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Set Your Exit Strategy From the Beginning

Begin With The End In Mind

Stephen Covey

There’s a lot to consider when you are starting a business. You need to be clear on your mission and vision, your business model, your market research, marketing and sales strategy; and your budget and operations to implement that business plan. It’s easy to get busy working in the business, making it a viable concern. That’s the fun and the immediate reward for your vision and effort.

Another critical piece that’s easy to put off but critical to your long term goals is your exit strategy. If you set your exit strategy as part of your initial goal setting then all your goal achievements will lead towards your ideal exit strategy. Here are two areas to explore to be sure you achieve your end goals.

Is Maximum Value One Of Your Goals?

  • What does that mean to you?
  • Goal achievement is only possible if you have a goal you want to get to.
    Do you have a number you want the business to be worth?
  • How long will it take to achieve your goal, achieve that number?
  • How important is that number to your personal long term plans?
  • Do you have a number that you need in the bank in order to secure your retirement?
  • Do you want to live your legacy and leave a dynasty or do you want to work yourself into an early grave?
  • Do you want to pass on the business to family or successors and create an exit package?

These are easy questions to ask. They are hard to answer. If you find yourself not doing this homework or you keep justifying why you don’t need to do this now, or you think it doesn’t apply to your business, then you are unconsciously jeopardizing your business and your future.

What Is Your Timeline To Exit?

Do you have a timeline to achieve your goal? You have a choice starting today.

  • You can sell quick, or any time you want                   OR
  • You can take the time to position your business to sell high

You can’t do both.

I strongly recommend you work actively on your exit strategy starting now if you intend to implement it in the next 36 months. You have 12-24 months of work to do before you engage a broker, attorney, or CPA if you want to position your business for optimum sale.

Think about how much work is involved in getting your house ready to sell, improvements, repairs, decluttering, staging and curb appeal. The same is true for your business to get the highest valuation and an ideal buyer.

You need a goal, an exit strategy, a valuation number you are striving for, and a timeline. To do all four, you must do two things:

  1. Implement systems for every aspect of your business, in detail.
  2. Get the business out of your head and documented.
Schools Just Don’t Teach Comprehensive Early Exit Strategy Support

Schools just don’t teach this stuff, especially for private businesses. They focus on starting and running a strong profitable business, not how you’ll get out or how you’ll get your money out.

Most business owners only go through the exit experience once in a lifetime. They have no experience or hindsight to draw from to do this right.

There is only limited primary reference material available to teach CEOs how to plan and manage the business exit. The anecdotal lessons from CEOs’ personal exits reinforce the difficulties of exiting on your terms and on your timeline.

Comprehensive early exit strategy support is in short supply. Effectively executing your exit strategy requires collaborative teamwork from and with your expert advisors. You need to own the exit process as your top priority. An exit strategist can become your most trusted strategic advisor to achieve that end.

An entrepreneur who tries to continue running the company operationally and prepare the company for their profitable exit will do neither well. When you build an expert team, you can plan your exit to achieve your ultimate goal.

Why Are Exit Strategies So Difficult?

Working in a vacuum, the assumption is that Exit Strategies Are Difficult.

Most CEOS assume exit strategies are difficult. That assumption discourages anyone who is considering an exit from getting started early.

As the CEO of your growing enterprise, it’s easy to be so consumed with the day-to-day operations of the business, that you never find time to think about your exit strategy (knowing it is going to be difficult). So naturally, it simply gets shuffled to the bottom of your TODO list and never rises to the critical path until it’s too late.

You can minimize how difficult your exit is by being proactive, starting early and committing to the bigger plan to achieve your ultimate goal. As a discerning entrepreneur, you know your business is your largest asset that you need to monetize if you are going to secure your reinvention (fka retirement).

Exit planning requires numerous conversations and then an integration of solutions in all the following areas:

  • Peak performance
  • Succession planning
  • Contingency and continuity planning for management and leadership transition
  • Business valuation strategies to make the business buyer attractive and buyer ready
  • Transition planning to your reinvention (fka retirement)
  • Tax planning for both the business and the CEO
  • Estate planning goals and options from wealth advisors and insurance advisors
  • Deal structure options both legally and financially

Your exit strategy will be specific to you, your business, your timeline and your goals.

