Why You Need an Exit Strategy

Most successful businesses start out with a sound business plan that spells out every detail of the endeavour, from how it will operate to where funding will come from, so why don’t all entrepreneurs also include an exit strategy in their business planning? When you undertake any enterprise, you should always include a plan on how and when you will be selling your business, as a matter of course. By doing this, it allows you to set and meet goals that can significantly increase the value of your investment. Whatever you do, you never want to wait until you are in a position that requires you to sell your business quickly, because then there is a very high probability that you will lose out on potential profits that would have been available, had you of worked and sold to a plan. Therefore, it is important to remember that if you don’t keep track of your efforts, it most probably won’t matter in the end anyhow.

 

By making a plan to pass the business on to new blood, it gives you a goal to work towards for the entire time that you are in operation. Having an exit strategy will also help to motivate you to meet financial goals, as well as performance goals and is great as a measure of success to date. By following the plan, you will know if you are on target to meet the planned exit date, but more importantly, you will know if you are on target to maximise the value of your asset, by leaving some additional growth for a prospective buyer. This way, when you sell, your creation can go on to bigger and better things without you.

 

Some who go into business for themselves, do it solely for the challenge of creating something from scratch or solving a problem that exists, where they may not have an interest in maintaining the business long term, yet others may do it strictly for financial gain, where their whole plan is to work for themselves and make as much profit as they can within the business. Either way, if you do not have an exit strategy in place, you may not feel the need to challenge yourself to do a good job within the business and you most probably will not maximise the value of the business.

 

In general, there are three main types of exit strategy that are embraced, situations permitting. Firstly, there are entrepreneurs that will start a business with their family in mind, where they will build up the business and make sure that it is running and established before turning it over to family members. Secondly, there are business owners who prefer the option of selling to the existing management, as they are, and have been, running the place already and deserve the option to receive any additional value that they can create within the business. In this case it would require finding that manager that loves the business as much as you do in order to have them take it over and run it successfully. Finally there is an outright sale to an interested third party, where you may not know what their intention is for the business, and it may not matter, as long as you can come to an agreeable price where it all works to your plan in the end.

 

The need for an exit strategy exists long before the business ever opens its doors. It needs to spell out exactly what your goals are for the business, from the timescale to the investment and from the profits to a host of other attainable goals. By constantly tracking the progress of the business over time, it will allow you to measure the value of your investment and hopefully get out of it what you have put into it, but all being well, much, much more. In some cases, the effort that you have put into the business far outweighs any price that you are able to realistically ask, but if this is the case, then there should be some valuable lessons that you should take away from the experience, especially if you are planning on doing the whole exercise again.

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John Nollett
17.04.2014