Don’t feel bad if you don’t have a business exit strategy as you’ll be in good company with the vast majority of small and medium sized business owners out there.
But to be fair, you can define an exit strategy in a lot of different ways.
So lets go over the ways I would describe it and you can send me your comments if you see it differently.
The first type of exit strategy is to sell your interest in the business when its worth the most to others. The focus here is to work on increasing the enterprise value of the business and always have the business in what I call a sellable position, so when opportunity comes calling, whenever that may be, you’re ready to take advantage of a good payday.
The rationale is that you can’t predict when a highly motivated buyer will be looking to invest in what you have been building. So when ever the situation presents itself, you are ready to entertain top level offers.
The second type of exit strategy or approach to business exit is to build up the business to a point where its doing very well in its market and getting close to peak performance where incremental efforts to increase profitability will only generate marginal gains. The rationale is that the best price for selling an interest is when a business is at the top of its game and has a solid near term track record to back it up.
There is never any guarantees that performance at that level can be sustained, so why not try and sell out when you can paint the most glowing picture? If a new competitor enters the market, or an old competitor re-invests, or the economy turns, or whatever … will the spin off effect create a drop off in business, which in turn reduces the business value? Here, we never assume that business will be good and like any other market you want to sell at or near the height of the market.
While similar to the first strategy, this approach is more fixed on the near term where the owner may give himself up to 5 years to build up the business and get out. In the first strategy, while a short term sell out is possible, the main focus is to always be ready to sell if the opportunity arises whether that be in 5 years are 25 years.
Following the first two strategies towards exit, you are always treating your business as an active market position that you are prepared to sell for a good profit at any time.
The third and most common approach is to own and operate a business until you reach retirement age or you just get pain sick of it. The problem with this approach is that its not really a strategy at all in that its far easier to say my exit strategy is to sell when I retire. Therefore, no work is required right now, especially if you’re 10+ years to retirement, right?
Wrong, or at least I say its wrong. Why? Because when that day comes when you decide its time to retire, what are the odds that the business is at or near its peak value, what are the chances its been built up for sale over a series of years to support a solid sale price, what is the probability that there will be a demand for what you’ll be trying to sell?
If you want to take this approach, then in order to get the most out of your business for retirement, you need to be planning the exit strategy years in advance to build a profitable exit versus hoping a profitable exit will happen.
Unfortunately for many, there is no profitable exit and still others that could have been a lot more profitable with some planning and for thought.
If you don’t have an exit plan, its definitely something to start seriously thinking about.