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An exit strategy is a key component of entrepreneurship, as it can provide a sense of safety and peace of mind.
You wrote a business plan to launch your company. To say goodbye to it, you need an exit plan to get the maximum possible return and to limit any future exposure to what happens to the company after your departure. But years of experience teach you that nothing in business is predictable — and that’s why you need two exit plans.
Today, most business brokers and advisors recommend incorporating a thorough exit strategy into your business planning from the very start. While it may seem counterintuitive to plan on starting or buying a business and simultaneously plan how you’re going to sell or remove yourself from it, this is the smartest move you can make in today’s fast-paced economy.
Here are some of the benefits of developing an exit strategy.
If you don’t know where you’re going, you’ll never know when you get there. An exit strategy helps define what success is for you and provides you with a timetable complete with milestones toward your exit.
Without a plan, it’s easy to get caught up working “for” the business, and resolving day-to-day issues. With a firm end game in mind, you have the vision to work “on” the business instead, planning and executing the strategies you need to achieve the ultimate end goal you’ve set for yourself.
If you don’t have an exit plan, your business will have some inherent value when you look to change ownership, but this is often the baseline value. With an exit strategy where you have a clear end goal in mind, your business is worth more to potential buyers or investors. You’ve grown it, locked its profitability, trained a strong management team, established a customer base, cemented meaningful supplier relationships and, most importantly, structured the business to operate independently of your personal involvement. That is valuable.
At some point, you will likely need to make adjustments to your exit strategy. Sometimes, that will be for business reasons. Other times, something unexpected and unwanted like a sudden death, divorce, major health problem or required relocation may force you to change course. It’s easier to revise and tweak a plan that already exists with clear objectives and milestones than to come up with one suddenly to cope with a sudden change.
Having a preexisting strategy makes managing unforeseen events simpler. That’s because you already have a way of making decisions for growth — one that’s got you to where you are. You can strengthen this by involving outside professional advisors like a business broker, attorney and accountant to help you course correct when necessary and to monitor progress against your goals.
Creating one exit strategy may seem daunting enough, but to cover your bases, you should craft two different plans: one for a voluntary exit and one for an involuntary exit.
With a voluntary exit strategy, you’ll know the following:
But things don’t always go the way you expect them to, so you need a plan for that as well. With an involuntary exit strategy, you’ll know what to do in the following situations:
The best way to plan for leaving your business for good is to prepare as if you have to leave it involuntarily. That might sound strange, but the situations that lead to voluntary and involuntary exits have a lot in common. For example, in either scenario, you need to do the following:
With two exit plans in place, you have more bases covered, and you can carry out strategies that benefit both you and the new ownership.
Developing a well-rounded exit strategy entails the following.
For your voluntary exit strategy, set yourself a date in the future by which you want to achieve your ultimate goals. These milestones could be based on metrics like company revenue and profitability. Decide on whether you’ll still proceed with a sale if you’re not successful in hitting those targets.
When you have a fixed date of departure in mind, your approach to running the business changes. You now think long-term as well as short-term because you’ll constantly be looking for ways to not only improve profitability but also build more value in your business to make it as attractive as possible to potential buyers.
Try to come up with “buyer personas” — documents that detail the type of person or company that would want to buy your business and why. (These are similar to customer personas, which are developed to identify your ideal customer.) To get your wheels turning, look below at potential buyers for four very different types of businesses.
Company type | Likely buyer |
---|---|
Local retail or hospitality business | Individuals with cash looking for a career change or a local or national competitor who wants your location and customers |
Fast-growing e-commerce company | A rival e-commerce company selling the same products or a search fund or venture capital fund that believes it can grow your business much faster and sell it off to a private equity group in five years’ time |
Scientific or professional services company | Competitors who want your staff, customer base and intellectual property; you’ll also be a target for companies whose products or services complement your own and that want new things to cross-sell to your and their customers |
As-a-service subscription model | Competitors and tech investors interested in monthly recurring revenues |
Think about what specific aspects of your business will be valuable to buyers. Consider how you’ll develop and showcase those assets to increase the appeal and value of your company at the point of exit.
