The second principle of Steven R. Covey’s “The Seven Principles of Highly Effective People” is to Begin with the End in Mind. In order to apply this principle, one must have an imagination, a vision, and an ability to see something not as it is presently, but how it will be.
An exit strategy is one of those things requiring forward thinking – an ability to see something not as it presently is but how it will be or what you will make it. It is just as important to the start-up business as it is the growing and maturing existing business. It answers the question, what’s next?
Unfortunately, many businesses don’t begin to answer the question until they are in the golden years of their business and often times without forethought, At that point, it’s often too late to make a meaningful adjustment and soon a business is closing its doors or selling at a bargain price when just a little planning could reap the owner a respectable price/solution.
This article will answer some questions and hopefully give some direction to the 70 percent of 12 million businesses that will sell over the next 10-15 years, representing a significant increase in the annual number of businesses that will be sold.
What is an Exit Strategy?
So what exactly is an exit strategy? An exit strategy is a plan that maximizes profits when liquidating investment of a business. It is a plan developed to monetize an owner’s investment in a business and it is a means by which the business (and its owners) transitions to the next major level/stage. This can take many forms but mainly it helps the owners get the most out of the business while transitioning the business to the next generation or owner with a solid opportunity to grow the business and take it to the next level.
Why Develop an Exit Strategy?
An exit strategy is needed to plan how and when you leave the business. Much like being employed by someone else, at some point employees retire. So do owners. Having an exit strategy helps owners plan when they want to leave. A part of that planning process is determining how to transfer or pass on the responsibility of running the company to someone else, the process of transferring ownership and/or extracting the owner’s money. One thing is for certain, business owners that don’t plan a strategy in advance limit their options.
The benefits of planning an exit strategy far outweigh the cost of not planning an exit strategy. A few of these benefits include:
- Protecting of the value of the business you have built
Without a plan, you may be forced to sell your business for pennies on the dollar or to liquidate your assets for far less than they are worth.
- Creating a smooth transition to your management team or family member
This enables everyone to gain valuable insight and transition responsibilities while the owner is still present.
- Generating potential income for retirement
Some options will enable the owner to remain as a consultant, which has the potential for income as well as receiving a lump sum deposit for retirement.
- Enhancing the future worth of the business
When an exit strategy is planned in advance, the actions of the owners will seek to add worth to the business and increase the ability to receive a higher asking price.
Planning an exit strategy is an important part of the business operations process. Understanding what your options are helps position the company for the best possible alternative. And lastly, understanding the different types of exit strategies is as important for navigating the direction of the company throughout its life. Planning ahead will enable business owners to achieve the best transaction possible during this Boomer-induced wave of business sales.
Before you embark on your exit strategy, you may also want to engage your lawyer and even a business evaluation expert. Businesses should have a valuation performed to map out a strategy for selling and structuring the sale of the business. Engaging additional professionals for advice will ensure that you have considered all possible avenues for getting the best return on your investment.
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