4 Reasons Your New Business Needs an Exit Strategy

Published - May 17, 2022

You can be forgiven for thinking that you don’t need to create an exit strategy unless you’re thinking of selling your business in the next few years. But you’d be wrong. Business owners should start thinking of their exit strategy the moment they start their business.

What Is an Exit Strategy?

An exit strategy is the plan you make for how you will leave the business. Your exit strategy will look different if you want to exit soon than if you are creating an exit strategy for the future. This article will focus on an exit strategy for the future. It should be a mixture of aspirational and practical. Some of the things you may want to include in your business exit strategy are:

• • 5-year KPIs
• • 10-year KPIs
• • When you plan to exit
• • Post-sale goals for the business
• • Elements that would increase the valuation
• • List of shareholders that would need compensation

Why Your Business Needs an Exit Strategy From the Start

Think of your exit strategy as your end goal, the thing you are constantly working towards. It will help inform the decisions you make and reduce the amount of work you need to do when you are ready to exit. Here are 4 reasons why preparing to exit from the very start can improve the overall running of your business.

Your Business Runs Without You

Small business owners tend to fall into the trap of being heavily involved in their business. During the startup stages, that is understandable. Bootstrapping until you become profitable or receive funding and can hire or outsource is part of entrepreneurship. But staying heavily involved in the operations of your business after you have hired or outsourced is harmful to your business.

From a buyer’s perspective, a business that requires the business owner to run effectively is not a good investment. It suggests a lack of business structure and processes. The business owner may even be the only person who knows the “secret sauce.” A buyer may need to hire a new, more capable team or heavily invest in training for the current team since, apparently, the current owner does not trust their staff. The current owner may even be doing the job of 5 employees, so the wage estimates need to be increased.

When you start your business with an exit in mind, you need to ensure your business can run without you. Not only does that allow you to have a life, but it will actually help your business to grow faster. When you are able to take the day-to-day tasks off your plate, there is more time for growth strategy. You are able to take a step back and see what is working and what is not.

You Can Make Preparations For Your Ideal Exit

You will need to prepare in different ways for different types of exits. Preparing for a family member to take over is very different from preparing for an external buyer. You will need to find a family member who is interested and teach them the trade and all aspects of the business. They may need to spend years learning how the business operates and discussing visions for the future.

If you are preparing for an external buyer, you need to prepare in different ways. You need to cultivate a unique advantage that would increase the attractiveness of your business. This may be a process, client list, or even real estate that would make your business more valuable to a buyer.

The type of exit you want will help your decision-making when creating your business strategy. It forces you to create a solid, sustainable foundation from the start so that your business can survive a sale. As your business grows, your areas of focus should reflect the interests of your ideal buyer. If you want a competitor to purchase your business, then you might choose to focus on creating assets that they could not easily replicate. If you want an unrelated company to purchase your business, then your priority might be building a solid brand and a loyal, profitable following. If you want to pass the business on to family, then your priority might be creating solid processes and training senior staff to act as advisors to your protégé.

Your Exit Strategy Will Inform Your Profit Goals

Having an exit strategy can motivate you to grow faster than you otherwise would. In order to make your business attractive to a buyer, it needs to be profitable. By creating an exit strategy from the start, you can reverse engineer your profit goals and sales strategy to ensure you reach your profit target by your ideal sale date.

Instead of scrambling to hit a certain goal when you’re ready to exit, you can slowly build towards your profit target from day 1. All of your business strategies will take into account your profit goal and work towards it.

You Have a Metric For Evaluating Offers

Setting an exit strategy from the day you start your business gives you a lot of time to think about what your exit will look like. There is a lot more than just profit to think about; you poured your blood, sweat, and tears into this business because you thought it had something to offer the world. Most exit strategies don’t just examine the financial elements of a sale; they look at the bigger picture of your brand.

Many business exit strategies will discuss the kinds of buyers they will consider and the types of offers they will entertain. For example, you may want to sell your business to buyers that have similar brand values or goals so that your work lives on. You might want to protect your staff in a sale or even the interests of your customers.

If someone does make an offer before you are ready to exit, it can be difficult to rationally evaluate it, especially if it is a big number. Your exit plan is a vital part of your business strategy; it paints a picture of the circumstances that would make an exit you are comfortable with. You can use it as a metric to evaluate offers and negotiate. It will also help you see when you are letting sentimentality get in the way of accepting your perfect exit.

I’m Worried My Business Exit Plan Locks Me In

Just like any other business strategy, you can change your exit plan at any time. Avoiding making an exit plan because you like flexibility is like avoiding creating a marketing plan because you don’t like to lock yourself into one idea. Your exit plan will motivate you to create a profitable, thriving business, even if you decide in 5-10 years that you don’t want to exit. Businesses pivot all of the time, but that is no reason to avoid implementing this essential business strategy.

Posted in Finance on May 17, 2022