Stop delaying: Plan Your Business Exit Strategy Now: 9 Key Factors for Technology Service ProvidersAug 14, 2023
- What is a business exit strategy?
- Start planning your business exit strategy early
- Have an exit strategy timeline
- Evaluate the factors that impact an exit
- Know your exiting options
- Maximize valuation and appeal to buyers
- Increase your online presence and brand awareness
- Communicate the exit strategy to employees, clients, and stakeholders
- Know the legal and financial considerations during the exit process
- Post-exit considerations and transitioning to a new venture
- Foresight, consultation and strategic preparation
What is a business exit strategy?
An exit strategy is a plan developed by the owner(s) of a company that outlines how they intend to sell or transfer their ownership interest in the business. A business exit strategy supports the owner's long-term personal and financial goals as they prepare to transition out of the company.
Whether that's selling to a bigger fish, merging with a strategic partner, or even going public, setting that goalpost helps inform the plays you make now to get yourself in the best position when it's time to cross the finish line. Sure, you have to stay nimble and adapt along the way, but keeping your target exit in the crosshairs gives you a compass to guide your direction. It lets you focus on constructing something of real value that sets you up for the type of lucrative and strategic exit you have in mind.
This means going beyond just building a great product - it's about architecting an enduring company attractive to potential acquirers or ready to thrive on its own in the long run. That kind of planning is how you ultimately cash out on all your blood, sweat and tears down the line.
1. Start planning your business exit strategy early
Unlike product companies, service businesses in the tech industry are often heavily reliant on the founders and leaders who built them from the ground up. Your technical expertise, relationships with clients, and leadership style may be deeply ingrained into the operations. This makes transferring ownership or selling the business more challenging.
Planning for an eventual exit allows tech service owners to make strategic decisions that maximize value and position the business for a successful ownership transition. Outlining goals, timelines and methods for exiting the business in advance enables you to operate and build the company in a way that eases the exit process. Without proper planning, owners may be stuck in the business longer than desired or forced to liquidate under less than ideal terms. Setting your business exit strategy goals early on provides direction to price the business appropriately and groom it for a transfer to new leadership.
2. Have an exit strategy timeline
The earlier you start planning, the more flexibility and control you will have over the process. While the exact timeline depends on your specific situation, at minimum you want a 3-5 year runway to maximize your chances of a successful exit.
- 3-5 Years Before Your Target Exit Date - This is when you want to start finalizing your exit strategy, barring any major changes to your business. Identify your preferred exit path and start making operational changes to maximize your valuation.
- 1 Year Out - Begin taking concrete steps to implement the strategy such as interviewing potential brokerages, creating legal documents, and identifying possible buyers or successors. Hire professional advisors as needed.
- 6 Months Out - Marketing efforts begin if selling/merging the business. Important financial and operational data is compiled and audited. Key management succession plans are put in place.
- 3 Months Out - The business is actively marketed and promoted to prospective buyers. Management responsibilities are transitioned. Key customers and vendors are informed about the pending sale.
3. Evaluate the factors that impact an exit
The key factors founders should carefully evaluate when developing an exit strategy include:
- Exit goals: What are your motivations for exiting? Do you want to retire, focus on strategic aspects only, start a new venture, or ensure continuity for employees? Defining your goals informs the exit path.
- Heavy reliance on the owner’s skills, relationships and oversight: Since you likely built deep personal relationships with clients and your technical expertise underpins service offerings, extracting yourself from daily operations can be difficult. Buyers may not want to acquire a business if it heavily depends on your involvement.
- Fluctuating valuations: The value of service businesses can be hard to quantify compared to product companies with tangible assets and predictable revenue streams. Hiring a business valuation expert essential as valuations wax and wane depending on profit margins, perceived stability, growth potential, and reliance on key people. Ask yourself:
- What is your business worth today?
- What can I do now to increase the value of my business?
- How can you maximize its value in the future?
- How will different exit approaches impact the valuation?
- Timing: At what point do you want to exit the business? Determining an ideal timeline lets you work backwards and establish milestones. Transitioning too quickly or slowly can impact valuation.
