When it comes to running your own business, the actual running of the business might not be your overall end game. For a good portion of startups, a big draw to the world of self-employment is the big exit. However, the saying “the road is paved with good intentions” comes to mind here. Without a good exit strategy set, you may never actually “exit” your business.
There are several things to consider when planning an exit strategy, and most have to do with the size and type of business you run. When the time comes to leave your beloved business, you essentially have three options:
- You can close the doors. No, this is probably not ideal, but in some situations, it may be the only choice you have. This occurs most often when you and the business are so interchangeable that it would be impractical to carry it on without you. For example, when I decided to exit my law practice, my only choice was to shutter the windows as the “Strauss Law Firm” wasn’t very valuable without Strauss.
- You can go public. Of course, an IPO is the gold standard for bigger businesses, but is unlikely for most small businesses.
- You can sell: The exit strategy that is most common in the small business world is selling your business, either to a competitor who wants your market share and customer base, to a partner or employee, or to another entrepreneur who wants your profit potential.
If number one describes your business, there is obviously not a lot of exit strategy planning to do. If number two is your goal, then you already know what you need to do – grow! But if you are like most small business people, your exit will fall under number three.
Buyers of existing businesses are looking to reduce their risk; otherwise they would start a business from scratch…
The sale of a business is not unlike the sale of a house. You will want to get it ready for the sale, give it some curb appeal, and have the “amenities” a buyer would find attractive, so make sure to do the following:
Spruce it up: If yours is a virtual business, take a look at the visual appeal of your online presence and make sure it’s up to par. You’ll want to make sure everything looks its best to attract a larger offer. If yours is a physical business, you need to make it look nice, just as you would a house you want to sell: paint what needs to be painted, make needed repairs, and update where appropriate.
Boost your profits: Buyers of existing businesses are looking to reduce their risk; otherwise they would start a business from scratch. But by buying an established business with a proven track record they have a far better idea of what they are getting into. What buyers will pay depends in large measure upon how much money it makes (a multiple of three to five times earnings is one way to value a business.) Therefore, to the extent you can, it is smart to increase sales, reduce overhead, and thereby boost your profits. This alone is one of the best things you can do to prepare for your eventual exit.
Review the warts: Look for problem areas in your business and fix them.
Create a good team: A one-man or woman show is less attractive to business buyers because they fear that the business’ success is dependent upon your charm, or contacts, or your something. Instead, you have to be able to demonstrate that yours is a turnkey operation that the buyer can run as effectively as you. One way to do this is to have a staff and system in place that can run the business without daily supervision.
Get a an expert opinion: Most small business owners have very little idea of what their business is actually worth, for example, by overestimating the value of their goodwill. Therefore, it is often a good idea to get an expert business appraisal early in this process. This will tell you what your business is really worth today and what you need to do to make it worth more tomorrow.
The value of your business is based not based solely on its goodwill, but also its assets, sales, liabilities, and profitability. A business valuation will tell you not only what to expect, but what you can do to maximize the value of your business.
If you take the time now to get your business house in order, when the time comes to exit stage left, it should be a fairly simple process, and a lucrative one to boot.