Sometimes, your company’s real value may be hidden behind your North American Industry Classification System (NAICS) Code. Don’t limit your company’s selloff potential by only considering buyers in your specific field.
Consider this example: You’re an e-commerce retailer and you’ve developed custom software that places your products in prominent search positions on third-party sales platforms. That, of course, would have great value for a purchaser from your sector. But it may have much greater value to a technology company and you could make a lot more money selling or licensing that software than doing a traditional sale to a competitor. Another benefit is that you could sell or license this software to raise cash if your company falls on hard times and needs money quickly.
Keep finding areas of improvement across your business. If you have developed custom software, as mentioned above, continue to develop it with your own needs in mind first but also consider what other companies would need to make them want to rent from you.
Look at new ways to get more people to your website or your premises every month with each visit costing you less. For instance, consider changing suppliers if you’re offered a similar quality product or service that does the job for a lower price. Ask yourself what you need to do to get that package to your customer in three days instead of four.
Another great way to build value is to do a competitor analysis. Investigate the competition in your market. Where are they doing better than you and how can you match or beat them?
Be experimental and creative in your advertising and keep tweaking every campaign to find wins like a drop in cost per sale or conversion. If you can prove to a potential buyer that by spending $1 on this campaign, you get $10 in revenue back and that’s been the case for years, that has tremendous value.
Promote deals to customers through email marketing campaigns and short message service messaging and aim to make as much money as you can on each sale. Think of your future buyer when pricing up and chasing new business.
Don’t use the client email addresses and phone numbers you’ve collected just to move inventory; use them to grow customer loyalty.
Let customers know about a new product before it goes live on your website and give them the first opportunity to buy it. Send emails asking repeat clients to recommend you in online reviews. When someone does, give them a shoutout on social media and offer them a present as a thank you. [Learn the importance of social media for small businesses.]
Use customer tracking tools to work out the annual and lifetime value of each customer. Buyers look for those types of numbers. They also like companies with lots of clients who have given permission to receive emails and texts.
Customer loyalty is also key in any involuntary exit plan. If a crisis arises, you can attract regular clients and raise money quickly with a one-time sale. For example, if you sell subscription services, offer a special annual deal to existing customers to generate an influx of cash.
The hardest types of businesses to sell are mom-and-pop shops and one-man bands. To a buyer, it’s like buying a job, not a company. It’s also really hard to sell businesses where there are 10 to 20 employees but success is still the responsibility of the owner. That’s because it’s like buying the job of a senior manager.
Delegate an increasing number of responsibilities to your employees over time. Train them and trust them to take on key tasks. If they make a mistake, be there to help them fix it and build up their confidence. If you don’t delegate, you’re training helplessness instead of anything valuable.
If a buyer asks, “Have you spent time away from the business?” you want to be able to confidently and truthfully say something like, “I spent three months in Hawaii and got one update email from the team a week. Everything ran like clockwork.”
For an involuntary exit plan, knowing you can step away for a while and still draw money thanks to your responsible staff gives comfort if you’re suffering from ill health or burnout.
You should try to pay down as much company debt as possible. That’s because when one company takes over another, things like business equipment loans and factoring service agreements cannot be novated.
In other words, they have to be settled in full on “completion day” (the day you sell your business). Normally, whatever you owe creditors is subtracted from the agreed-upon price you sell your company for, so you want to have less debt to subtract. Paying down debt also reduces your monthly servicing bills, meaning more profit in the meantime.
Selling your business costs a lot of money. There are lawyers’ fees, accountant fees, professional service fees, a commission to your broker and more. For a business with $1 million in annual revenue, expect to pay up to $150,000 for a successful sale. If a deal is agreed to but falls through, you’ll still have to pay your team of outside advisors and experts.
