Six Pitfalls That Will Sink Your Exit Strategy

It’s no exaggeration to say that a business owner’s exit strategy can be one of the most impactful choices of their professional careers, to say nothing of their financial lives. It's the culmination of everything you have worked for. If the idea of navigating an exit plan makes you nervous, you’re not alone.

Exit strategies are chains of complex financial decisions with a high cost associated with making the wrong decision. Over the years at Masterpiece Capital, I have seen several missteps that have derailed even the best-laid plans. No two exit strategies are the same, but these are some of the most common mistakes I tend to encounter.

1. Not enough tax planning

Proactive tax planning can be the biggest difference-maker in whether your exit strategy will bring you closer to your financial goals in the next stage of your life. By “proactive,” I mean looking beyond the tax implications at the time of the exit. Business owners need to think about the years that follow as well, to mitigate or avoid unpleasant surprises.

Involve tax experts, like certified public accountants (CPAs), in every stage of your exit plan, as early as possible. You need another set of eyes who understands not only the tax landscape, but also how your business works and what your post-exit priorities will be.

2. Getting the wrong idea about what ‘financial independence’ means

Achieving financial independence looks different for everyone. But I often see entrepreneurs confuse financial independence with the accumulation of wealth. It's one thing to sell your business and enjoy a substantial payout. It's another to ensure this wealth sustains you in the years to come.

Your post-exit lifestyle and priorities should influence the shape of your exit strategy. How much do you anticipate that lifestyle will cost? Will you need to provide for family members? Do you have philanthropic goals? Are the wheels already spinning for your next venture? Business owners will struggle to realize their future plans if they lack a clear grasp on the resources they will need to fuel their financial lives.

This is also why a tax-advantaged plan matters so much in your exit strategy. You have far greater control over your tax exposure than you do over the fluctuations of your industry and the markets at large. Shielding yourself from taxes over the long term will give you more fuel for the post-exit life you want.

3. Overlooking your employees

Your key employees have been the backbone of your enterprise. Their loyalty, skills, and commitment are irreplaceable. Don’t overlook these qualities during your exit strategy.

Employees can tell the difference between an owner who feels responsible for their professional futures, and one who is completely checked out and eyeing the door. You want to keep open lines of communication with the linchpin employees who have gotten you and your business this far. Take into account what succession might mean to them, or what critical relationships or knowledge needs to be handed off as you carry out your exit strategy.

If your employees see a clear vision, they will stay vested during and after the transaction. If not, they will do what they need to protect their own futures. High turnover as the exit approaches can absolutely jeopardize your valuation, to say nothing of your credibility.

4. ‘All-or-nothing’ approaches to exit strategy

There’s no such thing as a one-size-fits-all exit strategy. Relying solely on one approach, like a straight sale or a family succession, might leave value on the table compared to other paths toward your exit.

As in most things, diversification is your friend. Be open to exploring multiple avenues, from mergers and acquisitions to ESOPs (Employee Stock Ownership Plans), to ensure you're taking the best path forward.

5. Taking your foot off the gas

It may sound self-evident, but you would be surprised at how many business owners limit their exit options by failing to maximize the value of their businesses, or even failing to understand what factors a buyer will consider when deciding on a valuation at the deal table.

Ideally, your business should be the best version of itself. That means demonstrating a solid track record of growth and profitability, recurring revenue, and sticky customer relationships. The more transparency you can demonstrate, the better. Do you have a process in place to handle an audit without a major disruption of your business? If necessary, can you demonstrate rigorous financial controls that protect the business and its customers?

6. Trying to do it all by yourself

An exit plan without a robust advisory board is like trying to navigate a maze without a map. You want to build a team of advisors, from financial experts to industry veterans who know you, know your business, and know what you want to do next. They can act like a sounding board for ideas and offer you invaluable guidance as you prepare your exit.

If this sounds like a lot… trust me, it is. But my last point bears repeating: you don’t have to go it alone. Successful business exits - and I mean successful for all parties, over the long term - happen when entrepreneurs build a team of allies and advocates to support them on every step of the journey.