WHAT IS YOUR EXIT STRATEGY?

by: Cary Christian

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 business.


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 things:

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 new owners.

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 without them.

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.


GOING PUBLIC

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 track record.


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 possible.

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