When to Plan for Exit?

One of the most common, and important, questions business owners ask is “When should I start my exit planning?”

Ideally, you need to begin serious planning no less than five years before your desired exit. Your final 60 months will make or break your exit success.

Can’t you just focus on building and growing an excellent company, and the rest will take care of itself?

Ultimately, there are two reasons why just building a strong business is not enough to be assured of a successful exit. These two reasons best explain why every business owner needs to create and follow an exit plan—years before you intend to exit.

Let’s call the first reason the “Unknown Destination Effect.” Imagine you’re out for drive, but don’t have a clear destination in mind. Without knowing where you want to end up, it’s impossible to know if the next left or right turn will eventually lead you to anywhere good.

Sometimes taking a drive on a beautiful day without a known destination can be fun. But when it comes to your business, generally you want to know where you are going. Leading your company without a clear set of exit goals is the same as driving around with an Unknown Destination. You end up making decisions without knowing if they will lead you anywhere good by the time you arrive at your future exit.

Here are several examples of important business decisions that, without a clear exit plan, you won’t know which decisions will help or undermine your exit success:

Which will have a bigger impact on your business’s value at exit – top-line revenue growth or bottom line profitability growth?
How do you decide to add staff, which can strengthen the team in the future but often decreases profits in the short term?
Should you trim any under-utilized labor, knowing it may cause current disruptions but can increase profits and potential sale value?
How do you evaluate a strategic initiative that may contribute to long-term growth but will consume significant current resources and reduce profits?
Which will produce a greater impact on business value: vertical or horizontal growth?
These are important business decisions, that, without an exit plan to follow, you cannot know whether or not your answers will help or hurt whenever you finally arrive.

The second reason that every business owner needs an exit plan is the law that “Time Increases Results.” This “law” refers to nearly universal truth that the more time allocated to accomplish a goal or project, the greater the probable results.

When it comes to achieving exit success, it’s often a surprise to business owners that many of the most important tools and tactics will take years to implement, and/or produce results that positively compound with years of time. In our experience, five years is the critical mark—if your desired exit is five years or less from now, you already may be running short of time to implement certain tools and tactics, and/or you may see greatly diminished results from your efforts.

Here are a few examples of issues that many owners have to address to maximize results at exit, but which can take years to fully accomplish:

Eliminate any dependency on the business owner for sales, operations, or key relationship management
Identify, hire, onboard, and align a leadership team that produces a track record of sustained long-term growth
Outgrow any customer/client concentration
Create brand value protected in a defensible IP portfolio
Time market conditions to your advantage
Evaluate and implement significant exit tax-saving strategies
Address any misalignment or disagreements between co-owners
Design and implement ownership and leadership transfer plans (if exiting to key employees or family)
Having a clear, written exit plan helps business owners evaluate and prioritize needs such as these, early enough so that time helps produce and compound positive results.

Put these two reasons together: The “Unknown Destination Effect" and “Time Increases Results” and it becomes clear that exit success requires more than just building a good company. The sooner you get started with your exit planning, the greater your likely success.

5 years = 60 months = 1,825 days

When we ask business owners when they want to exit, the most common answer is something like “Oh, about 5 to 10 years from now.” Let’s look at five years. Quick math shows five years and 1,825 days are the same length of time. But if you have a major future goal that is five years away, does it matter if you say the goal is 1,825 days away?

Apparently it does. Psychologists have shown that people told their goal was a certain number of days away were far more likely to take action now to prepare. For example, in one test participants told they had save money for a new child’s college education were four times more likely to start saving now when presented with information that college started in 6,570 days, rather than in 18 years.

One of the biggest mistakes we see owners make is waiting too long to start preparing for exit. If your desired exit is, for example, five years away, that means you have only 1,825 days, or 60 months, to get ready.

Once you reach the point where your desired exit is five years (or less) from now, it is essential to begin defining your specific exit goals and laying the foundation of your exit plans. With that little time until you exit, five specific questions arise that owners must answer to define their exit plans.