- Acquiring financing: Unlike startups with high growth projections that attract venture capital, service businesses are often bootstrapped and have lower valuations, making it harder to find investors and financing. This can limit exit options.
- Identifying the right successor: Who are possible buyers, investors or successors? Would an internal management buyout work or is an external acquisition preferable? Within a small tight-knit company, it can be challenging to identify and groom an internal successor with the right skills and leadership abilities to take over the reins.
- Maintaining continuity: Exits often result in churn of customers and employees who were loyal to the previous owner. Communicating the transition and retaining top talent throughout the process is critical.
- Legal and tax considerations: What are the tax and legal implications of different structures like asset sales or share transfers? How can liability and risk be minimized? The tax treatments for different exit structures vary widely. Modeling tax liabilities from an asset vs. share sale, for example, is essential.
- Transition planning: What is the detailed plan to transfer relationships and knowledge to new leadership over a 6-12 month period?
- Communication strategy: How will the transition be announced and explained to internal and external stakeholders?
Having clarity across these dimensions will lead to an exit strategy tailored to your situation and goals. Proactively developing strategies to mitigate these risks will place tech service owners in a much better position when exploring exit options.
4. Know your exiting options
There are several types of exit pathways a technology services business owner can take to achieve an exit:
- Sell the entire business - An outright sale to a new owner is a common approach that can maximize valuation but requires finding the right buyer. The buyer may be another company, a private equity firm, employees through an employee stock ownership plan (ESOP), or a partner or co-owner. The sale provides the owner with an immediate return on investment.
- Recapitalization - The owner restructures the company's equity by taking on new partners or investors. For example, a private equity firm may invest and take a majority stake in the business. The influx of new capital allows the original owner to take money off the table.
- Management buyout (MBO) - Leadership or management team members purchase a controlling equity stake from the current owner to takeover operations while providing the seller liquidity. This allows the owner to remove themselves from operations while selling shares to the people who already know how to manage the business.
- Transfer to family members - The owner transfers the business to family members through their will or estate planning. This can help keep the business in the family but requires heirs interested and able to run the operations.
- Merge with another company - A merger and acquisition (M&A) can be an effective exit strategy by joining forces with a strategic acquirer or competitor. In a merger, two companies combine together into one new entity. In an acquisition, one company purchases another outright. Engaging a business broker, M&A advisor and legal counsel can help owners navigate the process and get the best value.
- Initial public offering (IPO) - An IPO isn't always an exit strategy for the entrepreneur, but it does create a public market for shares going forward. The company offers shares of stock to the public for the first time allowing the business to raise expansion capital, while founders and early investors can sell some shares to realize a return.
- Liquidate assets - The company sells off its assets and inventory, pays off liabilities, and closes down operations. Often the lowest valuation option. The remaining cash is distributed to shareholders. This is generally seen as a last resort exit when the business is not successful.
The optimal path depends on your goals, time horizon, valuation needs, and desire for continuity. Each approach has unique trade-offs. Ultimately, focus on putting the company in the best possible position for acquisition or public listing through continued growth, profitability improvements, IP development, and building strategic relationships.
5. Maximize valuation and appeal to buyers
What do buyers look for when buying a business? To maximize valuation and appeal to buyers, tech services owners should take the following steps in the years leading up to an exit:
- Formalize systems and processes: Reduce reliance on the owner by documenting procedures, creating training manuals, and standardizing operations. Have clear processes not dependent only on you.
- Build a strong leadership team: Hire and develop managers and future leaders with the skills to operate and grow the business. Reduce key person risk.
- Expand services and enter new markets: Diversify offerings and revenue streams. Pursue growth opportunities that a new owner can further capitalize on.
- Strengthen finances and reporting: Maintain accurate financial statements. Consider an audit to confirm profitability. Institute budget forecasting and metrics reporting.
- Formalize customer relationships: Have clients sign long-term contracts and convert verbal relationships to structured agreements. This demonstrates stable revenue.
- Plan the transition: Create a detailed timeline mapping out the transfer of leadership, sale of equity, client handovers, training etc. over a 6-12 month period.
