What will my business be worth when I need it to be worth a lot? Your Exit Strategy
An exit strategy, as defined in Wikipedia, is “a means of leaving one’s current situation, either after a predetermined objective has been achieved or as a strategy to mitigate failure.” With planning, a solid approach to managing business finances and operations, lots of hard work and a little luck (and more planning), your exit strategy from the business will look more like something from the first category rather than the latter.
It’s important to note that having an exit strategy doesn’t necessarily mean that the sole purpose of the business is to sell out for a bunch of money – not right away, anyway. For many small business owners and entrepreneurs, the exit strategy is really about where they want their businesses to be in the future, and what they hope to get from it now and later. For every small business owner, it is a balancing act between meeting today’s needs and reaching tomorrow’s goals. The “Exit Strategy” is the essential plan for recouping the capital (money, time, effort) that has been invested in a company, whether that “recouping” happens earlier or later.
Not every business owner is in business to become a Fortune 500 company; some small businesses exist largely to support the lifestyle desired by the owner, and to perhaps leave a legacy behind for the heirs. As with any investment strategy, a well thought out plan must be developed and followed in order for the entrepreneur to have a chance of reaching the desired outcome with the business. What is really difficult is getting that plan in place, and then monitoring progress and making adjustments over time. Business valuation – establishing the worth of the business – isn’t done based on data from a single point in time, it must capture historic performance data over several years of operation. Business value also takes into consideration whether or not there is a profitable future for the business given its current condition, based not just on historic information but on industry outlook as well as economic and competitive landscapes.
Because business value is a dynamic thing, potentially changing with any given activity or event, it is essential that the business owner monitor performance and how it impacts the value “goal”. Too often is a business owner caught off guard, believing that things were going very well because the cash flow was good, only to find out that they have drawn too much cash out of the business to allow it to grow in a healthy manner. If the goal of the business is to support the owner lifestyle, perhaps this is not a problem, as additional growth of the business may not be the primary goal established. The following quote from an article on Entrepreneur.com described this type of business owner pretty well:
“I asked the owner of a small, fabulously profitable manufacturing company why he didn’t grow the business bigger and sell it for a gazillion dollars. His response: “Excuse me? You’ve had way too much schooling. What part of 30-hour work weeks and a $5 million personal income don’t you understand?”
For most small business owners, this is where the struggle becomes visible – understanding that what you do now in the business impacts what you will get from it in the future. If the business needs the money to grow, then taking too much out will stifle that ability. If part of the exit strategy is to build value in the business and position it for acquisition, then a growth strategy is likely a requirement. On the other hand, if you’re getting what you want and need from the business, and growth isn’t your imperative, then it is good to know that, too, and plan accordingly (the cash cow won’t be alive forever without proper care and feeding!).
The key for every business owner is to establish the goal – the result they wish to achieve from having the business – and to then make a plan and follow it as best they can, adjusting to changing conditions and situations, but never letting the path and the goal get out of sight.
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