When starting a business, ending it is usually the furthest thing from your mind. Passion and love for what you do define entrepreneurship, and turning your idea into a successful company has been hard enough, imagining saying goodbye to it is even harder.
But this is really just a bad approach to the planning of your business. You need to have a good answer to the question: what’s your exit strategy?
And research suggests most people haven’t figured out their answer. A study conducted by Securian Financial Group suggests that while 50 percent of small business owners do not have plans to sell their business, 72 percent have no exit planning strategy at all.
But no matter your intentions, having an exit strategy is a key component of your business plan and to the way, you approach the growth of your company. Here’s why:
Plan with the end in mind
Some of you will recognize this from Stephen Covey’s book The Seven Habits of Highly Effective People, and it is just as relevant in business planning as in any other aspect of life.
Where am I going? Where do I want to be? These are essential questions to answer in the planning process. After all, how can you possibly grow a business without having some sort of specific goal?
Of course, most of us start businesses to make lots of money doing something we love. And while this is a worthy goal, it isn’t really specific enough to serve as a valuable tool for strategy development and planning.
But it’s also important to be realistic. Many startup owners will dream of their business making it to an Initial Public Offering where they cash in for millions. This rarely happens though, and by planning for it, you are setting yourself up for a rude awakening down the road.
Unfortunately, the most common exit strategy for small businesses is failure. A study from Statistics Brain indicates that 25 percent of small businesses fail within the first year, and more than 70 percent close their doors within ten years.
So, to prevent yourself from becoming a statistic, it is important to begin planning right away. Chances are you won’t be heading towards an IPO, so then what do you need to do to turn your business into an attractive investment for a larger company?
This isn’t to suggest you should act timidly—often times risk taking is the strategy for success—but you do need to be realistic. Taking steps to plan how you’ll walk away helps make sure you do it on your terms, not someone else’s.
Give investors what they want: their money
When trying to secure funding for your business, having an exit strategy is one of the most important things you can do. This was something I learned the hard way. I would stand in boardrooms, present my plan, and then when they asked me this exit strategy question, I’d draw a blank.
Why is this so important to investors? Two reasons. First, the exit strategy is how they get their money. Unless you plan to generate so much in revenues that you can pay them back yourself (unlikely), then chances are the funds to pay these investors are going to come from your exit strategy. The money you receive upon an acquisition, for example, would in part go to your investors.
So, if you can’t demonstrate that you’ve thought through to the exit strategy, it shows you haven’t clearly thought through how you’ll return their investment. They understand there is risk—not every business succeeds—but no one wants to enter a venture when there isn’t a clear plan for recouping initial investments.
The second reason is that having an exit strategy thought out represents a more detailed planning approach. It shows you are working towards a clear and specific goal, something that demonstrates maturity to investors, which is often missing from many entrepreneurs.
Instead of vague promises about revenues and returns, you are demonstrating a specific end to your planning, something investors can look forward to. This will also prove useful since they will have a better idea as to when they can expect their return. There will be fewer question marks for all, leaving you to focus more on growing your business into what you want it to be.
Choosing an Exit Strategy
It’s clear having an exit strategy is essential for your business. But not all exit strategies work for every company. In general, there are four main types of exit strategies:
- IPO. While this is certainly going to be the most profitable, it is far and away the least likely. Very few startups make it to this point, and while it is important to set lofty goals, it is probably smarter to aim for something that has a much better chance of happening.
- Acquisition. As we mentioned earlier, this is probably the most common. Many companies have sold out to larger companies for lucrative payouts. One example off the top of my head is 17-year-old Nick D’Aloisio, who sold his app to Yahoo! for $30 million. Not everyone will get to this number, but it shows how an acquisition can be a very viable exit strategy for many startups.
- Sell to an individual. This is a popular choice if you have someone in the family or a friend who is looking to take over the business. Often times you can arrange some sort of an annuity agreement so that you can continue to enjoy an income. This option is often best for retirement. But if you are not ready for retirement, or are looking for a more lucrative deal, you can hire a broker to carry out a valuation and then use their network to find a buyer willing to pay the right price for your business.
- Failure/liquidation. No need to spend a lot of time on this one. We know what it is, and the whole point of planning out an exit strategy is to avoid getting to this point.
It might seem backward to start thinking about an exit strategy before your business is up and running, but not doing so is denying your business a valuable tool for planning and growing a successful company