  • There is no ‘cookie-cutter’ approach.
  • It doesn’t happen overnight.

The difficulty in exit strategies comes from the multitude of possibilities and recombinations you have to explore and choose from. That’s also where the fun and freedom come from.

You Must Have a Business Exit Strategy

I repeat, you must have a business exit strategy. It’s not optional.

Without an exit strategy, you may get stuck in a quagmire – where you can’t get out of your business. Why would you intentionally allow yourself to get into that predicament?

At its worst, an exit strategy will help you save face instead of closing the doors and walking away with nothing. At its best, your chosen exit strategy will tie your transition to the achievement of a specific objective worth more to you than the cost of continuing on as CEO.

When you do decide it’s time to move on and you want to ‘cash in’ on the successful prosperous business you’ve worked years to build, here are few steps you can take immediately to get started on your exit strategy:

  1. There is tremendous pressure associated with every step in the sale of a business. Make time to work on the strategic side instead of focusing exclusively on the tactical/operational side.
  2. To prepare for the sale, start thinking about it early: ideally 2-5 years before you intend to walk away.
  3. Put yourself in the buyers’ shoes. Recognize what they want, what they need, what they’ll ask for and what they’re looking for.
  4. Don’t even consider doing this alone. Loners can tell you the best stories about their failures but you don’t need to be one of them. Instead, assemble an integrated team of professionals. An exit strategist can become the virtual partner who facilitates your team of licensed experts to produce a cohesive exit solution.
  5. Make sure your financials are ‘clean’ and your projections are sound. You want everything in order well before the sale date.
  6. Prepare the business before you get a professional valuation to enhance the value of the business. This will strengthen your negotiating position with prospective buyers. The analogy is that to sell a home you de-clutter and make it spotless to get the best price, which takes time. The same is true, even more so, for your business.
  7. Get educated on the process of ‘selling a business’. There are many elements, many options, and many players. You want to be in control of the process.

Many CEOs believe the mythology that they can make the decision and exit the business less than 6 months later. In practicality, it takes 2-5 years for a CEO to fully exit their business.

If you try to rush it, you face many risks and consequences that are avoidable:

  1. You reduce your choices
  2. You eliminate strategic options to grow (top line, bottom line, etc)
  3. You minimize the value you can get
  4. You don’t have enough time to think through the integration of personal, professional and business goals
  5. You may not be satisfied with hastily chosen results
  6. You may not prepare staff and successors enough for an optimal transfer and transition
  7. You may not be able to prepare adequately for the tax consequences of your decisions
  8. You may not be happy with the outcome even if it is on your accelerated timeline

Tame your exit strategy. Start early. Plan ahead

Why You Need An Exit Strategy

Your business exit is not a death sentence. It should be the ticket to your next venture, adventure, avocation or simply the joy and fun of retirement. Here are just five reasons why you need an exit strategy.

