The first time I left the corporate world, I was invited to spend time in a well-known VC incubator. I was surrounded by founders who were building toward buyouts and IPOs. These people had investors who expected an exit.
And every one of them knew their exit strategy before they had much more than a novel idea. The founders I’ve met in the succeeding 20+ years still know their exit strategy, but many of them now have it before they’ve got their idea in place.
Not sure what that says about that world, but I do know what that means for the rest of us running businesses without the backing of VC cash.
No one is forcing us to answer the question those founders answer so quickly: What’s my exit strategy for this business?
Instead, we figure out how to find customers, manage the work, handle the team, fight through slow times, and make the most of good ones. We build our businesses in the hopes that they’ll survive.
But if you really want your business (and your life) to thrive, you’ve got to have a business exit strategy.
The Default Exit Strategy Most Business Owners Take
The Exit Planning Institute found that 75 percent of business owners plan to exit their business within the next 10 years, and 49 percent within 5 years. They also report that only 20 – 30 percent of businesses that go to market actually sell.
What do all these numbers mean?
Most business owners won’t have the exit they want.
The reason this happens is that they aren’t planning for their exit early enough. According to Top Dollar Exits, only 17 percent of business owners have a written exit plan, and 58 percent have never had their business formally appraised. So, they don’t know what their business is actually worth, which means they have little to no idea of what they’re building toward.
Then, when it comes time to sell, transition to a family member, or hand things off to a management team, the owners who didn’t plan usually wind up settling for much less than they deserve.
Why Failing to Plan Is So Expensive
Life happens, which means you could wind up needing to exit your business before you thought you would.
You could have to deal with things like health crises, partnership disagreements, divorce, a surprise offer from a competitor, an economic shift that suddenly and dramatically changes the market, or a family situation that forces a decision. Many business exits happen because of situations like these.
And when there’s no plan in place, things are even more difficult and expensive.
It takes 3-5 years to build a comprehensive business exit strategy. Time is passing without regard to your readiness to begin planning. If you wait until you’re emotionally ready to leave, you’ll end up with fewer options, lower valuations, and less to take to the bank.
Planning now makes sure you have more choice about how you leave when it’s time for you to exit your business.
What Do Small Business Owners Need to Know About Exit Strategies?
Let’s start with the definition: a business exit strategy is a plan that outlines how an owner will transfer ownership of their company, under what conditions, and with what outcome in mind. It’s a way to connect your personal financial goals to the decisions you’re making inside your business today.
There are 4 common exit strategies for small business owners:
- Third-Party Sale –This is where you sell your business to an outside buyer. It typically delivers the highest valuation, but requires the most preparation.
- Family Succession – In this exit, you pass the business to a family member. The surprising thing about this exit is that it often takes longer to do well than most owners expect.
- Management Buyout – This happens when you transfer ownership to members of your existing leadership team.
- Liquidation – This is where you close the business and sell all the assets. Although nobody really plans to do this, many owners end up here.
Of course, there are also IPOs and employee stock ownership (ESOP) exits.
For an IPO to make sense today, you’re roughly looking at revenue to the tune of $500M-$700M. (Back when I was in the incubator, those founders were looking for revenue about a tenth of that.) So, this isn’t realistic for most small businesses.
An ESOP can make sense at a more modest scale. According to PCE, it typically requires at least $1M in annual earnings and a team of 15 or more before all the administrative costs are workable.
There’s a lot to digest here and even more to learn about when you’re ready to begin putting together your business exit strategy.
The point I want you to take away is that the exit you’re building toward shapes every decision you’re making right now. If you’re planning to give your business to a family member, you build things one way. If you’re planning a third-party sale, you build things another way.
You need the clarity to make the best foundational decisions that support your business exit strategy as soon as you can – just like VC-backed founders do.
How Your Business Exit Strategy Can Create Profitable Growth Today
This is the part that most exit planning conversations miss entirely. And it’s why I want you thinking about this today rather than 5 years from now.
The disciplines that make a business attractive to buyers are the same disciplines that make it more profitable and more fun to run today. I know disciplines aren’t fun in and of themselves, but if you can keep the endgame in mind and take things step-by-step, I find that the business owners I work with can systematically install them.
So what are the minimum disciplines you need?
They start with financial literacy. You’ve got to know your numbers and understand what they’re telling you.
Next, your business needs to be able to operate without you. Yup, this means you need to fully step into the leadership role and develop SOPs so you can delegate successfully.
You also need a loyal customer base. Returning customers are critical for a successful business because less customer churn means more stable cash flow.
Finally, you’ve got to get your pricing right. Over- and under-charging are both problematic. If you’re underpriced, you’re leaving money on the table and fighting a race to the bottom. If you’re overpriced, you’re not going to be closing your ideal clients.
You’re probably not surprised by anything on this list. But there’s a big difference between awareness and implementation, and few business owners create the time to implement on their own.
What’s actually possible when you build with the end in mind?
Clarity about your business exit strategy gives you clarity about how you’ll run your business today.
Those founders in the incubator knew their exit because it gave them direction. It told them what success looked like. And it shaped every decision they made before they really had much of anything to decide.
Are you building your business with the same clarity?
A business exit strategy gives you a destination. And once you know where you’re going, it becomes a whole lot easier to make your business more profitable today, more valuable down the road, and more freeing to run as you get closer and closer to deciding you’re done.
