By Bruce Hakutizwi
Being forced to sell your business may be one of the worst nightmares an entrepreneur can face. There’s a sickening urgency to it, mixed with feelings of disappointment, anxiety and anger. And from a practical standpoint, it’s almost guaranteed you’re not going to get what the company is actually worth if the sale has to happen by a predetermined deadline.
On the other hand, selling a business on purpose — on a timetable you arranged, for reasons you agree with, and at a price that offers full value for your investment — is a truly beautiful thing.
So how can small business owners avoid the former and achieve the latter? By creating an exit strategy.
Not just for Shark Tank contestants
In many cases, hot startups seeking angel investment (similar to the companies that compete on Shark Tank) are required to develop an exit strategy that meets the requirements of the prospective investors.
Basically, this means that the investor only wants to invest their money if they can be guaranteed the opportunity to cash out within a set timeframe. To convince them this is possible, the entrepreneur develops an exit strategy that explains how they intend to grow the business to the point that it will be in prime position to sell for a significant profit by X date.
But, realistically, most small business owners don’t head into business with a desire to grow the business just enough to sell it off at a profit and move on. Most small business entrepreneurs start their businesses because they love what they’re doing, they have a passion for the product or service they’ve developed, and they have a long-range view of the company’s future.
That doesn’t mean, though, that an exit strategy is a bad idea.
An exit strategy designed for your unique needs
Even if you started your business with every intention of building it throughout your life and passing it on to your kids when you die, circumstances change unexpectedly all the time.
That’s why it’s smart to have an exit strategy developed early on in the life of the business. This exit strategy won’t be tied to real dates (since you don’t know at the point you create it if and when you’ll need to use it), but it will include a flexible timeline that makes sense for you and your business.
Here are the basic components of an exit strategy that you should consider:
- Your end goals: As a business owner, if circumstances changed and you decided to sell your business, what would you want and need to get out of it? If it’s a small side business that supplements a full-time income, perhaps just recouping your financial investment and breaking even is enough. If the business is your entire life and it’s how you expected to put your kids through college and fund a lavish retirement, your goals are much different.
- Your minimum profit requirement: Based on the goals you’ve outlined, how much do you need to earn from the sale to be satisfied? Remember to take into account both the loss of income and the increase in expenses (either due to inflation or “living the dream” after the sale).
- A conservative timeline: How long is it going to take for you to grow the business to the point that you can realistically expect to earn at least your minimum requirement above? If you’re already there, congratulations! Now you just need to concentrate on maintaining that level or better going forward. If not, your efforts should focus on getting there as soon as possible.
Once you have these three basic components in place, you’re in a prime position to continue working and growing your business as you like for the foreseeable future. But, if and when things change and you decide you need to sell, you’re in control of the situation. You’ve already mapped out what you need to achieve your goals, and you know whether you can afford to sell immediately or if you need to make adjustments at the time.
Either way, you’re in a far more comfortable position than those who are faced with the need to sell, but who’ve never even considered the details before.