Building an exit strategy for your business.
What is the first step in creating an exit strategy for my business?
The first place to start is to define your end in the business.
Many of us start a business out of a passion or interest, and in the first few years, it’s normal not to set expectations of where it will lead. It’s also normal to have/set expectations. Once you get to a stable point i.e. ok, this works as a business and I can see it leading to X, it’s important to begin thinking about an exit strategy.
An exit strategy is a fancy word for answering this question: how will I separate from my business?
a few other questions to support your strategy would be:
How long do you want to remain part of your business?
What is the future trajectory of you in your business?
What will your role be in 3 years, in 5 years, in 10 years?
When do you want a full exit from your business?
How much value do you need to extract from your business over the duration of your time in the business (this would be a combination of salaries, dividends, bonuses, and potentially proceeds from selling your business)?
Combining these answers with your own personal circumstances will allow you to start formulating an end goal, grounded in reality.
What are my options?
There are generally 3 ways to separate yourself from a business, and these are:
a) The Money Maker
Sell 100% of the business to a third party for an agreed sale price. There are many ways to structure this, but generally, you would remain in the business for a transition period, and receive the full proceeds upon the sale. For this to happen, you need to spend a number of years separating yourself from your business before you leave. This looks like having a strong management team that runs the business without you and demonstrating this to your buyer so they are confident that it can continue once you leave.
b) The Handover
A group such as your family or your employees buy your business - and typically, they don’t actually have the cash to pay for your business. The solution: a loan is taken out backed by your business balance sheet, which pays you for your shares of the business. The loan is repaid over several years from business cashflows. This is a great option if your family or employees want to take over, and if you are not yet fully transitioned out of the business but you are ready to hand over the reins and cash out (again, likely a transition period tied to the sale agreement).
c) The Closure
This is the reality for many businesses. If your business has got you front and centre and you can’t change that, then ceasing business operations is your exit strategy. In this scenario - the strategy would be to maximize profits through the life of the business and eventually cease operations when you’re ready to call it quits. There would be costs to consider such as discounting inventory, severance for employees and the costs of breaking long-term leases or contracts.
Now that you are informed about the possibilities and options, here are some next steps:
Answer the questions above to figure out what you want.
If there is a gap in your reality and your ultimate goal - figure out how to close that gap. If you still plan on running your business for another 5-10 years, now is the time to start heading in that direction. If you’re a solo-preneur but want to eventually sell - start figuring out how you are going to build a business that operates independently.
Remember that you don’t have to do the work alone - work with a professional to work through the numbers - these can make or break your plan.
Want to eventually sell and have a number in mind? I can help you make a plan to reverse engineer how you will build a business worth that much.
Getting ready to sell your business? I can help you get your financial ducks in a row so that you get the best sale price. I can work with you to figure out how to improve your margins and sales so that you a buyer is attracted to your business. We will also get your financial reporting in order so it’s easy to get potential buyers the information they need.