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When I give presentations at conferences, I often preach about the value of having a good, solid exit strategy. Too many business owners don’t think about their exit strategy until the very last minute (which is nearly always too late).
Not having an exit strategy essentially handcuffs you to your business. We have worked with dozens of sellers who found themselves in a position where they need to sell their business as soon as possible. The reasons for a quick sale vary significantly.
For some, it may be an opportunity that they want to pursue. For others, it may be the need to focus on a personal issue or family issue – something that their business is preventing them from doing.
When these sellers approach us to sell, after having ignored thinking about their exit, the result is a less than satisfactory sale. Either the process is longer and more difficult than it should be, or they are forced to take less money than they otherwise could – and should – receive.
So the lack of an exit strategy effectively ties you to your business, unless you are willing to compromise on the value of what you built.
But there is another significant reason to have an exit strategy: it normally drives a good business strategy.
How a Good Exit Strategy Drives Sound Business Strategy
It may sound odd or counterintuitive, but if you run your business thinking all the time that you want to sell it, you’ll usually end up with a business that you’d never want to sell.
Look at it this way. When you place your business up for sale, you are essentially telling potential investors that they can buy a business that is so good, so strong, so lucrative, that they can invest multiple years of potential earnings and still earn a significant return on that upfront investment.
In other words, the most sellable businesses are those that are great to own. So logic dictates if you build a business that investors would love to buy, you’ll probably love owning that business as well.
In a practical sense, if you are struggling with a business decision, it can often be helpful to simply ask yourself “would this make my business more or less sellable”? Often the answer to that question can drive your decision.
Here are three examples of business owners who have or could have benefited from this simple question.
“Should I Open a Retail Store?”
Years ago I worked with an e-commerce store owner who approached me with a serious case of burnout. His business, which was once exciting, was now crippling and imprisoning him. Why? Because he opened a retail store.
There were good reasons to open a physical retail store. He could get access to vendors that required a physical storefront. He gained better access to inventory, and he was able to better position hired help into multiple roles of selling the product and also fulfilling inventory. In addition, his hope was to leverage the physical storefront to build his own brand.
But the decision ended in disaster. He quickly learned that the physical store was low-margin, high workload, and unrelenting.
From our conversation (as I remember it):
“Over 80% of our profits come from the e-commerce site. The store is essentially a break-even proposition. We spend most of our time managing the store for little to no profit.”
The drawbacks the owner experienced in opening the physical store were essentially the same reasons buyers would have been hesitant to buy his business. If he had looked at this decision from the standpoint of whether it would make his business more or less valuable, the decision would have been clearer.
By opening a physical store, he made his business less transferable. Fewer potential buyers would be able to buy the business because of its geographical location. In addition, the workload of the business increased significantly as did the number of elements required to manage the business.
Making his decision with an eye towards an exit would have saved him a lot of headaches and given him much better options.
“Should I Start My Own Brand?”
Years ago I worked with a store owner who built his store after researching viable niches. By analyzing keyword traffic and potential competitors, he quickly found a ripe niche in which he could build a simple store.
Initially he built his business by driving traffic to others in the niche as an affiliate. As his site rose in the rankings, however, he moved to dropshipping his own products.
Then he had to make a decision. Should he manufacture his own product? There would definitely be challenges, but the benefits were obvious:
- There would be significant gains in his gross profit margins.
- He could control the quality of what he was selling
- He could sell wholesale to other retailers
- He could gain brand loyalty in addition to the retail loyalty already built
But the potential drawbacks were obvious as well. Most daunting was the task of setting up a process that wouldn’t have too many moving parts and thus too many points of potential failure.
If we look at this decision from the standpoint of a potential exit, he stood to gain significant value from owning his own brand. The higher margins would drive discretionary earnings up as would opening a wholesale side of his business. He would be protected from competition, and the brand loyalty would be a significant boost to his business’s value.
Therefore, the only question to answer was whether he could set up the manufacturing process to be relatively straightforward and easy. In the end, he was successful.
Making his decision with an exit in mind drove his business value up significantly – as well as his earnings and business stability.
“Should I Hire a Salesperson?”
In my days before owning Quiet Light Brokerage, I ran an online magazine that generated revenue through advertisements and email sponsorships. Since this was my first business, I had a lot of energy and the idea that I perform every role myself.
I wrote code for the website, I designed the layout, I wrote articles, courted potential authors, and sold advertisements for clients. When I look back I am amazed that I was able to manage that business on less than 40 hours a week, but I also see that I was a significant bottleneck to further growth.
One of the questions I constantly wrestled with was whether I should hire someone to sell the advertisements for the website. I never hired anyone because I was afraid of an initial drop in my personal earnings (since I’d be paying a commission).
Of course, seasoned entrepreneurs know that hiring a salesperson should have increased sales since his or her time would be dedicated to one job rather than being split as mine was.
Furthermore, if I had known about the basic principles of what makes an online business valuable, I would have seen just how simple of a decision this really was. Adding a dedicated salesperson would have removed me from a key part of the business operations.
As it turned out, when I tried to sell that business, buyers were concerned about how integrated I was in every aspect of the business. And they were right to be concerned – the business really was a result of my personal sweat equity.
I would have gained significant value – both in earnings and in the value of my business – had I hired a salesperson.
When An Exit Strategy Is Not a Good Business Strategy
It would be wrong to assume, however, that any business decision can be decided by just looking at the exit strategy.
For example, a good friend and fellow entrepreneur asked me recently a question about how he should structure his company. He knows that he should keep his individual businesses as separate as possible – even under different Tax ID’s if possible. But he is getting to the point where he could benefit from a full-time developer on staff.
But he wasn’t sure if it would hurt the value of his business if he asked his developer to work on both of his successful businesses at the same time. One the one hand, he knows that separating financials and assets from one business to the next is a key principle of maximizing value, but on the other hand he didn’t want to hire dedicated developers for each company just to keep his businesses separated.
I agreed with him on this point. While business separation is something that adds value to your business, it simply does not make business sense to limit a developer to one business if you own multiple businesses. Spreading and sharing that resource can be beneficial to both businesses far more than it would hurt any potential valuation. In reality, this wouldn’t hurt the valuation at all.
So while making your decisions according to a possible exit strategy usually results in great business decisions, there certainly are exceptions to this rule.
Common sense should prevail. As for this friend, at least he considered the implications on a potential exit. This is more than most can say.
When the business is going gangbusters and you are making good money, thinking about a possible future exit strategy might feel counterintuitive. After all, why sell something which is making you well off?
But nobody can predict what the future holds, and anything can change from one day to the next. You have to be ready to sell the business if circumstances demand. For this, you need an exit strategy.
To maximize your eventual sale price, formulate an exit strategy from day one, and base all of your business decisions on it. In the end, it may mean the difference between a big payday and a bargain basement sale.
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