If your business is struggling financially, having a decent amount of money saved up gives you more time to delegate day-to-day tasks to staff and raise cash by selling assets. If you also shrink your payroll and look for other savings, this will buy you even more time, financially speaking.
There are dozens of ways for owners and investors to exit their businesses; however, the path chosen often depends on the age and size of the company.
Beware of earn-outs. With an earn-out, you receive part of the agreed price for your company now and the remainder in tranches over a period of time based on the business’s continued performance.
It is perfectly normal not to receive your asking price in one go. However, if you agree that what you’re paid will be linked to the performance of the business once you’re no longer in control of it, you’ll be putting yourself in grave danger of not getting all the money you’re expecting.
Now that you know what creating an exit strategy involves and how exits can differ for startups versus established businesses, follow these tips when executing your plans.
You need to build your own professional team for the sales process because your buyer will almost certainly have one. You want to level the field as much as possible, but you also want people on your side who know the intricacies of selling companies.
Consider hiring part-time chief financial officers or fractional chief marketing officers well before you put your company on the market. Bring experienced, proven talent with wider connections in the business world to your C-suite to help you improve the organization first. They’ll be invaluable in helping you carry out your exit strategy when a deal is on the table.
These same professionals will have proven themselves adept at crisis management in their careers too. They’ll be able to help you get out of awkward financial situations and train your workers to handle management responsibilities.
Inform your accountants that you want to be in a permanent state of readiness in case you receive a purchase offer out of the blue or decide to put your company on the market. Once you’ve identified the financial areas of greatest interest to your buyer type, make sure your accountant updates the company’s finance reports on a weekly or monthly basis and keeps historical records of them. The best accounting software will come in handy. [Related article: How to Hire the Right Accountant for Your Business]
Retain a lawyer, preferably one with mergers and acquisitions (M&A) experience. Your buyer’s corporate lawyers will vigorously defend their interests and try to use the information you provide about your business during the due diligence process to bring down the selling price. You need someone on your team to advocate on your behalf.
Opinions differ on the effectiveness of business brokers and M&A advisors for companies with an annual revenue of less than $1 million. If you’re confident enough, it might be worth forgoing an advisor and handling the process yourself.
But what does a broker do? They market your business in many ways, often on websites like businessesforsale.com. They also handle initial inquiries, verify potential buyers have the required funds to purchase your company and sit in on the negotiations over price. Many try to engineer a bidding situation where two or more interested buyers make offers at the same time to try to drive up the price.
Brokers often also intervene during the due diligence stage. During due diligence, the buyer’s professional team of lawyers and accountants will ask for lots of detailed information about your company, often over a period of between three and six months. Their job is to help the buyer understand exactly what it is they’re buying. Tempers often become fraught during due diligence for a variety of reasons. When this happens, the brokers often act as go-betweens to smooth relations and keep the deal on track.
In years past, a buyer’s lawyer would enter a private room at your lawyer’s office called a “data room.” Here, they’d inspect financial and employment records, as well as documentation regarding intellectual property ownership and previous and ongoing legal disputes. Most data rooms are now virtual and the professional teams acting for the buyer and the seller usually email documentation to each other.
Create your own online data room as soon as you can and ask your accountants, lawyers and managers to submit updated reports every month. Delays in providing information can upset buyers — something you want to keep to a minimum.
Once you’ve settled on an exit strategy for your business, don’t spend any more than 30 minutes per day on it, even if you have a deal on the table and it’s going through due diligence. Concentrate on running your business as well as possible to retain and build on the value you’ve already created. Buyers will expect this and they’ll be able to monitor if you’re protecting their interests from the updated information in the data room. Proceeding with business as usual while simultaneously preparing for the future is the best way to be ready for a voluntary or involuntary exit.
Bruce Hakutizwi contributed to this article.