The five critical questions are:

1 - What is My Likely Exit Strategy?
2 - How Much Do I Need to Net From My Exit?
3 - What Do I Want My Legacy to Be?
4 - What Do I Want To Do in Life After Exit?
5 - How Exitable is My Company?

The four potential exit strategies for a happy exit are:

Pass to Family
Sell to Outside Buyer
Sell to Inside Buyer
Planned Liquidation
With five years or less before you desire to exit, you must identify which of the four is likely yours, because the issues and tactics used for each strategy are different. For example, if you want to pass your business down to your children, you face a different set of challenges and must pursue a different set of tactics than if you want to sell your business to an outside buyer. Likewise, selling your business to an outside buyer is a completely different process compared to selling to an inside buyer, commonly one or more key employees.
To make this point clearly, the chart below lists at left the four different exit strategies. Then you will see six or seven common exit tactics, such as “Audit Financial Statements” and “Develop Successor CEO.” As you can see, which tactics are required differ among the four different exit strategies. As long as you don’t know which exit strategy is yours, you will not know which tactics must be pursued. With only fives years or less to prepare, determining your likely strategy is an imperative.

Your Exit Strategy will determine your likely exit tactics

Time after time, client after client, research study after research study, the answer remains the same—business owners’ number one goal at exit is to achieve their financial win. In our experience, the most common financial goal at exit is to reach financial freedom, which means getting to the point where work is a personal choice, not a necessity. Money cannot buy happiness, but business owners who have reached financial freedom seem to smile on a regular basis.

How much do you need to achieve financial freedom?

Are you on track to reach financial freedom by your exit? How do you know? This may be one of the most important questions to accurately answer once you reach Your Last Five Years. If you are not on track to reach financial freedom but you still have five years before your exit, then you may have sufficient time to devise and implement a plan to meet your financial goals. However, if you only learn shortly before exiting that you will not reach financial freedom, there’s may not be enough time to do anything about it.


It’s not hard to know if a company is profitable—it’s right there, in black and white, in the financial statements. But what does it mean to say a company is exitable? And, just because a company is profitable, does that mean it is exitable?

Admittedly, we made up the word “exitable.” But if the word was real, what would it mean? Well, an exitable company would be one from which the business owner or owners can actually exit. That would mean the company has value—value that is convertible into personal wealth and financial independence for the owner. Exitable would also mean that the company can survive the exit process, without disrupting operations and critical relationships. The bottom line is an exitable company is one that can fulfill the owner’s business and personal goals at exit.

With that definition in hand, let’s now ask—if a company is profitable, does that mean it is exitable? This question is important because most owners go to work every day challenging themselves and their teams to “grow” the business. “Growth” is primarily measured by revenue and profits. If growing profits does not necessarily make a company more exitable, that would be very important to know.

Unfortunately, it turns out profitability and exitability are not the same. And sometimes owners only learn very late—meaning shortly before they wish to exit, at which point their exit success is undermined, or perhaps even blocked outright.

There are a surprising number of ways that businesses can grow and operate profitably, without necessarily being exitable.

Here are four common situations where this can occur.

1. Owner Dependency

The first common limitation on exitability is owner dependency. If your business is dependent on you, or any other owners, to operate and grow profitably, this typically limits exitability. The company’s value cannot walk out the door when you do. It’s ironic too because your company probably would not be what it is today if you had not worked as hard as you have up to now, perhaps over many years. It’s great to be good at what you do, but if your company is losing an essential employee when you exit, that undermines exitability. It’s not enough either just to say that the company could manage to survive without you. It has to be able to thrive without you. Buyers want to know that the business’ profits will not slow down nor go away when you do.

2. Customer Concentration

The second common limitation on exitability is customer concentration. This matter may surprise you because customer concentration is usually a byproduct of a job well done. Your company may have one or a few customers that are served well, and they've responded by sending more and more business your way. But then, one day, you look around, and 20%, 30%, 50%, or more of your revenue and profits comes from these few customers. These customers might be generating a lot of profits, but customer concentration usually limits exitability. If you intend to sell your company one day, your future buyers likely won’t have longstanding relationships with these customers, creating risk for them. Buyers often pay less for companies with customer concentration or pass on purchasing that company altogether. Customer concentration thus becomes a serious limitation on exitability, no matter how profitable those customers may be.

