Contrary to popular belief, exits aren’t limited to the sale of a business to a third party or a flashy, newsworthy IPO. 

In reality, in any one of their many forms, they’re an inevitable endpoint in every entrepreneurial journey. As such, they should be considered and planned for by every business owner at some point. The alternative is backing into a low-quality exit. High-quality exits are created, not found by accident.   

While “the earlier the better” is a good rule of thumb for when to start planning for one (as Shakespeare once wrote, “better three hours too soon than one minute too late”), here are five of the most common trigger moments when it becomes particularly important to start seriously working on the creation of an exit strategy:

  • When facing a significant partnership misalignment: You always hope to avoid them, but partnership disputes are unfortunately a reality. From misalignments on immediate or long-term goals for the business, to clashes in core values to personality conflicts, partnership disputes come in different flavors. When one of the partners believes the conflict is irreparable, the prospect of exiting one (or more) partners from the partnership – or deciding to sell the business to a third party – arises. A core partnership can also be structured so as to prevent expensive deadlocks, using mechanisms such as shotgun or drag-along clauses, accompanied or not by rights of first refusal. A good core partnership agreement is one that prevents and prepares the partnership for multiple likely exit scenarios (from ideal to unfortunate), so that exit opportunities don’t simply become triggers for lengthy and messy internal negotiations. Otherwise, the exit process can become an acrimonious, complex – and often hostile – negotiation among former partners who simply don’t see eye to eye anymore. 
  • When planning for a reduction in role or stake: Sometimes a founder wants to redesign their role, or leave the day-to-day operations to others altogether – while still wanting to maintain a stake (perhaps even a majority stake) in the business. This could happen for a variety of reasons: they may want to pursue other endeavors outside the business, or may simply be ready to take on a smaller role and create more time for them and their families. In such cases, “internal exits” can be a great way to start. By gradually expanding the roles of team members – sometimes assorted with option or equity grants, sometimes under restructured agreements – founders can progressively remove themselves from segments of the business’ operations. The great thing about internal exits is that founders slowly make themselves more replaceable, which opens up more options in an eventual sale. Many entrepreneurs execute internal exits first, as a step or set up for an eventual external transaction. A well-articulated exit strategy often includes both.  
  • When preparing to sell or IPO the business: Should a founder decide to sell their business – usually with a goal of maximizing their net payout – a good exit strategy will guide the process. Selling or taking a business public will usually involve third parties, such as business brokers, investment bankers, and M&A professionals – finding the right partners is absolutely critical. Also, preparing for a sale or IPO is a process that can take time to implement (tax optimization, re-organizations, asset protection, compliance obligations, implementing changes to agreements, etc.), so it’s recommended that this start at least 18 months before the intended exit, with an ideal time frame being somewhere between 3 to 5 years before the transaction. The closer one gets to the transaction date, the narrower and less impactful their options will be in the actual planning, and the more painful the due diligence process will be. 
  • When preparing to hand down the business to the next generation: Some founders (Logan Roy, anyone?) are in it for the long haul. For them, exit planning is mostly a matter of succession planning. They are typically looking to transfer equity and operational responsibilities to a combination of key employees and family members. For them, succession tax planning (which includes life insurance and wealth planning) and legacy issues (including philanthropy) will be paramount. Since the instruments in question can get quite complex – including trusts, wills, and advanced tax planning techniques – it’s in their interest to not only start as early as possible, but also review their legacy plan in light of new and evolving circumstances. At the same time, their time horizons are typically longer, so they have less urgency to prepare for the exit planning – then again, the angel of death has a nasty habit of showing up unannounced. 
  • When facing the unfortunate reality that the business won’t ever “turn the corner”. Sometimes, despite a founder’s best efforts, the business simply cannot turn the corner to sustainability or profitability. In such cases, less exciting – but nonetheless necessary – forms of exit must be considered. These can include selling key assets, restructuring, insolvency or bankruptcy. It can also include bringing on a new financial or operating partner or selling the business at a discount. A founder exiting this way should make sure to protect their future ability to start afresh. 

Planning for a high-quality exit in advance is something founders can always benefit from, but these five triggers describe times when it’s particularly relevant. 

Once a strategy is in place, a founder can focus on the steps required to materialize it – and can keep updating and customizing it to changing circumstances as they go.  

Now that we know when to start thinking seriously about an exit strategy, what general factors should a founder focus on in designing it?