  1. Plan B – Every business owner needs a Plan B. You always have options and contingencies in mind for business decisions and opportunities to consider. When it comes to what you do ‘next’ after this business, you need options too. Plan B could be as simple as closing up shop and walking away when you get tired of the business. Plan B could be what you’ll do next when your hands, your eyes or your legs won’t let you do any more of what you’ve been doing for the last 20 or 30 years. Plan B could be the fulfillment of every promise you made and every dream you’ve had over the last few decades. If you don’t have Plan B, you are in denial.
  2. Plan Ahead – Every CEO is busy in their business, keeping it going, growing, and thriving. CEOs care about their customers, clients, staff as well as their outside support team, investors and others. But when you stay focused on today, tactics, and to-do’s, then your view of the world is narrow and shortsighted. As the CEO, it’s your job, nobody else’s, to look at the long-term goals and direction of the company, the future of the company and the security of your team. The CEO has the strategic responsibility to plan ahead. Own it and everyone will benefit. Ignore it or deny it, and your business will drift with no rudder. When you acknowledge your mortality and plan ahead for your exit, you ensure both your legacy and your dynasty will carry on.
  3. Contingencies – There are business contingencies and there are owner/leader contingencies. As the CEO, you need both in place. Emergencies happen. We have no control over the weather, fire, flood, or earthquake. How will your business continue in spite of/around outside disasters? You need contingencies built in for the short-term or long-term loss of a key team member – do you and your staff know what to do in case someone breaks a leg or quits for health reasons? You need to document a process and a plan for how to proceed so the business doesn’t miss a step. Most importantly, do you have contingencies in place so that if you must get out of the business, the business can continue? Have you made you irrelevant to day-to-day operations? These contingency plans reduce risk and add value to the business. They provide the terms and parameters for how you can indeed exit the business while preserving your legacy and dynasty.
  4. Security – Your business is likely our most valuable asset – and yet it’s also probably the most illiquid asset you own. Therefore, while you are working, drawing a paycheck from the business, it is providing security. But as soon as you can’t or choose not to continue in the role of CEO, what does that do to your financial security, especially long-term. You need to start building your exit strategy now so this business you’ve invested so much blood, sweat and tears into will indeed provide for the security of financial independence which you need when you exit. Setting up and implementing this one element can take years.
  5. Build Wealth – The biggest mistakes almost all CEOs make in both large and very small businesses, is that they settle into building a business that provides only an income stream. They never set up the business to be a wealth-producing machine. They get to the point where they want to exit and there’s nothing there that can be monetized anywhere near the value they think it’s worth. Their wealth is so tied into the business; they can’t leave with the financial independence they dreamed of. There is a solution.

With an exit strategy in mind all along the way, then every day-to-day decision is tied to the strategic long-term goal of a specific exit strategy. When you focus on a wealth-producing strategy, the income stream will be there.

Inkling to Exit Your Business? Part 2

RBS Citizens and Forbes Insights recently produced a new survey entitled Middle Market M&A Outlook 2012http://images.forbes.com/forbesinsights/StudyPDFs/RBSC_MiddleMarket_M&A2012.pdf . They surveyed the buyer market for M&A (Mergers & Acquisitions) activity.

If you are the CEO of a growing business with even an inkling to exit your business in the near future, take note of these findings. Their insights and commentary are equally useful to exiting CEOs as prospective sellers into this market.

Here are more of their findings:

There will be deals. One in three executives said they were likely or very likely to acquire one or more significant assets over the course of the next year.

Most express a merely opportunistic approach. About one in four executives described their current orientation toward transaction markets as proactive. Their companies are poring over balance sheets and income statements, looking for viable external targets or even potential internal divestitures. Well over half said [that] though not actively seeking a transaction, [they] would be willing to act should a compelling proposition arise.

Synergy, though challenging to achieve, still drives valuations. Synergy, the idea that one plus one can equal an amount greater than two, can be triggered, within a deal premise. Synergies come in two basic forms: cost and revenue. While both can be difficult to achieve, and both are often overestimated; it is revenues that sophisticated acquirers say should be treated with particular skepticism. Two out of three executives said that synergies were a vital component of valuation.

Executives perceive a range of integration challenges. One reason that executives tend to prefer organic growth is that bringing an acquisition online requires considerable focus and resources. Survey participants noted that a number of areas are, at best, difficult to integrate. The areas of greatest concern include IT, sales and marketing, product development, and manufacturing.

Deal practitioners are using a wide range of tools. In performing valuations, executives use multiple lenses. Tools include everything from discounted cash flow models to comparisons of comparable transactions, public company valuations, payback periods, and even real option and multi-variable simulations.

Consultants matter. Faced with the challenges of assessing opportunities, performing valuation, or financing a deal, executives recognized the need for a mix of both in-house and external resources. For those companies most active in the market; valuation, financing, and due diligence are the areas where specialists are most often tapped.

