” Without a clear exit plan, you risk leaving significant value on the table and could face unexpected challenges when it's time to transition.

When Should You Start Exit Planning?

The short answer is as early as possible. Exit planning is not something that should be left until you're ready to sell. In fact, the best time to start planning is years before you intend to exit the business. This allows you ample time to optimize your business for sale, address any potential issues, and ensure that your company is in the best possible shape to attract buyers or facilitate a smooth internal transition. Key times to consider exit planning include:

1. Business Milestones: Major milestones such as achieving profitability, expanding operations, or securing significant clients/contracts are ideal moments to begin thinking about your exit strategy.
2. Life Changes: Personal milestones, such as approaching retirement age or facing health issues, can also prompt the need for a solid exit plan.
3. Market Conditions: Favorable market conditions, such as a booming economy or high demand in your industry, might make it an opportune time to start planning your exit.

Why Business Valuation is a Critical Component

A critical aspect of exit planning is understanding the true value of your business. Just as people get regular physical check-ups to monitor their health and catch potential issues early, a business valuation acts as a "check-up" for your company. It helps ensure that your expectations of your company's worth align with market realities.

A thorough business valuation considers multiple factors, including company-specific risks. These risks can be controllable or uncontrollable, similar to the advice you might receive from a doctor. Controllable risks are areas you can improve to enhance your business’s value, such as streamlining operations, diversifying revenue streams, or reducing dependency on key personnel. By addressing these risks proactively, you can minimize surprises during the sale process and increase the likelihood of a successful deal.

The Cost of Being Unprepared

Surprises are one of the leading reasons why business deals fall apart. According to Forbes, unexpected issues like third-party interference during the sale process are a significant barrier to closing deals. These issues often arise from a lack of preparation, including discrepancies in financial statements, unresolved legal matters, or unrealistic valuation expectations.

Benjamin Franklin famously said, “By failing to prepare, you are preparing to fail.” This adage rings true for business owners who neglect to plan for their exit. Without a comprehensive exit strategy, you may find yourself unprepared for the most important financial transaction of your life.

How Lutz Can Help with Your Exit Planning

At Lutz, we understand that exit planning is a complex and deeply personal process. Our team of experienced advisors is here to help you navigate every step of the journey, from initial valuation to final sale. We work closely with you to develop a tailored exit strategy that meets your unique goals and ensures a smooth transition. Contact us today to learn more about how we can assist you in planning for the future.