Planning an Exit Strategy

When I start working with them, one of the first questions I ask clients is, “what is your strategy to exit your business?” Most of them say, “I don’t know” or, more frequently, “I am just getting started; why would I think about how I will exit my business now?” A fair question, but there is a VERY vital answer to this somewhat puzzling question.

First, most of you have heard the phrase “start with the end in mind.” Depending on your exit strategy, the way you build your business can vary widely. That’s why knowing what your existing strategy is “starting with the end in mind.” without it, when you start, you could build your business incorrectly and end up spending 3 – 5 years trying to transition it to what you need to exit later.

Five basic exit strategies exist:

1.    3rd Party Sales – selling your business to someone else.

2.    Private Equity Group (PEG) Recapitalization – selling a portion of the business to gain personal liquidity of your business.

3.    Employee Stock Ownership Plan (ESOP) – creating a program whereby employees earn or buy shares in the company allowing the owner to develop personal liquidity.

4.    Management Buyout – transitioning the business to key employees within the company

5.    Gifting – transferring ownership of your business to family.

These five strategies or some combination thereof are the options available. Can you see that the exit strategy you pick may impact how you set up, run, and grow your business? This is why deciding on an exit plan is important when starting your business.

For example, if you plan to sell your business to someone else, then it is crucial that you understand what an investor or a buyer looks for when evaluating a business for purchase. Cash flow is critical, as most investors want to buy a cash flow stream. So, you should build your business for cash flow!

While cash flow is essential to a PEG, they tend to look for businesses that have high-growth potential. PEGs want to make their money in a short period of time and get on to the next deal! So, if you like this option, you need to build a company for rapid growth.

What is your exit strategy? Have you thought of one yet? If not, you need to consider it and work it into your business plan. If you don’t, you’ll end up like many clients we see. They want to get out but find themselves stuck for 3 – 5 years as they transition the business into something they can easily transition to someone else!