Why All Businesses Need an Exit Strategy

culled from:readytomanage.com

While most businesses will have had a start-up strategy and may have a business strategy on an ongoing basis, the idea of an “exit strategy” does not typically occur to a CEO, the Board or the senior executive team until it is suggested to them, especially in smaller and younger companies. In other words, exit strategies are often developed as a “knee-jerk” response to external circumstances, such as a need to bring in a partner firm or to respond to an inquiry about selling, in most cases. As such they may be far from fit-for-purpose. This is not because a plan cannot be developed to sell a business or to bring in new equity partners fairly quickly when required (and there are plenty of consulting firms who can help to do this) but because this may create a sub-optimal result in which the only very slowly maturing business does not realize as much value as it could. For this reason, any business needs to develop its potential exit strategy as part of its overall planning journey well ahead of time and use it to steer its forward path.
What is an Exit Strategy and what are the options?

An exit strategy is the specific method or approach by which a company’s major shareholders (or its founders in particular) intend to give up some or all control and to either play a more minor role in the future or no role at all, and are compensated for doing so. In other words, the exit strategy is a way of “cashing out” the investment that has been made in the past by the founders or shareholders. When business owners exit completely, this is often called a “harvest strategy” or “liquidity event”.

Although a particular exit strategy will clearly be highly specific to each business there are a number of broad options that are available to most. A few of these are:

    To sell some or all of the assets of the business (including intellectual property)
    To sell some/most of the shares to a larger strategic partner
    To sell to employees or internally
    To sell out to a competitor
    To sell to a private equity firm
    To conduct an IPO or Initial Public Offering (although this is usually both costly and labor intensive, and usually requires a significant upfront investment to do it).

Our purpose in this brief article is not to dwell on which of the above may make most sense in the circumstances but to suggest that developing a plan for an exit at some point in the future is well worth planning for and in order to do this several issues are likely to be critical whatever option is Ultimately chosen. The ten points that follow will therefore help to make any exit more profitable when it comes:

    Make yourself as a CEO/founder/owner more dispensable. In simple terms all businesses should never be reliant on a CEO or one or two business founders and the quicker they extract themselves from the day-to-day operational side of the business the better it is from an exit perspective.
    Build a diversified customer base. This simply means making sure that you do not rely on a limited number of customers for a huge amount of sales. For example, if you lost 1 or 2 of these clients due to a competitor or liquidation, how would this affect your business? If its 30-40%, look aggressively for other markets or referral sources which can complement your current client base. By exploring new market sectors and referral sources, this will help to balance your business and make it more financially stable. Customer diversification can also potentially improve your business income during slow periods for your current market sectors.
    Craft strong and stable supply supplier contracts. This entails making sure to negotiate sound and flexible contracts with every major supplier and even re-negotiating your key supply contracts where necessary so that they are deemed to be solid by any future investing entity.
    Stand out clearly from your competitors. Try to differentiate your business from the rest of your competitors. This means clearly establishing why your clients use your business over other’s so that you can use this to your advantage when talking to possible buyers in the future.
    Ensure that you have stable and consistent cash-flow. Try to improve the overall strength and consistency of your cash flow of your business, with as few surprises and urgent funding needs as possible.
    Establish a strong management team. A business should always work steadily towards setting up and training a management team which can perform well when the CEO and/or founders are not there or unavailable. This is considered a huge plus for potential investors and buyers. A good way to think about this is to consider what would happen to your business if the CEO was “hit by a bus” tomorrow and couldn’t function for a while.
    Have well documented processes at all levels. Many businesses have little or no documentation and what is sometimes called a “knowledge management” system in place which describes all key processes. A prospective investor or buyer will expect these to be written clearly and to be comprehensive (and this is even more crucial in a high tech company).
    Have available clean and solid financial statements. Create a clean and verified financial statement of your business for the last 3 years and a solid budget for the year ahead. Try to ensure that the financial controls are well established at all levels and that risk is well assessed and managed.
    Have a credible growth plan or scalability in your chosen industry. Many businesses say that they expect to grow in the future much as they have done in the past. However, a prospective investor or buyer will expect a specific and credible plan for growth to be in place and expect your organization to be able to defend your assumptions and goals when questioned.
    Create good barriers-to-entry. Many businesses may think that they are relatively unique and not prone to much in the way of competition but a prospective investor or buyer will not go along with this and will expect the organization to have thought carefully about its competitive position and how to defend itself from others when they try to steal away market share.

In summary, an exit strategy should be developed alongside an organization’s business growth strategy. In developing it, the more attention that is paid to each of the ten points above the more it will help guide the organization’s growth and help to yield a good result when the time does come to exit in some fashion.