#1 Reason Exit Planning Is So Critical When Starting Your Business
One of the first questions I ask clients when I start working with them is “what is your strategy to exit your business?” Most of them say “I don’t know” or more frequently “I am just getting started, why would I think about how I will exit my business now?” A fair question but there is a VERY vital answer to this somewhat puzzling question.
First, most of you have heard the phrase “start with the end in mind.” That’s what knowing your exist strategy is “starting with the end in mind.” Depending on your exit strategy the way you build your business can vary widely. Without it when you start you could build your business incorrectly and end up spending 3 – 5 years trying to transition it to what you need in order to exit later.
The Exit Strategy: 5 different strategies exist
- 3rd Party Sales – selling your business to someone else.
- Private Equity Group (PEG) Recapitalization – selling a portion of the business to gain personal liquidity of your business.
- Employee Stock Ownership Plan (ESOP) – creating a program whereby employees earn or buy shares in the company allowing the owner to create personal liquidity.
- Management Buyout – transitioning the business to key employees within the company
- Gifting – transferring ownership of your business to family.
These 5 strategies or some combination thereof are the options available. Can you see that the exit strategy that you pick may have an impact on how you setup, run, and grow your business? This is why deciding on an exit plan be so important when you start your business.
For example, if you plan to sell your business to someone else then it is important that you understand what an investor or a buyer looks for when evaluating a business for purchase. Cash flow is critical, as most investors want to buy a cash flow stream. So you should build your business for cash flow!
While cash flow is important to a PEG, they tend to look for businesses that have high-growth potential. PEG’s want to make their money in a short period of time and get on to the next deal. So ,you need to build a company for rapid growth if you want this option.
No matter what your exit strategy creating business self-sustainability will help you get more money from the transaction. If you need help in this area check out the DE, Inc. business self-sustainability resources.
What is your exit strategy? Have you thought of one yet? If not, you need to give it some thought and really begin working it into your business plan. If you don’t, you’ll end up like many of the clients that we see. They want to get out but find themselves stuck for 3 – 5 years as they transition the business into something that they can actual transition to someone else! Get started now!