The exit strategy for any new business is one of the critical components to good planning.
Sadly, it is also most overlooked by many entrepreneurs who anxiously and enthusiastically push their business idea into motion with little forethought of how things may play out five, 10 or 20 years down the road. The most common fallback position is simply assumed: The owner will just sell the business.
Oftentimes in the classroom we’ll discuss this concept with Everett Community College students who appear genuinely bewildered. After all, why are we talking about exiting a business that has yet to be launched? But once we examine real businesses that appeared very successful until the time of making their exit, the principle begins to click.
A recent Associated Press story brings clarity to the argument. The article, which ran in The Herald on May 7, is headlined “Retiring state winemakers find it’s a tough time to sell.” It illuminates the challenges of holding off and selling your business when you’re feeling kaput.
Eaton Hill Winery, which was started by JoAnn Stear and her late husband in the 1980s, grew to a formidable small business in south-central Washington, according to the article. But at age 82, Stear noted that “due to health and age, it was time to go.”
The business was originally listed at a fair market price of $2.7 million, which wasn’t simply a number drawn out of thin air. Consultants made market appraisals based on cash flow and assets, much like any business valuation would be penciled out. Yet when it was clear there were no buyers ready to make offers anywhere near the asking price, she eventually settled for $1.2 million.
There are forces in life that will cause a business owner to question whether they should continue their work. Death in the family, relocation, desire to spend more time away, retirement or perhaps declining health are just a few examples.
The danger of waiting for an eventual life event to define the timing of the exit is that it may not bring the greatest return for the value of the business. Instead, it’s a great strategy to establish benchmarks or hurdles that will help develop a proactive position with regard to an exit. These benchmarks may take the form of a time horizon, or they may involve reaching a value threshold of the business.
Most experts agree that the best time to lay out exit alternatives is at the outset, rather than waiting for a point where the exit plan takes on the feel of a liquidation “fire sale.” In other words, defining the exit timeline can help force conversation with friends, family and perhaps staff to determine the best course of action.
Here are a few common strategies entrepreneurs may consider:
Build a business to pass along to the next generation. This strategy assumes perpetuity and also that there are willing and able children or family members being groomed to take over the family business.
Develop an enterprise to sell at a future point in time. This strategy expects a business’ value to grow and that the owner is setting the business up for a windfall at a specified future time horizon. Acquisitions are popular when a business is able to position itself to complement the offerings of another existing business. Sale of the business to the current employees is also a possibility, as employees have a vested interest in the business.
Operate a business that can be shut down when it’s time to throw in the towel and liquidate. This strategy assumes a business has generated cash flow to cover expenses and hopefully provide some income for the owner. Yet at the end of the day, there is little value in the business and perhaps more hassle than is worth the time and effort to sell what remains.
Timing considerations that may trigger the exit strategy are often defined by the owner’s preference. Perhaps an owner has interest in leisure and travel and might make a decision to run a business for 10 years and then sell. For another owner, the goal may be related to the business’ size and success. In other words, the owner may set a targeted value, sales or profit objective, then pursue a sale of the business when the target is achieved.
None of the exit strategies should be set in stone. They are plans subject to revision or adjustment. Most importantly, an exit strategy places the owner in the driver’s seat, rather than falling victim to setbacks or forces in life that will impose an exit decision.
Pat Sisneros is the vice president of college services at Everett Community College. Juergen Kneifel is a senior associate faculty teaching business. Please send your comments to entrepreneurship@everettcc.edu.
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