We’re not for sale. Three out of five executives bluntly stated their companies were not for sale. Still, the remaining two out of five said they were willing to entertain the idea of being acquired. Only a tiny fraction of survey participants described themselves as anxious. And a note to any would-be sellers: the vast majority of executives viewed carve-out financial statements as at least somewhat or very important. Or put another way, the preparation of reliable carve-out statements can help to ensure a quicker transaction.

Reread these key findings in the context of your business and you being the seller who is being targeted. How can you use these insights to strengthen your own company’s position?

Inkling to Exit Your Business? Part 1

RBS Citizens and Forbes Insights recently produced a new survey entitled Middle Market M&A Outlook 2012. http://images.forbes.com/forbesinsights/StudyPDFs/RBSC_MiddleMarket_M&A2012.pdf . They surveyed the buyer market for M&A (Mergers & Acquisitions) activity.

If you are the CEO of a growing business with even an inkling to exit your business in the near future, take note of these findings.

Their insights and commentary are equally useful to exiting CEOs as prospective sellers into this market.

Combining a survey of 432 senior executives with 11 in-depth interviews from companies that ranged from $5-500M in size (45% under $25m); they found that: “most mid-size companies said they had ample cash, while two-thirds viewed today’s conditions as a “buyer’s market.” To this, add the fact that asset prices are at or near historical lows.”

Consider each of these Key Findings and how they apply to your situation:

Key signals indicate that markets could be ripe for M&A. Two out of three middle market executives view conditions today as a buyer’s market. Meanwhile, two-thirds of the survey respondents also said that balance sheet cash was plentiful—with over a third indicating that they could acquire assets of $2 million or more without incurring debt or injecting equity.

Other signals are mixed. Deal volume is often driven by market participants (aka buyers)’ view of future asset values. Only about a third of executives said they believed prices would be higher one year later. However, among the most active acquirers in the survey sample, that expectation rose to one-half.

For now, organic growth is the preferred path. More of today’s mid-size companies are focusing on achieving growth through wholly internal means than by any of the corporate development approaches involving mergers, acquisitions, partnerships, or other close collaboration with external counter-parties.

But companies are very much open to M&A. M&A is recognized as a source of potentially significant growth. Half of all executives described themselves as active in M&A, with one out of eight describing themselves as very active.

 

Plan Your Business Exit BEFORE You Plan Your Market Entry

“Most traders never plan or even discuss their Forex exit strategy. “

In the world of Forex trading, that’s what Pete Visconti says. In his world, traders pay more attention to their entry, setting up a good trade and timing profits.  They forget or don’t look at the cost of not having a Forex exit strategy for each trade too.

As Visconti learned the hard way himself:

“Although, traders will argue which is more important,
you need to understand that they both are.
Just make sure they are planned and part of your trade plan.”

Analogous to his advice for traders to have a Forex Exit Strategy, here are my four points for Entrepreneurs/CEOs to plan your business exit strategy before you plan your market entry:

  1. Know What Your Business Exit Strategy Will Be BEFORE You Launch Your Business.

If you are in business and didn’t do this up front, you are already behind. It’s already harder for you to make good clear decisions about your business day to day, because you don’t know what your exit options are; what you are aiming for.

Therefore, if you don’t have an exit strategy in place, put exit planning on your critical exit strategy, path now to increase the value of your business at exit – whenever that may be.

  1. Consider Multiple Exit Strategies

When you lock down your exit strategy too soon, you eliminate the possibility of alternative opportunities providing even better solutions. When you maximize the number and variety of options on the table; you have more choices, more opportunities, and can make better decisions along the way

The sooner you start exploring alternatives open to you, the more control and more choices you can position you and your business to benefit from. The longer you wait and the smaller your exit window, the fewer options you can consider and reducing the value you can realize at closing.

  1. Always Initiate a ‘Stop Loss’ as Part of Your Exit Strategy

In the context of your business exit strategy, a ‘Stop-Loss’ is a contingency plan if things go awry and you must get out fast.

You have an emergency exit from the building. You have a backup of your hard drive offsite. You also need a plan for other crisis scenarios.

