The sooner you begin thinking about life after your business, the better prepared you will be for that day and the more likely it will happen on your terms.
When my eight year-old son challenges me to a foot race, I begin with the end in mind. I know I have to lose the race, but I also know that I must do it in way that is fun and exciting for him. My exit strategy clearly dictates how I run my race!
In general terms, the financial value of a business relates to the amount of money you earn along the way plus the amount of money you earn when you exit your business. If you are building a family business, your value is not in what you can sell the business for but rather, it is the amount of money that your children can earn once they take ownership of it. In either case, it is important to give thought to a clear exit strategy so that you can increase the chances of achieving your goals. Knowing what you want to achieve when you exit your business can affect the way that you operate from the very beginning. In short, it is never a bad idea to start with the end in mind.
When I graduated from university I started up a small chain of grocery stores in Toronto, Canada. I did not think about an exit strategy – I just wanted to be my own boss. If you asked my wife today, she would tell you that even after all these years, I still can’t stand being told what to do! Way back then, had you asked me what my plan was, I would have answered with (a) make as much money as I can and (b) do what I want to do.
After eight years of making lots of money, a very generous offer came to buy the business. Because I had no exit strategy in mind, I turned it down. I had never thought about what I would do next or how I could maximise the sale price of the business. In my mind, I could not separate myself from the business. All I ever thought about was doing things my way and making good money along the way. Four years after rejecting the offer, there was a change to the local laws that had allowed me to remain open on Sundays while the national chains were closed. Overnight I went from making good money to losing money and in the end, I ended up selling the business for a fraction of what was offered just a few years earlier.
A good exit strategy, formed when I started my grocery stores, would have helped me avoid all this. In my case, had I given as much thought to eventually selling the business as I had to maximising my daily sales, I would have been prepared to negotiate and accept the offer that eventually came my way. I had half the equation right (earning money along the way) but in missing the other half (the sale of the business) I managed to lose everything.
Learning from mistakes
The upside of these experiences for me was the lessons learned. Understanding (the hard way) the value of a good exit strategy has allowed me to create a number of successful start-ups since then in both Canada and here in Australia. From my grocery store experiences, I now enter a business with the end in mind. What you get from the sale of a business is now as important to me as the income opportunities that arise as you grow the business. Building equity in a business is just as important as generating income.
There are a host of exit strategies that an entrepreneur can take and each one depends on a set of circumstances as unique as your business. You can sell your business as a going concern, you can sell the contracts you have with your customers, sell the business assets, sell the customer list, sell your IP, go public, pass it on to the children, merge, sell controlling interest or just close the doors, turn out the lights and ride off into the sunset. How you exit your business is determined by both the type of business you are in and what your business goals are.
Timing is everything
Once you have determined the best way for you to eventually exit your business you need to be clear on the timing of it. The timing of your exit will be determined by your industry, general market forces, the economy, and of course, where you are in the achievement of your business goals. Is it revenue targets that will trigger your exit or is it your age? Given the way things are these days, perhaps the trigger point is your stress levels. Whatever it is that determines when the time is right for you to exit the business, you will need to have thought and planned for it well ahead of time.
Your exit strategy often dictates how you operate the business from the onset. For example, if you are building up a retail store operation that you will want to sell one day, your stores need to be protected by long-term leases at preferred rates with reasonable renewal options. If your business is based on physical premises, you have to ensure these are protected for the long term. The shorter your lease, the less money you can expect from the sale of your store regardless of your revenues or profits.
As you grow your business, you will develop strategies for maximising revenues and profits. Often, you will reinvest, sacrificing short-term profits for long-term gains. Do you grow organically, borrow money from traditional lenders or take on equity investors to raise the capital necessary to reach your goals? The timing of your exit strategy comes into play and will factor into these decisions. If you are planning an exit anytime soon, why invest current profits into future opportunities if you don’t plan on being around to reap the benefits of those reinvested profits?
What affects your final price?
What are the things that will positively affect the valuation of your business when it comes time to execute your exit strategy? Just as importantly, what are the drivers that will negatively impact your sale price? The answers to these questions must be thought of and addressed proactively right back at the beginning while you are busy running your business, well before you contemplate triggering your exit. Again, your exit strategy will have a direct effect on how you run your business.
There are many drivers that will positively impact your exit valuations that are specific to your particular industry. Here are a few conditions that universally benefit the sale of a business:
- A minimum of three consecutive years growth of revenues and profits.
- A minimum of three years of excellent financial records.
- A diversified customer base. Your purchaser won’t want all their eggs in one basket.
- Your business has ownership of unique intellectual property that is in demand
- A contracted, recurring revenue model is always a popular model.
Just as there are some universally accepted beneficial business drivers, there are some that will always detract from your ability to exit the business on your terms. Some of those would include:
- There is recent or imminent litigation affecting your business.
- Your business is in arrears with key suppliers or even worse, you are behind in your tax or superannuation remittances.
- Your business is not growing.
What are you waiting for?
The only time it is too late to do something to positively impact on your business’ valuation is after you have sold the business. The sooner you begin thinking about life after your business, the better prepared you will be for that day and the more likely it will happen on your terms.
Starting a business is all about an individual taking control of his or her destiny. Planning the exit strategy is as important as determining how the business will be run from day to day. To succeed in business, you need to know not only how to start or grow a business but also how to exit it.