- Address legal readiness: Ensure all agreements and records are legally compliant and readily available for due diligence. Settle disputes or outstanding issues.
6. Increase your online presence and brand awareness
The key is working with a digital marketing company (or your internal team) early enough so they have time to implement strategies and demonstrate results before you put the business up for sale.
- Build your online presence - Get your website ranking higher in search engines, create engaging social media content, run online ads, etc. This makes your business appear larger and more established to potential buyers.
- Improve SEO and content - Optimize your website and online content for keywords and search engines. This can drive more organic traffic to your site, making the business seem more valuable.
- Collect customer data and analytics - Demonstrate the growth and potential of your business by collecting customer data. Analyze and improve your metrics. Hard data appeals to buyers.
- Establish your marketing team - After the sale, the new owner instantly has an experienced digital marketing team already familiar with the business. This makes the transition smoother.
With an expanded digital presence, brand authority, and data-driven growth, your business becomes more attractive to potential buyers. This puts you in a stronger negotiating position to ask for a higher valuation and sale price.
7. Communicate the exit strategy to employees, clients, and stakeholders
A clear communication plan helps retain key staff and customers through the uncertainty of a transition:
- Employees should be told early on and reassured about job security and opportunities under new leadership.
- Customers require plenty of notice about account transitions and introductions to new points of contact to maintain trust.
- Referral partners, vendors and linked businesses need advance notice of major changes.
- For co-owned businesses, communication norms should be set around informing current shareholders.
- PR and marketing strategies can help frame the news as a positive transition.
- External stakeholders may need to be notified depending on contractual obligations.
Transparency and frequent status updates reduce confusion around changes occurring during an exit.
8. Know the legal and financial considerations during the exit process
Key legal and financial considerations owners need to navigate when exiting include:
- Business entity structuring to optimize tax impacts based on the sale approach.
- Negotiating sale agreement terms like pricing structure, payment timeline, equity rollover, guarantees, and conditions.
- Selecting experienced M&A attorneys to oversee due diligence and create binding contracts.
- Modeling the tax implications of the transaction – capital gains, gift tax, asset vs. share sale.
- Projecting total costs including advisor fees for legal counsel, valuation experts, accountants.
- Accounting for any shareholder agreements, share vesting schedules, or ownership restrictions.
- Planning personal financial life post-exit if liquidating a large portion of net worth.
Allowing ample time for financial and legal planning creates a smooth transaction free of surprises.
9. Post-exit considerations and transitioning to a new venture
Exiting a business is often the precursor to retirement or pursuing new ventures. Owners should plan for the transition:
- Non-compete clauses may dictate the timing of starting other businesses in the same sector.
- Ongoing mentoring of new leadership may be expected during the handover phase.
- Roles or board positions within the old business can be negotiated to maintain involvement.
- Tax implications of post-exit income from new businesses or investments should be modeled.
- A plan to replace the former company as the primary income and achievement source can ease the adjustment.
- Financial readiness for retirement or funding a new business should be evaluated.
- Lifestyle changes should be anticipated and discussed with family members.
Planning for life after exit can make the next chapter smooth and fulfilling.
Foresight, consultation and strategic preparation
Creating a detailed business exit strategy tailored to your personal goals and business model is an invaluable exercise for technology services owners. The process of outlining future timelines, valuations, buyers, legal and operational considerations allows you to build business value and set the stage for capitalizing on the transfer when the time comes. Without proper planning, exiting a service business can be complex and emotionally challenging. But with foresight, consultation and strategic preparation across the financial, legal, tax and communication spheres, technology services owners can smoothly transition their businesses to new leaders and capitalize on the hard work they’ve invested for a new phase of personal and professional goals.
If you're currently planning your business exit strategy, be sure to check out:
- Why increasing revenue doesn’t always make your business more valuable (and what you should focus on instead)
- The 9 changes that increased the value of my business the most
- What is my business worth?
- How to switch to a recurring revenue model (and why you need to)
- How to remove yourself from the day-to-day running of your business (and why you need to)