You Need a Better Exit Plan

Entrepreneurs and business owners often are so focused on the day to day struggles and exhilarations of growing their business that they don’t plan ahead for the day they no longer want to be in this business – the day they retire or exit the business.

The decisions made early in their business – even those decisions made today – can have implications down the road. You need to always have the exit in mind.

For independent business owners who work with an executive business coach, the discussion around exit planning will definitely come up – it is a key part of planning your business. And as the population ages it becomes increasingly critical to plan ahead for an exit. Here is why. According to Statistics Canada, approximately 3500 people per day turn 65 in Canada. The data also shows that just over 15 percent of the Canadian population are self-employed. If that is true, then approximately 525 people per day are at the age where people generally want to exit their business. And the number grows each year.

If all this is true, competition could be fierce when it comes time to sell or find your way out of your company. So it pays to plan ahead if you want to be certain of getting your money out of the company when you exit. You need to maximize value in your company and prepare now.

If you are thinking ahead, then it pays to consider these four possible exit strategies.

1.  Enjoy a Lifestyle Company

In a lifestyle business, rather than reinvesting money in growing your business, you simply keep things small, take out a comfortable amount of money and live on the income. Pay yourself a large bonus, reward yourself with extra perks. Basically enjoy the fruits of your company.  Think about it – create a business that generates $1 million annual personal income on 35 hours a week. It might not work for a Rotman MBA lesson, but it’s hard to argue with that as a personal strategy, as long as you don’t have other shareholders or investors. Just remember that if you are in a business that must invest to grow, taking out too much money can hurt you down the road. But as an exit strategy, it works – you don’t even have to think about an exit strategy, just scale down when you are ready.

2.  Sell to a Friend or Family Member

If you have an emotional attachment to your business venture, then you may not want to shut it down. You may want it to form a legacy for your family or want to see it continue under different leadership. Potential candidates might include children, family members, customers or even employees.

Think of the local pub down the street whose daughter works behind the bar. Or the landscaping company whose owner put the long-standing employee in charge of day to day operations. Or the consulting firm where the founding partner has backed away from most client interactions. There could be a transition in ownership coming up.

Often in these kind of situations, the seller finances the sale of the business and lets the buyer pay it off over time. This may not be the most lucrative exit in the world, but it can be tax efficient and provide the original owner with a source of ongoing income. So it can be a win-win for all parties.

3.  Formal Acquisition

With a formal sale of a company to an unknown party, the owner gets the opportunity to sell the business, add to their wealth and spare the business from the challenges of second-generation family takeover. This is the most common exit strategy and gives you the opportunity to negotiate a price.

Generally the acquisition is one company buying another company as a growth strategy, which can be a good thing because the person making the acquisition may not be the owner of the acquiring company, so the decision is not personal for them. When that happens, the value of your company can far exceed what would be reasonable in other circumstances. But it does require finding a prospective buyer where there is a strong fit, where the acquisition of your company can help the acquirer expand into a new market or offer a new product.

4.  Go for an IPO

This may be the sexiest exit, but it is fraught with potential issues and is challenging to do. Think about this -there are millions of companies in North America and under 10,000 of them are public. But if you are funded by professional investors with a track record of going public, then it may be a good plan for your business. But unless you have been a very strategic negotiator, then it is unlikely that you have more then a tiny fraction of your company and it may be an unexpectedly small windfall for you. Plus it will take millions of dollars to get you to the point of an IPO and it involves schmoozing the analysts. And even then, the IPO may fail. In my opinion, not worth the pain and challenges. But depending on your business, it may make sense, so definitely consider it early in the development of your company.

There is one other exit strategy that may be forced on an entrepreneur if they do not follow the advice of their business coach and peer group. It is the big bang exit. You don’t want this. You don’t want to find yourself forced to exit your company if you find yourself in a difficult medical situation. And you don’t want your family to have to deal with the closing or sale of your company in the event of your death. Take the advice that I offer as a TAB business coach to all of my entrepreneurial members – look after yourself day to day. And plan ahead for your exit.