WHAT IS YOUR EXIT
A month or so ago we published
a series on developing a business plan. Doing so requires a lot of research
and work on your part. When you're done, you feel a sense of accomplishment,
and you should. It is a large but important task and a great tool for
helping you build and run your business effectively.
But there is one thing often left out of most business plans designed for
internal use, and that is an effective exit strategy. An exit strategy is
just what the phrase implies: how are you going to get out of this business
when the time comes?
Most people run their businesses with the implied idea in mind that they
will run it until they drop dead some day. With a little further thought,
almost every business owner will admit that this is not really what they
have in mind. This is true no matter how large or small your business might
be at this time. Most business owners want to grow their business to a
certain size and then cash out on their years of hard work.
But how many PLAN for it? Actually, very few. And it's a BIG mistake.
GROWING YOUR BUSINESS WITH A PURPOSE
The primary reason people perform business planning is to grow their
business. But the goal of "growing the business" is not refined or specific
enough. Grow it to what size? Over what period? To what end?
Business planning without an exit strategy is really business planning
without a long-term purpose. When you're a year away from retiring it's too
late to change your overall business strategy to force it to fit your
retirement desires. Your retirement from the business, no matter what age
you choose for retirement, is a major business change that must be planned
for properly. Your planning will vary depending on how you plan to exit the
KEEPING IT IN THE FAMILY
Many of you may have family members, such as sons or daughters, that you
would like to see take over the business. If so, you have to do three major
1. Make sure they actually want to take over the business,
2. Get them trained and prepared to take over the business, and
3. Get the business ready for them.
Transferring power to a family member can be very difficult if you don't
plan for these items. It will take many years to accomplish these goals and
it is never too early to start planning for them. If they are not interested
in the business and have not been trained, your business is going to fail
very quickly after your exit. Likewise, you must have the business
positioned to fit their management style and, hopefully, with some extra
cash reserves to take into account the inevitable mistakes they will make as
Having a painless transfer of power will require them to be heavily involved
in the management of the company well before your retirement. This is not
only to make sure they are trained to handle the business, but to allow time
for your employees, customers and vendors to get to know them and learn how
to deal with them.
This is especially true with respect to management-level employees who are
important to your business. If they resent your putting family members in
charge when you leave and decide to go elsewhere, your business could fail
You also need to plan what you need from the business and make arrangements
to get it without bankrupting it. Do you need a lump sum up front or can you
afford to take it out over time? If you take it out over time, what happens
if the business doesn't do as well? Will you stay involved in the overall
management of the company or do you want to make a clean break?
All of these issues should be addressed and planned for well before the time
comes to transfer the reins.
An excellent way to cash out is take your company public. This will likely
require more planning than if a family member is taking over. When leaving
your business in the hands of family, you have literally open-ended options
with respect to what type of business you are building. It can retain a "Mom
and Pop" feel if that is your desire. If your goal is to eventually go
public, your planning will have to focus on building a company that will be
appealing to the market. That means more structure, a deeper executive core,
sustained profitability through all types of market conditions, and a
concentration on building the intangibles of your business.
You will also have to plan for the rather large expenses of going public.
It's not uncommon to need to spend $500,000 or more on this process.
Assuming you want to cash out altogether upon going public, you'll need to
plan to have a CEO in place well before taking the company public. If you
are the CEO up to that time, your leaving will have an impact on the stock
offering. Plan to turn over the day-to-day management several years before
the offering in order to give your new CEO time to build a reputation and a
SELLING YOUR BUSINESS
When the time comes, perhaps you just want to sell your business and
completely wash your hands of it. It's a very clean way to retire. If that's
the case, you're going to want to build as much value into the company as
In a sense, you're going to follow a similar plan as if you were going to
take the business public except that you would not have to concentrate so
much on building a "corporate" structure and mindset.
If another individual buys it, he will likely be purchasing it to run it and
would probably prefer a small business atmosphere.
If a corporation buys it, they're going to bring their own corporate culture
to the company.
Your goal will be to build a business that can run profitably independent of
your will and talents. This means training your employees, particularly
management-level employees, to take over more and more responsibility as you
get closer to the date you set for retirement.
WHEN DO YOU START?
Your choice of how you build your business over the next years or decades
will change depending on what type of exit strategy you prefer. That is why
you must start planning for it now. You can only ensure your ability to
comfortably retire from your business if you build it to meet the needs you
will have at that time.
Exit strategy planning is also not a one-shot deal. It is a process you will
begin now and then update as often as necessary based on market conditions
and your own, possibly changing, personal preferences.
Running your own business can not only be profitable; it can be enriching in
so many other ways as well. Proper exit strategy planning can make your
retirement years comfortable and care free!
Copyright (c) 2002