A fallacy almost every entrepreneur experiences at some point in their journey is the belief they are invincible. Maybe they do not openly state it, sort of like not wanting to jinx themselves, but their actions support that belief. To show anything less than perfection could be considered a weakness, or chink in their armor. Unfortunately, a weakness does exist and it’s in a place that tends to be a massive blind spot for them. Their vulnerability lies in not understanding how to position their business to continue on without them. This is why developing an exit strategy, through the creation of an exit plan, is vital for all parties dependent on the entrepreneur. In this article we will cover why it is important to have an exit strategy, what is exit planning, and how creating an exit strategy with an exit plan will yield the best outcome for everyone.
What Is An Exit Strategy?
By now I am sure you’ve heard the adage “begin with the end in mind”. Within the context of exit planning I prefer to modify the adage to “begin with the exit in mind”. It is a simple concept but a concept nevertheless that eludes entrepreneurs and business owners. In my opinion the elusiveness is partially tied to the illusion that the entrepreneur doesn’t know where they will be in a year, let alone five or ten years, so why focus on the end when they may still be at the beginning. That said, I believe the biggest reason the concept alludes entrepreneurs is simply because they are focused “in” their business rather than “on” their business.
Take a step back and think about where you started your journey. Think back to the time when your only goal was trying to understand who you wanted to be and what you wanted your company to offer. What problems were your clients having? How were you going to help them solve those problems? Those early times were fun, exciting, nerve-racking, chaotic, and so much more. You were just getting started so it only made sense that you were NOT thinking about what would life look like at the end.
Of course it would be great to think that you would make time to work on the direction of the business, but that’s usually never the case. In most situations the patterns you start with are the patterns you maintain… that is until someone slaps you across the face to wake you up and remind you that in order to grow you have to start working “on” your business, in addition to working “in” your business.
This is where thinking about where you want to take your company becomes a critical step in your journey. The sooner you can decide where you want to take your business the easier it will be to align your business’s goals, resources, personnel, market, and so much more. However, the MOST IMPORTANT step you need to explore rests squarely in building an exit – for you, your employees, or simply the exit from your business.
An exit strategy is a carefully designed plan tailored to help you understand the point at when you should step away from your business. Now “step away” can mean a few things.
- It could mean you step back from running the business to let management run it.
- It could mean you step back from running the business to let family run it.
- It could mean you sell all, or a portion, of the business in order to pursue other goals.
- It could mean you close the business so you can explore other opportunities.
- It could be some combination of the aforementioned items.
The point is, an exit strategy allows you to stipulate the circumstances under which you would transition the business AND what needs to happen between now and then fulfill on those circumstances.
To execute an exit strategy you need to design a step by step plan so you can evaluate your progress. This plan needs to be very detailed, hyper focused on a few areas, it needs to have structure to ensure the necessary areas are covered, and it needs to spell out key requirements that need to be met before a transition is started. So then how do you prepare an exit strategy?
How To Create An Exit Strategy
To understand how to create an exit strategy you need to understand why it is important to have an exit strategy. In short, building an exit attempts to answer the question “Where do I go from here?” For example, if your exit strategy is to scale your business to 20 employees and $3 million in annual revenue then once you reach that goal “where do you go from here?”
- You may decide that once you reach this level you would rather sell the business so you can spend time with family.
- You may decide that when you reach this level you want to sell the business and explore another opportunity.
- You may decide that once you reach this level you still have more to give which means you need to build a new exit strategy three to five years out from there.
The more you think about the exit the easier it will become to make decisions today. Why? Well, in business every decision you make needs to be focused on moving you closer to your desired goal. Strategic goals need to be set three to five years out then broken down into shorter periods to measure progress to goal. The byproduct of achieving the three to five year goal is to decide whether you continuing doing what you have been doing or exit.
If you choose to continue down your current path you simply restate the next desired benchmark three to five years out from there and repeat the process. Alternatively, if you exit then you’re on to the next phase in your life. Preparing an exit strategy merely allows you to answer the tough question of “where do I go from here?”
Unfortunately, the steps you need to take to create an exit strategy are not easy to walk as they require a lot of self-reflection, a balanced super ego, a vision, and the ability to execute.
- Self-reflection is needed to check your hubris.
- A balanced super ego is required to ensure your entrepreneurial spirit doesn’t run wild (the id) while at the same time you do not over negotiate on the risks you need to take (ego) to keep the company growing.
- A vision is critical in understanding “who you want to be when you grow up”. Without a vision it is extremely difficult to measure progress to goal simply because you have no goal.
- You could have a well-rounded outlook, a strong super ego, and a vision of where you want to take your company but if you cannot execute then you’d better find someone who can. Otherwise your business will never see the three, let alone five, years.
Assuming you have all, or can develop all, of the traits mentioned above let’s tackle the steps you need to take to create an exit strategy. Each of the following steps have multiple sub-steps, build on top each other, and have to be constantly measured.
