6 reasons to define an exit strategy as a business owner
Defining an exit strategy is non-negotiable for every business owner, but only a few actively think about it until it’s too late.
This is understandable, considering many of us start businesses to be able to spend more time doing the things we enjoy most or for a better work-life balance. The key focus in the early days is to win enough clients to pay the bills with as little overhead as possible, so you’ll wear as many hats as possible and do the work yourself.
Not everyone starts a business with the end in mind - with the end being a possible sale or transition to the next generation. This only becomes a question as the business grows and is successful - something we consider valuable.
And rightly so. It’s so important to define an exit strategy as a founder and business owner for these reasons:
Planning for the future: Defining an exit strategy requires you to take a step back from the day-to-day running of the business and think about what the ultimate destination of this journey should be to make it all worth it. Having that end goal will make it much easier to set goals for the business in the short and medium term and prioritise your neverending workload to move the needle toward achieving that vision. Lastly, having this in mind will make it much easier to deal with the growing pains that are unavoidable on the entrepreneurial journey.
Attracting investors: Investors want to know when and how they can cash out of an investment, so waiting until retirement and shutting up shop isn’t a viable option. They also want to mitigate as much risk as possible. Backing a business that relies on one person (=you) to be successful is a no-no. Too much risk - see below!
Managing risk: Defining an exit strategy can help mitigate risk and ensure the business is prepared for unexpected events, such as market changes or personal circumstances. When looking at risk, we often bring up the hypothetical ‘getting-hit-by-a-bus’ scenario, but it doesn’t have to be this extreme to be a problem: this is not a short-term project but a long-term strategy. The likelihood that you’ll need to step away from the business for varying lengths is high. This could be for anything from a two-week holiday to major surgery and the associated recovery. Making sure your business can operate without you there or constantly available will allow you the freedom you set out to create when you stepped on this path.
Preparing for retirement: Understandably, this isn’t a high priority when you’re 37 and have been in business for three years, but it’s worth considering when you spend a lot of time and energy building something. You want to ensure you have a plan to transition out of your role in the business - whether to retire or to focus on something else. This is also relevant whether you plan to sell or pass the asset you have created on to a child.
Maximizing value: An exit strategy can help you maximize the value of your business by identifying opportunities for growth and improvement. A business is significantly more valuable to a third party if it’s scalable, predictable and NOT reliant on the business owner. But even more important to you: you can exit and make money more quickly if you are not crucial to the operation. Someone may still offer to buy the business if you are, but they may ask you to stay involved and structure the deal with an earn-out over time - which means an increased risk for you.
Maintaining control: Lastly, having an exit strategy can help you control the timing and manner of your exit from the business, ensuring that it aligns with your personal and professional goals. A sale of a business is a much easier process when you are in control of the conversation, confident that the buyer is getting a fantastic asset with a bright future.
If the above makes you wonder why you haven’t an exit strategy already, then the best time to design this is now. Be aware that this process will require you to let go of control and hence, can be uncomfortable for you as the founder.
Getting help from someone willing to challenge you and who will remind you of the bigger picture when you get stuck in the weeds can be a gamechanger. I promise you that you will get a significant return on that investment when you sell the business for more than you thought possible.