3. Co-Owner Goal Misalignment

The third way many companies experience limited exitability is if they have co-owners who are not in alignment with one another. We did a research study some years ago, and it revealed that 7 out of 10 small to medium sized privately-owned companies have ownership shared among two or more co-owners. We often see co-owners who are in strong alignment with one another for years and sometimes even decades while they are working together to grow the business because they share one clear priority, which is to increase revenues and profits. The problem arises when one or more of those co-owners get closer to exit because then the goals often change, and the co-owners find themselves no longer in alignment. For example, one co-owner may want to sell now, while another wants to wait. Or, one co-owner may decide to sell for lower price, while another wants to keep growing the company and hold out for a higher price. Whatever the situation, when the goals change, the co-owner alignment changes, and often the co-owners don't even realize it's happening until close to exit, at which point it can ultimately undermine a company’s exitability. No matter how profitable your company may be, if the co-owners are not in alignment, exitability will suffer.

4. Unclear Plan for the Future

The fourth way companies experience reduced exitability, regardless of profitability, occurs if the company lacks a clear, compelling plan for future growth. For a company to be highly exitable, it must offer a buyer or successor a credible and compelling vision for how that company will grow going forward, after your exit. How profitable the company has been up to this point is nice, but what the company is expected to do in the future drives value and exitability.

Many profitable companies don’t have the systems and habits that help create this compelling plan for future growth. For example, the company leadership team might not do sound strategic planning, or perhaps they do not diligently measure monthly or quarterly performance against financial budgets and operational benchmarks. Without experience doing effective strategic planning, and without a clear track record of being accountable for achieving business goals, it may be unclear to the future buyer or successor whether this company can sustain its future growth after your exit. This shortage undermines exitability, even if the profitability has historically been good.

Once you arrive at Your Last Five years, it is time to assemble your exit advisory team. Trying to exit without professional help is a recipe for frustration and possible failure. First, there will be highly technical legally, tax, accounting, and financial issues to address. Second, preparing for exit can take hundreds and sometimes thousands of hours of work. This work must be done, but you and your management team cannot afford to take your eyes off the company during Your Last Five Years. Bringing in outside help during these last five years adds much needed bandwidth. Last, if you are selling your company then your buyer likely will have more experience doing deals than you do, and will deploy a team of expert accountants, attorneys, and bankers against you. (You would too if in their shoes.) You will need your own team of experts working to achieve your goals and protect your interests.

For these reasons, you need a competent advisory team.

Many business owners put off starting their exit planning—for understandable reasons. You are busy. Your business needs constant attention. Planning for exit takes time and hard work. As long as the business is profitable and fun, why rush to work on a future exit?

However, there is a significant cost of waiting. The longer owners wait to prepare for exit, the higher the cost to exit likely becomes. Here’s why. Preparing for exit takes time—time that many owners do not have in abundant supply. If time is limited, then the things you can do to prepare yourself and your company for exit are limited too. Once you reach the point where your desired exit is within the next five years, you may start to encounter issues that there will not be enough time to address.

Here are some specific examples. Of the four possible exit strategies (See Chapter 3), the most common three are: Sell to an Outside Buyer, Sell to an Inside Buyer, and Pass to Family. For each of these exit strategies, the charts below list just some of the specific issues commonly encountered by owners seeking to exit using that strategy. Failing to fully address any one of these issues can undermine or even block your exit success.

Trying to exit without professional assistance is a recipe for failure, and you have only one shot at exit success. First, there will be many highly technical issues to address during exit dealing with legal, tax, accounting, and financial issues. Second, preparing for exit takes hundreds and sometimes thousands of hours of work. Last, if you are selling your company then your buyer likely will have more experience doing deals than you, and will use this experience against you if you don’t have your own team of experts.

Your advisory team can be broken down into two components, a Core Team that every business owner needs, and then a Support Team which varies by your likely exit strategy.