Exit Planning, Part 1: Why Your Business Must be Built to Sell from the Start

Even if retirement is years down the road, every entrepreneur needs a proactive exit strategy

For many entrepreneurs, selling their business for a windfall of cash is the endgame from the start. But too many others see the potential for moving on as so far in the future that they fail to plan an exit strategy.

No matter how unlikely it may seem right now, there’s going to come a time when life events such as illness, divorce, a readiness to retire, or a simple desire to try something new may motivate you to sell your company. You might end up selling, transferring your business to your kids, or—if you’re really lucky—getting an unexpected acquisition offer from a large company.

Savvy entrepreneurs realize that having a clear, written exit strategy in place right from the start helps them make better decisions and increases their chances of achieving an optimum outcome. Let’s be clear: what you do today in your business can either set you up for a smooth exit or make it much more challenging, and even impossible.

If you have zero intention of leaving in the immediate future, building your business as if you’re going to sell it increases its value today as well as puts you on the path toward a profitable sale. It keeps you focused on running your operation efficiently, maintaining a clear financial picture, implementing best practices for standard operating procedures, and building a business that can run without you.

In this first installment of our two-part series on exit planning, we explore how to set your business up for a sale, even if your endgame is many years down the road. Stay tuned for part two, where we examine what entrepreneurs can do if they’re ready to exit their business but are struggling to find a buyer.

Why do I need an exit strategy?

A business exit strategy is a strategic plan for transitioning away from your company. But unfortunately, exit strategies are the most overlooked part of business plans.

Whether you are running a sole proprietorship or focused on earning your first dollar, the importance of creating an exit strategy can’t be overstated. Carefully crafted exit plans not only to shorten a business owner’s learning curve when it’s time to sell, but they play a key role in the future direction of a company. If the business is successful, a thoughtful exit strategy can help an entrepreneur reap substantial rewards; if the venture is struggling, it can limit their losses.

Exit strategies can include acquisitions, mergers, family successions, selling shares to partners, shutting down operations, or initial public offerings (IPOs). But walking away from a business isn’t always as simple as finding a buyer and setting a price. A common scenario involves a multi-year agreement where compensation is tied to a customer-retention percentage after the sale. The owner may also want to keep a stake but have selected others to run the business while that owner continues to collect the income.

Another common way of structuring a deal is where the buyer agrees to pay part of the sale price upfront in exchange for the owner remaining for a predetermined time to ensure a smooth transition. After that period is up, someone else operates the business—and whether the seller receives the remaining portion of the sale price is dependent upon performance.

But how can owners ensure that their business won’t fall apart when they walk away and negate their exit strategy?

7 steps to creating a business that’s built to sell

1. Build a business that can run without you. The best test of whether your business is built to sell is seeing how it performs when you aren’t there. Take a vacation and address issues that you notice when you return. Create processes that ensure that you aren’t the only one with information vital to running the operation. Surround yourself with a winning executive team capable of managing the business successfully and assuming your duties if you’re unavailable. Eventually, you should be able to take a three-month sabbatical without any negative impact on the company.
2. Document standard operating procedures. Even if you aren’t looking to sell, having repeatable processes and standard operating procedures (SOPs) in place not only spurs consistency and quality but can be the difference between your business functioning as an extension of you and evolving into a self-sustaining entity. Creating and documenting sustainable SOPs are extremely useful for your team and very attractive to potential buyers.
3. Consider who you want to take over. You invested a great deal of blood, sweat, and tears into growing your business, so it can be understandably difficult to hand it over. Consider what type of successor you would find ideal. Do you want someone who agrees with your strategies? Someone who will shake things up and inject new life into your brand? What skills may benefit the business down the road? Take time to think this through so you can train your key staff, children, or another potential successor, as well as recognize the right type of buyer.
4. Keep your business in optimal shape. Ensure that your business is appealing to potential buyers with updated equipment, organized systems, and records that can pass a due diligence test by giving a clear idea of how your business has done financially. Reduce bloated inventories and do your best to keep your company debt-free. It’s also important to create incentives for retaining critical employees whose skills, knowledge, or expertise is key to performance.
5. Look for ways to increase value. At the end of the day, value comes from the predictability of future cash flows and the risk associated with achieving them. Businesses are generally worth a multiple of their profits, depending upon the size of the deal, location of the business, industry trends, market demand, and other variables. Diversifying revenue streams by focusing on new customer groups or adding products or services can drive value and reduce risk. Running efficient operations is also key, perhaps by reducing overhead, cutting unnecessary staff, or investing in better processes. A business plan that creates a clear road map to achieving sustained revenue and higher returns down the line can also convince buyers to pay a higher premium for your company.
6. Always keep the endgame in mind. Even if it’s 20 years down the road, your exit strategy should influence business decisions, helping you manage growth, hire strategically, and target specific customers. Work with your accountant every year to understand the valuation of your company, as well as valuation in your industry. Knowing key factors that drive value for your competitors highlights ways to increase your own value, as well as what sets your business apart. If your children are your successors, consider asking them to work somewhere else for part of their careers so they can return with fresh ideas.
7. Mentor potential successors. Planning for a successor should be a key component of an exit strategy, giving owners viable options in case there aren’t interested buyers down the road. Practitioners such as accountants and lawyers, for example, can create ready-made buyers in their practices by training employees to take over—but this model works for a variety of other ventures. Other businesses have benefited from working with local universities and trade organizations to cultivate relationships with people who are seeking mentors and hoping to break into your industry. Identifying your successor as early as possible – and having him or her build relationships with your customers – makes a smooth and successful transition more likely. Even if the individual your mentor doesn’t buy the company, having someone in place who can competently run the business when you walk away makes it much more attractive to other buyers.

Changing circumstances can make sudden sales a necessity

Baby Boomers are retiring in droves, contributing to a record number of small businesses changing hands in 2018. At the same time, today’s knowledge economy has many entrepreneurs considering early exits as big corporations compete to gobble up promising start-ups.

You never know when circumstances might suddenly make leaving your business necessity or a smart option. Running an organization that’s built to sell from the start ensures that you achieve the optimal outcome for you and your heirs when you’re ready to walk away. That said, if you see selling on the horizon and you don’t have a plan in place, it’s never too late to implement one. A team of qualified advisors can help put the pieces together.

Stay tuned for the next installment of our two-part series on exit planning, where we explore the best way to exit a business without an outside buyer in place.

To learn more about how to conceive and implement the multiple aspects of an exit plan, contact Karp HR Solutions today for a free consultation.