It's Never Too Early to Think of Your Exit Strategy

Whether you plan to pass your business down in the family, sell it, or something else, the question is not if you will leave your business, but when and on what terms. There is no one-size-fits-all, and a successful exit strategy does not need to project the future with absolute precision. Rather, it should be a guide that sets out the course ahead but allows for flexibility should circumstances change. Keeping the endgame in mind helps you set out long-term goals, clarify day-to-day priorities, and strengthen your chances of leaving on the terms that work best for you.

What your options are

There are many ways an entrepreneur can exit from their business, including some that are industry-specific and those that are a blend of several. The following are three broad categories, each with its own sub-categories.

Liquidation

Liquidating your business means selling off its assets. It is akin to selling the pieces of your car separately–the wheel, tires, leather from the seats, etc.–instead of the car as a whole. Just like how a nice car is worth more put together than in pieces, you can expect the lowest return on investment when liquidating your business. By disposing of your business’s assets, you separate them from the value of the goodwill and other intangible benefits they gained by integration with your business and its operations. But liquidation can offer simplicity, speed, and flexibility, any or all of which may align with your interests at the time you decide to wind up. Two ways to think about it are liquidation over the short-term and long-term.

Short-term liquidation, like the name suggests, occurs over a short period just about when you’re ready to close up shop. This option requires the least upfront planning but comes with increased risks of discounted sale prices and finding buyers.

Long-term liquidation is like short-term, but with the benefit of forethought that allows you to maximize your lifestyle by extracting assets over a period of time. This may include paying yourself an increased salary/dividend, scheduling asset sales to align with your exit timeline, and putting them up for sale without the pressure to sell to the first good offer. By scheduling the sale of particular assets, this option also offers you the flexibility to scale down operations over a period of time without shutting the door entirely.

Sale

It isn’t the case that only high-tech startups get bought. In fact, small, community-based businesses can be attractive options for buyers looking to get a foothold with a business that already has a customer base and revenue. If your plan is to sell your business, it’s important to keep your value proposition in mind – that is: What makes your business more than just the sum of its parts? Do you dominate a niche business that a competitor would value? Does your business have a loyal customer base that new ownership can rely on?

If your plan is to sell your business, who your target buyer is can make a difference in how you plan. For instance, you may decide your best option is to sell to a group of investors with little-to-no industry experience. This group might be skeptical of relying on customer loyalty and would prefer to base their purchase price on hard numbers. Meanwhile, a local or large competitor with long-term growth goals might be more motivated by eliminating competition than paying the least amount possible, which could help you extract the best price. There’s also the option of selling to one or more employees, who may seek to leverage their position for a discount, but also may give you the best chance to extract the most value from your business’s goodwill.

Succession

Many parents dream of one day handing the keys to their child. Indeed, many children of entrepreneurs look forward to one day taking over the family business themselves. If this is your plan, you need to consider several things.

First, if you have over one child, which one? Or, if you intend to split it among several, how? Does the child you intend to pass it on to want it, and are they willing to put in the work to prepare? You should make these arrangements as early as possible, and particularly as the outcome becomes more likely, and understood by those affected.

Second, what does this mean for your timetable? Passing the business on to your child is well and good, but that likely requires maintaining the business until they’re of the right age and experience to take over. Do you want to work for that period of time, and is it likely that your business is sustainable with you at the helm?

Finally, it’s worthwhile considering how this succession plan impacts key stakeholders, whether it be your employees, customers, or financiers. It is possible that each one of these constituents maintains their relationship with the business because of their trust in you. Are they going to stick around when your child takes over?

What you can start doing now

Regardless of your exit strategy, the following are several things you can start doing now to put you in the best position possible when the time arrives.

Keep records in order

One of the first rules of maintaining a business is keeping your records and affairs organized. This means clear and legible accounting records, outstanding obligations, updated licenses, and anything else a potential buyer or successor would need to see before taking over.

Consider strategic priorities

By giving thought to the endgame, you can clear up strategic priorities for your business. For instance, if your plan is to sell one day, you might pursue a growth strategy at the expense of profits. This would affect day-to-day decisions like products to invest in and marketing tactics. However, if you plan to live off the profits and one day hand the reins to your child, you’re like to prioritize day-to-day profits and risk management over high-growth strategies. Strategic priorities will help you focus your financial goals, allowing you to better identify projects that will ensure you set your business up to be competitive for the long run.

Put the right team around you

Putting together a team of employees that are not just working for the business because of their relationship with you is crucial for remaining flexible in your exit options. But putting the right team in place is not just limited to employees; this could also include accountants, lawyers, business brokers, and bankers, all of whom play a role in maintaining your business, advising you on decisions with exit planning implications, and keeping you focused on the long-term.

And, again, if your plan is to have one of your children succeed you, it’s important to make these people aware as soon as is necessary. Long-term employees who know your child and don’t think they’re up to the task might be unwilling to work for them, or your banker might be skeptical of extending another line of credit. Revealing your intentions sooner rather than later, and what you’ve done or are doing to make the transition as smooth as possible, will go a long way in maintaining their trust and setting your child up for the best chance to succeed you.