If you have been on an airplane in the last few decades, you have heard the pre-flight announcement reviewing the safety features of the plane; including pointing out all of the exits and asking you to locate the exit nearest you (remembering that the nearest exit may be behind you). Although I am happy to say I have never needed to make an unplanned exit out of an aircraft, I always make a point to locate the nearest emergency exits at the start of a flight. I certainly don’t want to be winging it if an emergency does occur.
This analogy is also true with your business. As soon as you have created an economic venture that has value to yourself, or others, or both, you should begin thinking about your exit plan. In an interview with Bjork Ostrom of Food Blogger Pro, Mark Daoust from Quiet Light Brokerage points out, “I often tell people that a good exit strategy is usually a good business strategy. In other words, if you’re building your business with an exit in mind and selling it in mind, you’re typically going to build a really good business.”
Mark Daoust’s point is true regardless of what your immediate or eventual business plans are – if you build with an end in mind, you will build and run your business with more intention.
But selling your business is not the only exit strategy that you could take. Strategies often vary depending upon a wide variety of factors. That being said, exit strategies generally fall into one of these four broad categories:
- Sell the business outright
- Transfer the business — usually to a family member(s) or long-time trusted friend(s)/employee(s)
- Retire from the business
- Simply close the business permanently
Understand All Your Options
Selling the business is often considered to be the only “honorable” exit strategy, but it isn’t always the best or most appropriate way, and sometimes it’s not even possible. To sell a business you typically need to have a number of elements in place:
- Assets that you can transfer to a new owner and that have tangible value someone is willing to pay for.
- Systems, processes and in some cases, people, to ensure that the person buying will not have to start from scratch.
- Usually the business needs to be truly profitable, meaning the business doesn’t just turn a profit on the books, but that the owner is taking regular, consistent, significant money out of the business.
If your exit strategy is to sell your business, the more of these elements that you have in place, the more likely you will be able to find a buyer who is willing to pay your asking price.
Transferring the business is similar to selling the business, but usually includes a significantly long transition period. Although transfers can take place between the current owner and trusted friend(s)/co-worker(s), most often transferring a business is a transaction that takes place within a family, between generations (most commonly in the form of parents or grandparents transferring the business to the next generation). In this strategy, most of the same elements need to be in place as for selling a business, but the current owner stays on and mentors the new owner, often for several years as they transition responsibilities. These transactions also tend to be more lenient on the exact terms of the “sale” and as such may make accommodations.
Retiring is often used as a default exit strategy, particularly if the “sell” option doesn’t pan out. But it is a completely legitimate and viable option. Those choosing retirement, generally set a deadline and take steps to liquidate assets and/or conclude business by that date. This option in particular makes good sense for those who have really created a job for themselves as opposed to built a business. That said, I have known several business owners who chose to retire instead of sell their business as they wanted their brand and business to only be associated with themselves.
Closing the business is a less elegant version of retiring. With this strategy, you just stop doing business with little or no planning. Although technically this is an exit, it is usually less of a strategy and more of a reaction to unforeseen circumstances in the owner’s life.
Create Your Strategy
To avoid just having to unexpectedly close, think about how you would like to exit in the eventual future and how you could exit in the near-term if unforeseen circumstances should arrive.
- Consider what assets are currently “owned” by the business. These can be physical items like inventory or equipment, intellectual property like trademarks or copyrights, or transferrable agreements like leases or contracts. Make note of, but do not include items that have subjective value like mailing lists, website traffic, social media following, good will, or customer loyalty, because while these items do have potentially tremendous value, that value can quickly change, especially with a transfer of ownership.
- Assign a value to each of the items in your list from step #1. Many of these will have a value within the balance sheet of your accounting system or reported on your tax return. Keep in mind that for most sales, assets do not transfer at a direct value, but at a percentage. Don’t be overly optimistic–better to estimate low and get more, than the other way around.
- Next consider the value of things that are more subjective such as well-documented systems and processes, mailing lists, website traffic, social media followings, good will, brand recognition, etc. Try to put yourself in the buyer’s shoes and ask “how much is this really worth versus the new owner creating or building it from scratch?” Also consider how readily these things will really transfer to another person.
- Look at your finances with a critical eye. How much money is the business generating for you as the owner? This is not sales, but money into the owner’s pocket. Then consider, is this consistent or intermittent? These numbers, when multiplied by a factor of X, are often used to determine a business sales price. Multiplied two to three times is currently a reasonable rule of thumb, although the exact multiplier varies due to many considerations.
- Review all the numbers in the steps above and decide if these numbers “work” for your exit strategy (regardless of which option you choose) or if you desire something greater. One consideration for example would be how much have you personally invested to date as compared to the potential value the business has created for you?
- If you wish to potentially improve your exit value, consider what steps would move you in that direction. If your brand is too dependent upon you, consider moving yourself out of your current role or work closely with an apprentice. If your business works, but is not well documented, start the process of creating the necessary documentation. If your finances are not stable and appropriately profitable, look at ways of reducing your expenses while creating a consistent income.
It is never too early to start thinking about an exit strategy for your business. If an emergency arises, you will be prepared. But even if you never need an emergency exit plan, thinking about it ahead of time will most likely lead you to build an even better, more sustainable, more profitable business.
Gwen is a business consultant focused on the craft industry. For more information on how she helps her clients build profitable businesses, and to get more down-to-earth, put-in-the-hard-work business advice visit http://gwenbortner.com/