Q. Dear Zenagos, I asked a friend of mine who graduated from business school to read my business plan, and she said I need to describe my “exit strategy.” I looked it up, and it seems to mean a contingency plan, but I don’t understand in case of what? What is an exit strategy for a business, and why do I need one?
What are the ways you can exit a business?
Sell the Business
If you have created a lot of value in your business, then selling your business can make you very wealthy. There are many ways to sell a business:
Transfer the Business
Many small business owners exit the business by transferring ownership to their children or other heirs. In this case, you may not receive a payment, but will transfer all assets and liabilities to the new owners.
Liquidate and Close
When businesses cannot find a buyer or transferee, they may simply close. Typically, you would sell the assets of the business, if any have value, and then file paperwork to close the business.
Why does it matter how you exit your business?
Not every exit makes a business owner wealthy, but it is still important for business owners to understand how exits work for a number of reasons:
If you understand the kinds of buyers and their motivations, you will avoid nasty surprises. You may not like some outcomes. For example, when you sell to a private company, they typically demand an “earn out” period, during which you will help them learn the business. These periods can be several years long and can have many risks. When you sell to competitors, they already have leadership, so they will often fire your former leadership team. Most investors create value by squeezing costs from the business, so if you sell to a professional investor, you may not like what they do to the quality of your product or how they treat your former employees. When you sell to the public, you are subject to a complex set of laws, which can make your exit more time-consuming. You cannot control what happens after you sell your business, but if you are informed, you can make the exit choices that are most aligned with your values.
It is a lot easier to plan a trip if you have a destination. If you know the kind of exit that you most prefer, then you can learn about how to create value for that kind of buyer. For example, competitors will be very tempted to buy a company that has customers they really want. If your customers are companies with known brands, that will make your company very tempting for strategics (existing companies in your business sector). Knowing this, you should put a lot more effort into finding branded companies and selling to them, and you should put less energy into winning smaller customers who won’t be interesting to such a competitor.
People hear a lot about stock options in the media and entertainment shows, but they are often surprised to know that equity in a private company has no value unless the company sells. Options have absolutely no value if their strike price is higher than the market value of the company, even if it does sell. It is important to know how business value works, so you can see how your company could have future value. Once you learn something new, you will see it everywhere. If you invest some time in learning how companies are valued, you will make decisions that create more value for your company. If you don’t understand what creates value, you simply won’t see those opportunities. They will be invisible to you.
It may be tempting to put off thinking about the future of your business and proceed without a financial plan, a marketing plan, and an exit strategy. Many of us live our lives very happily by learning as we go. However, truly great finishers focus fanatically on their goal. With a small change of focus and a little bit of learning, you can increase the chance that you will be satisfied with the way your business story ends.