Why business owners should have an exit strategy from the start

statue of man thinkingIt is the last thing a business owner is likely to think about at the start or in the early stages of a new business, yet many consultants advise that an exit strategy should be part of the start-up plan.

They argue that knowing their eventual goal will determine how owners structure and develop their business and the kinds of people they may employ.

Among the eventual goals could be:

* A large income
* Wealth from a sale of the business
* Ego by providing evidence of your success to others
* Power from having influence over others
* Lifestyle being your own boss, doing something you enjoy or making a decent living to fund something else you want to do
* Security or legacy by building a business that can be passed on to children

These goals will determine both exit strategy and business structure

Fundamentally the choice is between building a business that can be managed by others, or one that will die when the owner ceases to be involved.

Legal identity tends to be key as a Limited Company is easier to sell than a sole trading business.

Consider, also, what is a realistic time frame in which to achieve these goals. There are plenty of stories about young entrepreneurs who started a business in their early 20s, made a fortune and were able to retire in their early 30s. Do you have a unique idea for a product or service that will be snapped up rapidly?  If not the time frame to bring the business to a saleable point may be longer but these days retiring at 50 with a comfortable income for many is an attractive proposition.

Having clarified the goal, it is also important to consider anything that might limit its saleability. Do you intend to have shareholders? What long-term contractual agreements is the business involved in?

There are generally three categories of buyer for a business: a trade buyer who knows the industry, a finance investor who likes the income, or existing management.

The type of buyer is influenced by your goal and at an early stage the expectations of key people will need to be managed. Managers and family in particular will need to be trained if they are to become directors and owners, which is very different to what will be expected of them if the business is sold to a private equity company as a finance buyer.

There are many other factors to consider at start-up. A key one being the brand and the culture needed to establish a solid and reliable reputation that justifies a loyal customer base.

Being your own boss and making a decent living depends more on sales and margins than investing in the future of the business. However, while you may be making good money and enjoying what you are doing, it is still wise to plan for exit which may be retirement. Investing in a pension may be more important than investing in the business but still requires planning long before any decision to sell the business or indeed to close it down.

Include the exit strategy in the business plan

Whatever the owner’s goals, the exit strategy should be included in the business plan since this is the end goal and essentially the main purpose of the strategy.

Along the way, you will need to assess whether the business is still on track to meet the exit strategy and if necessary to make adjustments to either the exit strategy or the plan.

In a second blog, coming soon, John Buxton, of Kingsworth Associates in London has kindly prepared notes and a checklist covering the considerations and steps for implementing an exit strategy once the actual decision to exit has been made.

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