- Create a vision for where the business will be in three to five years.
- Look at your vision through the lens of eight categories: marketing, planning, finance, legal, leadership, people, operations, and sales.
- Looking through the lens of all eight categories and break the vision into twelve month goals that progressively build on each other.
- Structure the annual goals into quarterly milestones that work toward the annual goal.
- Prioritize the quarterly milestones in terms of the eight categories.
- Execute monthly projects within the prioritized category to achieve the quarterly milestones.
- Assign daily, or weekly, tasks to measure your progress toward each monthly project.
- Find points of leverage by delegating tasks to others – in or outside of the organization – who would be more efficient, or cost effective.
The steps above should be done with all interested parties (in or outside of your organization). This will help ensure all parties are bought in to the aforementioned steps, leading to better accountability. Once you have outlined the items above you will need to document your steps in your strategic plan before constructing your exit plan.
What Is Exit Planning?
Designing a good exit strategy requires an exit strategy framework. In other words, an exit plan. So this begs the question “how does exit planning work?” The answer starts and ends with a look inside yourself. I know that might sound cliché or esoteric but it is true. To know what you want from the exit and whether you have reached the point of exit, you need to know if your heart is still in it.
Exit planning is the process for preparing your company for sale. However, sale does not mean tomorrow, or even in three to five years. While preparing a company for sale may take 12 to 36 months you need to be ready NOW for the known and unknown exit planning opportunities.
By now you know that life is not predictable. In fact, for entrepreneurs it is the unpredictability that keeps us going… it keeps the “game” interesting. However, when your heart isn’t in it anymore the game becomes boring and the business results reflect that. This is why self-reflection is a required personality trait, both for evaluating the progress being made to goal AND whether you should keep going.
To prepare an exit plan you simply need to look to your strategic plan and decide if the business you have built should continue under your leadership, or that of another. To know how to attack that decision you can look at the progress you have made within each of the eight categories of your strategic plan. If you feel that your progress has stagnated and the motivation to continue pushing it forward is waning, then it is time to seriously consider triggering your exit plan. Alternatively, if you look at your strategic plan and see continued progress and get excited about what lay ahead then you can keep your head down and continue to grind.
The point is this, knowing whether your heart is still in it, whether you have the knowledge to break through the next ceiling, and whether you want to keep grinding will have a direct impact on the future exit price. Let me share a story…
We were approached by an entrepreneur and their spouse. They had built a business within the service industry. It was something they were proud of. They came to us to understand if they were doing the necessary things to plan for their future.
After reviewing their goals, financials, and concerns it became apparent that they were “Lifestyle Entrepreneurs”. This means they designed their business to fund their lifestyle rather than continue on after retirement. So I asked them “when you retire, what happens to your business? What happens to your employees? What happens to the contractors reliant on your business?” At first their response was “I don’t know”. Then it became “I don’t understand why that’s important to our executive financial plan”. Finally, it ended up with “we have never given any thought to what happens to the business, or the people who helped build our business, when we eventually retire”.
This thought process is not uncommon. As noted earlier, many business owners are so focused in their business that they lose focus on what will happen to their business when they are not here (i.e. disability, retirement, or death). To help them understand the importance of integrating the retirement planning and exit planning process I walked them through a set of questions:
- If someone came to you today with a blank check and asked you to fill it in with a reasonable number to purchase your business, what would that number be?
- Based on the number you wrote down, do you believe the buyer could receive their money back within three to five years – without your ongoing support – based on your documented systems, fulfillment, and sales processes?
- If not, what would you adjust the number to reflect the lack of infrastructure?
- Now based on the final number you landed on, would that amount of money – plus what you have already saved – be enough to secure your family’s financial future for this generation?
- If not, how much more money would you need from the sale of your business BEFORE you would have enough money to secure your family’s future?
As the clients went through this thought experiment they came to realize their lifestyle was heavily dependent on the business’s cash flows. This led to the epiphany that in order to walk away with financial security for the family they needed to stop being Lifestyle Entrepreneurs and instead become Value Creators. It is only through Value Creation that exit planning works.
It is sad to think over 80% of entrepreneurs fail to exit their business. Some may not want to exit and others may not know how to exit. For those looking for the “perfect” exit I only have this to say “There is no perfect, or even good exit strategy, for business”. There is only the exit strategy, and corresponding exit plan, that make sense for you and your family. The purpose of an exit plan is to merely help you transition your business at a reasonable valuation designed to secure your family’s financial future for one, or more, generation(s). If you need support integrating your executive financial plan with your exit plan, or even designing your exit plan, feel free to reach out to our Certified Exit Planning Advisor team at C-Suite Planning!
The material contained in this article was created for educational and informational purposes only and is not intended to provide specific recommendations, tax, or legal advice. The author, and the author’s firm, strongly encourages you to speak with a qualified professional before taking action on anything mentioned in this article.