Things I wish I knew before starting my first business. #3 Know the End Game - What is your Exit Strategy?

Smart #BusinessStrategy: Start your business with the end in mind.

This is the third article in a series on hidden or unexpected challenges that #Entrepreneurs and #SmallBusinessOwners face on a regular basis. (Click here for an introduction to the series with links to other topics.) Here, we will discuss the #BusinessStrategy of beginning with the end in mind - know your exit plan when you start your business.

Every entrepreneur is optimistic and believes that they will be wildly successful and make millions, when it is time to sell their business. Unfortunately, statistically speaking, the reality is that: A. the business is not going to be as successful as your dreams, and B. even with a dose of reality thrown on your dreams, you are still unlikely to be able to sell it for what you think it is worth - or, Heaven forbid, sell it at all.?

Even though you might think this should be the last article in the series, it really belongs near the beginning for two reasons. First, you need to plan your exit strategy from the beginning of your business, so you can set it (the business) up correctly and make the right strategic moves running your business to make it attractive to potential buyers. Secondly, you need to know the long-term financial plan for your business to see if it even makes sense for your personal financial and lifestyle goals.?

Timing

The first thing that entrepreneurs need to realize is that exiting a business is hard. It is not like turning in your 2 week notice to an employer, where you hand over a letter, turn in your badge two weeks later, and walk away. There is a lot involved, and it commonly takes a year… or longer. There are a number of steps, each of which can be long, and you have to bear with each of them, all while you are still running the business.?

If you are a franchisee, it can be more complicated, because the franchisor likely has to vet and approve any new owner. However, the franchisee may also help market the business and bring additional candidates to you, so they can provide value, too.?

This isn’t meant to be an article on the Steps to Sell Your Business, so I’ll stop here on that subject. There are many business books covering that topic. But, here are some things to consider when thinking about your exit strategy.

Financial Goals

How much do you need from the business, when you exit it? Are you investing to build capital in the business, are you investing to be able to have significant income from the business, or both?

Whatever the answer is, make sure that the business you are starting can support it. E.g., if you are investing $100,000 in a business and your goal is to get $1,100,000 out of it in 5 years, make sure that your #FinancialModel supports an increase in value and available cash that averages $200,000 per year - and get very, very detailed. Don’t just assume that your sales are going to grow by X percentage every year, model what you are going to do and when you are going to do it to make them grow - that includes marketing and personnel plans. More on that in a minute.

Also, have a #mentor or advisor, who is familiar with your industry, review the Financial Model to make sure that it is realistic. We, as #Entrepreneurs tend to be overly optimistic, so a second set of eyes may see challenges (including unrealistic optimism) that we don’t see.

Don’t have a mentor? Seek a local or national mentoring organization, such as The Venture Mentoring Team, for guidance. These are mentors, not Business Advisors, and many are free.?

Mentors will provide high level guidance, but they do not work in the business with you. Business Advisors are usually not free, but they will dig in deeper and help devise and implement strategies or projects.

As you set annual, incremental goals for your sales and profit levels, make sure that you substantiate them with granular goals for marketing, sales, and operations (including personnel). For example, if you need $500,000 in sales per month to meet your goals, is 5 sales people enough? I.e., break it down further - is it reasonable for a salesperson to bring in $100,000 per month in your industry? If you bring on a new salesperson, how long will it take him or her to reach $100,000 per month in sales? Or, if you are more of a retail business, is it reasonable that, say, $5,000 in marketing will drive the $25,000 in sales that month in order to meet your goals?

Operational Considerations

There are so many operational considerations for your business, and most are completely dependent on the industry and/or type of business. Here are just a few very generic things to consider:

• What skillsets are needed to run your business??Do you have them??Can you hire them??How much will they cost if you have to hire them?
• Do you have the expertise to run any equipment that is in the business?If not, what is your exposure from being dependent on staff to run the equipment?
• How are you involved in the sales cycle?Are you a bottleneck in the sales process?Is the sales process very relationship driven??If so, who has the relationship with the customer, you or an employee??If the employee leaves, does the customer leave too?
• Is the business dependent on a single vendor, which could be a single point of failure?
• What is the cash flow of the business??What is the delay from paying vendors to getting paid by customers? Include AP and AR Terms in the equation.

Again, these are just a few examples of generic questions to ask yourself. A mentor or advisor can help you with these questions.?

Lifestyle

There are two main aspects to Lifestyle to consider: money and schedule.

Money

The money aspect is covered primarily in the Financial Goals section above, so we won’t go into a lot more detail here. Just realize that how much money and when you can take money out of the business are lifestyle factors to consider.?

Schedule

Does the business allow you to live the lifestyle that you want? For instance, if you have small children, you may not want to work nights and weekends. (Or, depending on your children… you may want to work nights and weekends! And, yes, I am 6-months from being an Empty Nester, so I can say that!) If your business requires that, and you don’t want to do it, can you hire someone to help the business during those times? How much will that cut into Owner's Comp?

Legacy

Are you looking to pass the business along to your family? This can be a touchy subject for a lot of reasons that I won’t go into here. If you are, just add one thing to your Annual #OperationalPlanning Process: checking with the family that is going to be involved to make sure that they are still interested in it. If they are no longer interested or are having second thoughts, you want to know that up front, because you may approach the sale and #BusinessOperations very differently, if you are selling it or transferring it to family, rather than an outsider.

Be Adaptable

We are all used to being agile and adaptable in the small business world - that should continue with your Exit Strategy. Chances are your exit will be many years past your start, and lots of things change in that time - family, health, finances, interests, and aspirations, just to name a few. You don’t have to know every detail of your Exit Strategy and Plan when you start your business, but you should have a general idea of how you want to exit. Make sure that your Annual Business Planning is accounting for your Exit Strategy. You should also have a 5 Year Plan for your business. You should revisit this every year as part of your Annual Business Planning and adjust it accordingly.?

Next Steps

Most Exit Plans involve selling your business in some way. This is an entirely separate subject that we will cover in a future article. However, as you are building your business and making strategic and tactical decisions along the way, here are some things to consider:

• Is your business sellable??
• Is it attractive to investors or buyers??
• Is your multiple consistent with other businesses in your industry??
• How are your leases and other obligations structured??
• What percentage of your revenue are they and how long do they last??

If there are not positive answers to these questions, you aren’t going to get what you want for it, when you exit. Again, we will cover these topics in future articles related to Maximizing you Business Sale Price, but these basic questions should be a part of your daily decision making process.

Please ask any questions in the Comments section below. Alternatively, you can message me with any specific questions that you may have.?

Follow us to make sure that you don’t miss other articles in this series.

#Entrepreneurship

#SmallBusiness

#BusinessOwners

#Startups

#Founders

#BusinessStrategy