16 Oct Why you should make your exit plan before you start your business
Every business owner has to exit their business at some point. Whether you’re hoping to sell your business for a profit, work until you retire, or otherwise, you will eventually have to leave the business.
I have always been a big advocate for making your exit strategy early. Many business owners don’t necessarily consider this when they start a business, however I think that clarifying how you want your role in the business to end can help you set the right goals, and certainly help you reach them.
The reality is that your intended exit strategy will shape your business goals. If you plan on staying in the business for 40 more years, you will have to build a business that’s sustainable long term. If you’re looking to exit within the next 5 years, you will probably want to focus intensively on growing the value of the business now rather than in the future.
The question of what your exit strategy should be closely resembles the questions: why are you running your business? What is your personal motivation? What do you want to achieve? Most successful business owners will know the answers to these, and should therefore be aware of how they want to leave the business behind.
There are four main reasons why I suggest new business owners define their exit strategy from the very beginning. Below I will discuss each of the four in detail:
IT HELPS YOU CHOOSE THE RIGHT BUSINESS GOALS
If you’re planning to sell the business, you might be more concerned with getting the best price for it. However, if your children will take over the family business after you, your focus might instead be to build a strong business that can secure your successor a stable income.
Knowing how you intend to exit the business can therefore help you decide which direction you want to move the business in, and help you set realistic business goals so that you can achieve the result you want.
YOU WILL THINK LIKE AN OWNER
It’s very easy to become overwhelmed by the day-to-day operations of your business. Having a planned exit strategy, helps your efforts ON the business instead of working IN the business. Your business should be built around systems and processes rather than people. You can sell systems and processes, but it’s very difficult to sell people (with all their quirks). With an exit strategy in place, you will think like a business owner, rather than a person who happens to run a business.
YOU’RE MORE LIKELY TO GET THE EXIT THAT YOU WANT
Business owners can sometimes have unrealistic expectations in terms of how fast they can grow the value of their business. I’ve had meetings with business owners who reveal to me that they intend to retire next year, and that they would like to sell the business for a certain amount. They work really hard for the entire year, but they simply cannot grow the value of their business as much as they want in such little time, which leads them to have a smaller pension than expected.
If you know how and when you plan to exit at an early stage, you can undertake the right projects that allow you to work on your end goals from the very beginning. This can significantly increase the chances that you will achieve your desired outcome.
UNFORESEEN CIRCUMSTANCES HAVE LOWER IMPACT
Sometimes things don’t go according to plan. Unforeseen circumstances like changes in your family situation, health problems or simply a change of plans could happen to anyone at any point in time, and you might have to exit your business earlier than intended. Having a plan in place will often put you in a much better position in these circumstances.
Example 1: Peter runs his business day to day, without worrying too much about the future. He wants to retire at some point, and if anyone asked him about an exit plan, he would tell them that he will deal with that when the time comes. However, at 55, he develops health problems, and is forced to exit the business immediately. As he hasn’t spent any time building the value of the business, he isn’t able to sell it for much more than the value of his assets, which is about 10% of the profit he expected.
Example 2: Clara made her exit strategy when she made her initial business plan. Over the years she has worked on building a sustainable, valuable business that can run without her. At 55, she also suddenly develops health problems, and wants to exit the business immediately. She hasn’t quite reached all the goals she once set for her business, but since she’s been continuously working on it over the last few years, she’s close. She is able to sell the business for 90% of the profits she expected, and is still able to retire comfortably.
If you want more advice on making an exit strategy, you can book a call with one of my team members to discuss this further.
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.