It could be an insurance policy, a backup successor, a backup exit plan that is not ideal, but fulfills many of your criteria and can be invoked quickly. It’s like having a co-signer on a key bank account or having a second key holder for your lockbox.

  1. Stick to Your Business Exit Strategy just as Conscientiously as Your Business Strategy

One of the biggest obstacles business owners face is getting distracted by the ‘new shiny object’. They get restless or bored working the sound strategy they are implementing and decide to shake things up without any stopgaps to protect them or the business. That lack of discipline can cost you your retirement and the business in the end. Revise it strategically if necessary. It’s in your best interest to trust your exit strategy and follow it with discipline.

Most entrepreneurs will skip these elements of laying out their business. Most CEOs will trivialize the importance of their exit plan in building the success of the business.

The flaw in that thinking is that business is all about making a profit.

Planning your business exit strategy from the outset is an imperative to achieve your goals for the business. Consequently, your daily decisions all lead to how much profit you achieve and what you want to do with the resulting profits.

Top Dollar Strategies to Sell Your Business

Why would you ever want to sell your business? The best reason is that you’ve accomplished everything you set out to do. So when you sell, you want to be sure you’ve done everything to assure you command top dollar.

To sell your business for top dollar, be diligent applying these three strategies:

  1. Prevent Seller Neglect – Just because you’ve decided to sell, doesn’t mean you can neglect the business. You must do everything you can to increase sales, momentum, and customer loyalty right through the exit process until the transaction is done.

You must keep you eye on current and forecasted sales. Your buyer will pay more for the business with proven increasing sales and forecasted accelerated growth than for declining or stagnant sales with nothing new in the pipeline.

  1. Remove yourself from day-to-day operations of the business. You need the buyer to see that the value of the business he’s buying is in the business, not in you. To maximize the value of the business, you must demonstrate the business can be self-sustaining without your daily presence. They need to see customers, your team, your vendors engage and commit to do business with your company because of the business, not you.

To do that, train your management team to take on all your responsibilities (not cold turkey but over time). Build the infrastructure to support them to do everything you’ve always done. The more systems, structure, processes and procedures you have, the more valuable the business. You can monetize every operational task and responsibility that you delegate and transfer to your team.

  1. Reduce the personal perks and benefits you take from the business. There are many ways that small business owners can have the business pay for conveniences and luxuries. However, when it comes time to sell your business, buyers will be willing to pay well for your profits. So if you are taking money out of the business for personal expenses (legally), you are reducing profits. That’s not appealing to them.

When it’s time to sell, separate your personal and business expenses. Stop using the business to bankroll family dinners, vacations, cars, country club memberships.

Maximizing value is the key to selling your business for top dollar.

CEO Exit Readiness Assessment

How do you know when you or your business are ready for you to transition out of the business?

How do you know when you should get out fast or hold on for the long-haul? What business model will help you maximize the value of the business? Here is a starting point for exploring and considering when and how you might exit/sell your business.

This CEO Exit Readiness Assessment provides a short set of questions to highlight your current thinking, decisions, issues and options to get out of business.

  1. Is your business ready to be sold?
  2. Are you ready to get out, leave the business and move on to your reinvention?
  3. Who will buy your business – and what form will the transaction take: trade, cash, management buyout, private equity, VC, Employee buyout?
  4. What sort of seller will you be?
  5. Do you have the right team in place (staff and management)?
  6. Do you have the right set of expert advisors on your team?
  7. Do you know what it is that you don’t know? How do you know that you don’t know?
  8. Have you already planned your reinvention after you exit your business?

There are more questions to consider. Your answers here give you a baseline to begin developing your exit strategy and plan the steps and timeline to exit or sell your business.

From the outset of your business, start asking these questions as part of your strategic planning at least annually if not quarterly. Keep a log of your evolving answers as the company grows, your role changes and your team matures.

When you tie your long term goals for the business and your role to day-to-day decisions, you will make better decisions, faster, easier, with less complete information while minimizing risk.

To avoid exit planning errors and pitfalls that could potentially derail your exit transaction, email me with any questions you may have.

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