When you start a business, you have a fair idea of whether you are setting it up as a primary source of income or as equity that you can divest for a profit in the future.
The reasons for starting will influence how long you plan to be involved and your exit strategies. There are innovators who want to change the world one idea at a time, those who don’t want to work for anyone else and others who want to get faster profits out of a great idea.
Successful entrepreneurs (especially serial entrepreneurs) consider exit strategies as the foundation of the vision and planning for their new venture – a question to be addressed at the start. Tech companies are especially good at planning exit strategies. Instagram is the poster child for successful exit strategies.
However, what seems to be an obvious step often gets demoted down the list of priorities and, lost within the operational ‘busyness’ of running a business and chasing profit margins.
Commonwealth Bank found that less than half (47%) of Australian small business owners have an exit strategy. More alarming is the fact that half are working more than 50 hours a week, even if the business will close. Fewer family businesses have an exit strategy in place. According to a study by Pitcher Partners/Swinburne University, around 75% of business owners have no exit strategy. And, according to a survey by accountancy and business advisor network DFK, exit strategy is one of the top 10 issues SME’s grapple with.
Aside from giving the business a sense of purpose, a clear exit strategy also helps in generating financial support. As an angel investor, I’m more confident in businesses with an exit strategy that will most likely yield returns for my investment within a set period of time.
Here are a few considerations to think about while planning to sell your business for a profit in a few years:
The oft-heard mantra when talking exit strategies is: “the sooner, the better”. Exit planning should ideally start when your business does. If you don’t, you will become part of the group working over 50 hours a week for a business that will eventually close – often worrying about operational issues at the detriment of your personal wellbeing.
Thinking about exit from the business early on also gives you the acceptance and understanding of how much growth you can achieve within a given timeframe.
Seek professional advice early
Start speaking to accountants, advisors and other planning experts prior to developing your exit strategy, so you know what factors to consider and are structuring it into feasible timeframes. Their help in building the valuation of your business is important to increasing the chances of selling at maximum price. Their due diligence and marketing advice will frame your strategies over the years leading up to the sale.
Build your value
Price often gets confused with the value of a business. The price is just the end denominator for the value that has been built using various parameters. The price should be backed up by validation of the business value. How can you justify the price you want to sell your business for?
Managing price and valuation expectation at the start is essential to exit planning. As most small businesses often sell to people within their networks, it is also important to think about how they perceive the values of your company.
Ensure the business can run without you
Owners/managers play a significant role in business – from product development, business generation to leadership and team management. However, buyers are interested in the business and not your job. If you are intrinsically tied to the success of your business, there is not much left to sell after you remove yourself from the equation.
Investing in your employees and helping them grow is integral to building the value of the business and, getting the best price for it.
Set a plan for yourself
Knowing what you want to do after you exit the business is as important as your exit strategy. For most entrepreneurs, letting go is an emotional phase. It is hard to just say goodbye when you have invested blood, sweat and tears into your business.
That’s why, it is important to gradually make yourself redundant from the business by grooming your team, so you have time to cope with the change. Don’t think of exit strategies as retirement – there are more 30 year olds with exit strategies than 60 and 70 year olds.
And, as you do all of this, remember to “Dream Big, Think Big”. Dream big and follow your dreams. Think big to anticipate fast growth and start with the right foundation to handle expansion and growth, so your business farewell is a pleasant one.