As I write, it’s the start of a new calendar year, a time that many business owners contemplate the year ahead, how their business is tracking and where it’s headed. Or, what I call Exit Planning.
Equally motivated by some time away over the festive holidays from the day-to-day and feeling;
- Daunted by the year ahead and wondering how you could click your fingers to summon a cash-upped buyer ready-to-take-over, or
- Excited about the year ahead and wondering how you can make this translate to greater business value and/or if it will put you on the radar of the active acquirers in your industry.
So, what exactly is an Exit Plan?
Here’s one definition:
An exit strategy is a contingency plan executed by an investor, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria have been met or exceeded.
An exit strategy may be executed to exit a nonperforming investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.
An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO).
Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning, liability lawsuits, or a divorce; or even because the business owner/investor is retiring and wants to cash out.
Source: https://www.investopedia.com/terms/e/exitstrategy.asp
In the high flying, corporate Mergers & Acquisitions (M&A) world, this definition fits well.
In Small Business (SME) land, not so much. Did you notice how the Business Owner is only mentioned in the last sentence?
I live in SME land and, for me, Exit Planning needs to start with the owner, and their personal aspirations.
An M&A hotshot won’t kickstart the introspection you need.
Here are questions I believe essential for Business Owners to consider as they consider their Exit Plan:
- Why are you in business?
- What does the business provide you with other than (hopefully) the financial benefits?
- If you didn’t have the business, what would you do with your time?
- Do you know that you’ll be OK when you’re no longer an owner?
- What other interests do you have outside of business?
- How have your important personal relationships been impacted by the business? And,how would they change if you were no longer a business owner?
Whatever your answers are, they have a major bearing on the non-financial pluses and minuses of owning your business.
Underpinning my enthusiasm to get owners Exit Planning is a mix of financial and non-financial factors.
In pure dollar terms, you should;
- Know and understand the market value of your business, i.e. what you could sell for, should you choose, and
- Be able to identify potential buyers (or at least buyer types) and have a good feel for why they may pay more or less than your estimated market value.
Armed with a robust assessment of potential market value, you then need to think about that value as an Asset on your household Balance Sheet. An asset that you control and that fluctuates in value, just like listed shares.
If you’re planning to sell, that market value converts to cash on your personal Balance Sheet.
If you’re not, it’s an investment that you have control over and responsibility.
While I’d love to say ‘and you can take that to the bank’, the reality is our real estate obsessed banks don’t really see it that way!
More work to be done on getting banks to back small businesses!
In non-financial terms, Exit Planning is critical to making the business work for you, rather than the other way around and working towards the life and lifestyle you want.
To kick your Exit Planning along further, here are some tips to get you started and to lay some Exit Plan foundations;
Exit Planning Tip #1: Understand the market value of your business and investment today.
Then actively manage that investment and assess the time, stress, and money you invest from then on in terms of how that changes the value of your investment.
Exit Planning Tip #2: Settle on a target timeline for when you could happily sell your business.
This gives you a timeframe against which you develop and refine the business and personal plans that make sense for you.
Exit Planning Tip #3: Accept that #1 and #2 are in your control but that there is a significant probability that factors outside your control will have a major impact on your Exit Plan.
The external factors range from unexpected personal issues (e.g. health), to business interruption (loss of a key client or staff member), or disruption (new technology), to the more positive, where a potential buyer unexpectedly approaches you to sell.
Exit Planning Tip #4: If you have a strong business, you will be ‘on the radar’ of competitors or other business buyers.
The stronger your business, the greater the chances you’ll get an unexpected approach. It happens all the time. You probably know that. Waiting on this to happen might result in an Exit, but that’s not the Exit Plan I’m referring. It’s about being ready for their call, knowing your market value (and why it might be higher for these buyers), how to negotiate, etc. all take time and are part of your ongoing Exit Planning. Indeed, if you feel like you’re waiting too long for the call, there are ways to bring urgency to the potential buyer.
Exit Planning Tip #5: If your Exit Plan is simply to appoint a broker, set a price and advertise the listing when it suits you, then you’ll likely fail.
Selling a business quickly (because that’s what you’re likely hoping with this strategy and what the broker will promise), cleanly (i.e. quick and smooth hand-over to the new owner) and for market value is highly unlikely.
If you have a good business, you need to invest early in some planning to sell well.
Exit Planning Tip #6: If you have a business that actually ‘runs under management’.
If your business runs under the management of a manager or management team, and not you the owner, there are two things I’d urge you to consider;
- Keeping it: It’s potentially the best investment you’ll have on personal Balance Sheet, and
- Selling a stake in the business to the manager (or team) who do the ‘running under management’.
If you're struggling at the thought of starting, consider this genius: To finish a helpful Exit Plan, you need to start somewhere.
So if you want to crack on with YOUR Exit Plan, please book a call here. We can talk about what your aspirations are, where I help best, and, if outside my expertise, which of my other colleagues might help you.