The term entrepreneur goes hand-in-hand with self-starter, business person and visionary. Entrepreneurs are creators. So it might seem strange to see the word entrepreneur and exit strategy in the same sentence.
The word “exit” reminds us of failure or giving up, and this is the last thing we associate with entrepreneurs.This is a misunderstanding of what an exit strategy is and what it means for your business. Moving on from something is not necessarily giving up on it.
It is important to think about how things will look at the end of your business cycle. This is a good way to figure out how to grow your business today.
It is my opinion, too many entrepreneurs don’t pay enough attention to their exit strategies. They either don’t think they’ll ever need one, or they figure they’ll come up with one when the situation forces them too.
Plus, in the frenzy of starting and running a business, you’re constantly being pulled in different directions. It’s can be challenging to learn how to properly delegate tasks to employees, let alone selling a business you just started.
Doing this is not only bad planning, but it’s causing you to miss out on analyzing your business to identify strengths, weaknesses, threats and opportunities.
If you’re not convinced, here are five reasons why you need an exit strategy for your business.
Reasons For an Exit Strategy
You Never Know What Will Happen
As much as you may try, you cannot predict the future.
As the expression goes, “Life is what happens while you’re making other plans.” So, while you may think you’re all set in your business, and will be for the foreseeable future, you never know what can happen that will take you off course.
New technology, family issues, medical problems, competition and/or a change in passion can all easily happen.
If you don’t have an exit strategy in place, but find yourself in need of one, you likely won’t be able to choose the most ideal exit strategy. Chances are it will be chosen for you either by someone looking to buy your company or your competition.
Worst-case scenario, you sell all your assets and close your business. Best-case scenario, you find a suitable buyer and you can sell your business. But without proper planning, there’s little chance you’ll get an offer that reflects the value of your business.
Building a business takes time, money and sweat equity to grow. The least you can do is make sure you get rewarded for your hard work when you sell it.
Another reason to consider is retirement. A lot of entrepreneurs don’t plan for retirement. They have the mentality, if you love what you’re doing, why stop working?
The business becomes their future retirement plan. Not a bad idea, but you should plan because stats say, 34 percent of entrepreneurs don’t plan for retirement.
Have a Plan For Investors
While your focus as a small business is on your customers, there’s one group of people who have more invested in your business than you. Its the investor.
Whether you’re starting out or if you’re a ways into the business, there will come a time when you’ll need an investment. This will help build the business and take it to the next level.
You may want to launch a new product line or open a new location. Whatever it is, you’ll need startup capital. No one is going to invest in you unless they know how they’re going to get their money back.
Designing an exit strategy is a concrete way of helping you explain to investors how they will recoup their investment and profits.
Now remember, you don’t actually have to use this plan. If things change and you can pay back the investment, that’s fine. But it’s a lot easier to sell a detailed plan than a “maybe someday we’ll have enough to pay you back.”
A common pitfall for entrepreneurs and small businesses is focusing too much on the short-term. This is understandable; it’s hard to stay afloat from month to month. But if you aren’t thinking about the big picture, it’ll only hurt you down the road.
Planning your exit strategy asks you to project several years into the future and envision where the company will be. What will it look like? How will it be the same? How will it be different?
You’ll never get your company to where you want it to be if you don’t first picture it in your mind. Designing an exit strategy forces you to do this. If and when you do leave your business, you want to do so when it’s in its best possible state.
Imagine the future of your company and how you plan to get there. This will help identify areas of your business that are performing well and those areas that need more time, money and resources.
Often times you won’t realize these areas of concerns until it’s too late. When you think long-term you can snuff out problems before they become a bigger.
Step Outside the Business
When planning your exit strategy, think like the person who may one day purchase your company. Ask yourself, if I walked into my company today, what would I see? What works and what needs to change?
We don’t often do this when thinking about our business. It’s can be hard. We’re so deeply involved that it becomes difficult to zoom out and see things in a different way.
Pretend you’re an investor that is looking to buy your business. This is an excellent method for changing your point of view and finding strategies that can improve your business.
This activity is particularly useful for identifying risks and creating plans to mitigate them. No one wants to purchase a business that’s not being run properly. The dangers range from not being competitive, facing legal action, fines or a company not meeting regulatory standards.
From the outside, these risks are easy to identify. You’re more likely to be honest about their severity when looking from the outside in.
A Valuable Business is a Good Business
Lastly, one of the main reasons it pays off to design an exit strategy is that it allows you to build value into your business. Your revenue is big part of determining your company’s value, but there are other factors.
To successfully exit a business, you need to plan in advance so that you can improve certain areas of your company and increase your chances of getting maximum value.
Here are some of the ways in which business value is determined:
- Current revenues
- Future growth and sales projections
- Lead generation strategies
- Brand awareness and recognition
- Risk management
- Business processes and systems
- Records keeping
Excelling in all these areas will make your business more valuable to the buyer.
Well, it’s quite simple. Focusing in these areas makes your business better. Any entrepreneur would want to own a company that is worth a lot of money.
Because it is likely that it is making money or has the potential to, when the entrepreneur buys the company.
Looking at how you’ll exit your business, and working on implementing changes that maximize the value is good business sense. You rigorously analyzing your company and by doing so, you make it more valuable and sort after by potential investors.
An exit strategy does not need to be a scary thing. As the entrepreneur, your business is your life. Walking away from it can seem like one of the last things you’d want to do. But planning to exit the business is not only smart, but it can help you find ways to improve it.
Existing your business requires you to analyze your business in a new way. It improves the business now and makes it future ready.
He is an internet business broker. He specializes in buying/selling and appraising of online businesses.
He’s been running businesses for a long time and frequently writes about his experiences to help entrepreneurs. He is an advocate of planning for the future. For more info on Jock, click here.