Why A Good Exit Strategy Is Good Strategy, Period.
It may seem odd to sit down and consider an exit strategy in the early days of a business, but just like running a marathon, you can’t succeed if you don’t know where the finish line is.
The fact of the matter is that so few business owners think about the longtail future of their business – their exit strategy – because it tends to provide little tangible, immediate return day-to-day. In many ways, it’s simply human nature: the same mental hurdle that causes people to underestimate retirement costs, ignore estate planning in the event of death, or save money for a rainy day. Both cost and risk seem exponentially more concerning in the context of the present than they do in that of the future.
The fact of the matter is that the most successful and valuable businesses are often characterized by leadership that keeps their eventual exit in the back of their minds. This doesn’t mean that you know you’re going to sell your business, or genuinely even believe you intend to any time soon, it’s simply a recognition of a likely reality and the intention to plan for it.
As Benjamin Franklin said, “By failing to prepare, you are preparing to fail”. With that in mind, here are just a few reasons why keeping your exit in mind can help you and your business prosper.
You Increase Post–Exit Value: Not only do many online business owners never fully consider their exit plan – until they absolutely need to – they also never consider what they might do post-exit. Many sellers become focused on the absolute sale number, the amount on the term sheet when the deal is inked, but many factors are at play.
- Taxes: Though this subject could warrant an entire library of articles on its own, the basic message is that any business owner that keeps an exit strategy in mind is one that probably keeps their books in mind. Thinking ahead about selling your business means that you can not only structure it in a way that allows for ease of sale down the line but also create an infrastructure that reduces your immediate exposure to a substantial tax bill once your business is turned into cash. These mechanisms can take multiple forms too numerous to mention here, but the point is that when it comes to taxes, an ounce of prevention is worth a pound of cure.
- Living Expenses: Though more common with brick-and-mortar businesses, many sellers fail to realize what percentage of their day-to-day living expenses are subsidized by the business. Vehicles, home office space, life, and medical insurance and travel are all costs that might have been rolled into the business but now need to be paid out of pocket. Depending on the size and scale of the company, this can amount to a significant cost or change in lifestyle.
- Control: Once an owner has cashed out of their business, thoughts turn on exactly what to do with the after-tax proceeds. Though many entrepreneurs might pursue acquiring or starting another new business, it’s likely that some portion of these new liquid funds will be placed into financial instruments designed for long-term – and relatively safe – returns. This means that a portion of your wealth will likely be controlled by an outside advisor or entity, a hard pill to swallow considering that money – though illiquid – was once under your control in the business.
By having a well-considered and thorough exit strategy, you’re able to not only get the most value out of a potential sale but generate the most value from your newfound liquidity in the long term.
You’re Better Prepared For The Unknown: No one has a crystal ball predicting the future – after all, if they did they wouldn’t be entrepreneurs, they’d be Biff Tannen as in Back to the Future Part II, – but always keeping your exit strategy in mind is the next best thing. By some estimates up to 50% of all business exits are unplanned, and the reasons are innumerable: loss of an intangible asset, recession, sudden loss of capital, regulatory changes, and death are among the few things that we prefer not to think about but should. Not only are businesses with sound and ‘active’ exit strategies more immune to these often unforeseeable risks, but they are also able to maintain and justify the most value, even in a quick sale.
It Gives You And The Business Direction: No business owner is likely to describe themselves as aimless, but if you’re not maintaining an exit strategy, that’s effectively what the business is. One mental mistake business owners often make is believing that they don’t need an exit strategy until they need an exit strategy. But the fact of the matter is that if you don’t consider and set the terms of what your business exit should look like, in many ways, they will be set for you by factors beyond your control. Ultimately, an exit strategy is seldom written in stone. It may be a moving target, but it’s still a target, and as such, it can inform day-to-day decision-making in ways that can create benefits:
- Informs Growth: an exit strategy is in many ways a growth strategy, in the long term informing where you intend for your business to go and what success looks like, while in the short term giving you and the business the ability to make sound decisions towards getting there.
You Create A Business You Might Not Want To Sell: Any business created and operated with a potential sale in mind is a business that not only provides benefits to the future owner but also to you. They are more efficient, profitable, and easy to manage operations, and with a well-considered exit strategy combined with a business like that, you have the benefit of maximizing your value during ownership and post-ownership. It reduces your exposure to an unplanned sale and allows you to be in a better position to have decision making power until the very last day you own the business. After all, the most appealing businesses for buyers are those that are great to own: creating a business you don’t want to sell if creating one buyer’s will likely be clamoring for.
Thinking about an exit strategy can be difficult, as business owners and entrepreneurs, you are likely highly invested both financially and personally in your venture. In the end, the reasons for having a comprehensive and ever-evolving exit strategy as the foundation of your business are too numerous to ignore:
- Protecting and increasing the value of the business
- Enhancing the future worth of your business
- Creating a strategic direction for your business’s growth
- Maximizing use of post-tax profit in both the short and long term
- Reducing potential cost to business partners, spouses or family in the event of an unplanned exit