Should entrepreneurs prepare an exit strategy? If so, what’s one crucial step to incorporate in their plan and why?
These answers are provided by Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most successful young entrepreneurs. YEC members represent nearly every industry, generate billions of dollars in revenue each year and have created tens of thousands of jobs. Learn more at yec.co.
1. Define Your 10-Year Goal
Before you even start your company you should have your exit plan in place. You need a true five- to 10-year goal to drive your new team toward. From the beginning you need to decide if this will be a cash flow company to fund other ventures or will this be a company that industry giants will want to acquire? Based on that, put the right systems in place to scale and get to the ideal EBITDA to exit.
2. Explore Your Exit Options and Understand the Requirements
Every entrepreneur should have this in mind even before they start the business. Whether you plan to IPO, sell it off or keep it as a life-long business, knowing your exit strategy is paramount to how you structure and run your business. Make sure you research the requirements of your exit strategy to minimize the amount of effort you’ll need to make that a reality down the road.
3. Create a Tax Filing Strategy That Aligns With Your Exit Plan
If you had an “entrance strategy” (also known as a “business plan”) then you should also have an exit strategy! An exit strategy doesn’t mean you have to sell outright. It can also be the strategy to take the company public, convert to an ESOP or sell a minority interest. From a tax protection perspective, the earlier you begin “strategizing” by the way you file, the better off you will be!
4. Hire Operational Leaders Carefully
Entrepreneurs should ultimately work on their business, not in their business, so it is important to develop a strategy to exit from an operational role to a strategic one. A crucial step in ensuring that an entrepreneur can successfully transition is hiring the right operational leadership. By hiring your replacement, you will be much better positioned to step out of your role.
5. Thoroughly Document Your Standard Operating Procedures
An exit strategy is absolutely necessary because it helps define the structure of your business. One step I would suggest is to establish documented standard operating procedures. Buyers are looking for a business they can get up and running quickly. Operating procedures help navigate problems and help the new owners understand exactly what to do to keep the business running successfully.
6. Detail Your Own Role and Responsibilities
Founders should plan how they will remove themselves from the business long before they do. We’re often the face of the brand, but if it’s to be sold, you must fade into the background. Detail your role and responsibilities and develop ways other people can take over for you far enough ahead of time, so the brand is able to stand on its own by the handover.
7. Craft a Dynamic Culture and Business Model
Build your company up so you can exit up. When you craft a corporate culture and business model that is dynamic, you are better able to exit. Your processes and strategies should be so ingrained that your leadership becomes part of the model and, therefore, can be applied whether you are at the helm or not. Looking to refine your culture? Consider team-building and process-defining sessions.
8. Name Your Successors
The hardest part of creating an exit strategy is having to choose the successor in terms of leadership. This is true if your exit strategy includes a couple of other people moving into a new company with you. Succession planning can make or break the continuity of a business. Ensure there are competent and passionate people who will take the place of the leaders who established the company.
9. Keep Your Team in the Loop About Changes
It’s important for entrepreneurs to have an exit strategy because unexpected things happen all the time. Sometimes, you can’t prepare for what’s ahead of you. However, you need to keep your team in the loop and inform them of the changes that are about to take place. You can avoid unnecessary confusion and keep everything on track that way.
10. Establish Points of Value and How to Continue Them
At the end of their cycle in the company, it is necessary to generate exit strategies, which guarantee the continuity of the company even in its absence. Based on your experience and on the procedures that yielded results within the company, establish points that you consider of value and advice about how to carry them out in the best way.
11. Prepare for Multiple Exit Scenarios
Entrepreneurs need to be prepared for as many possible scenarios as possible and an exit strategy is not an unlikely possibility. A crucial step that any business can take, especially when it has multiple brands, is to have separate accounts, subscriptions and entities. If you end up selling one brand, it won’t be difficult to separate it from the rest, making a smooth exit easier.
12. Focus on Revenue Growth
Before exiting, concentrate efforts on maximizing your company’s revenue growth opportunities. If done well, your company’s growth will indicate to investors that it has the potential to scale and that costs can be kept low in the process. This will make it significantly easier to finalize the sale of your company once you feel ready to exit.
13. Don’t Make Yourself Indispensable
The best exit strategy is to build a sustainable business that doesn’t rely too much on any one person, often the founder(s). Create strong systems, reporting and organized processes. Run the business as if you’ll run it forever, while simultaneously building it so you can sell it tomorrow.
14. Plan for the Outcome You Want Most
There are so many ways you can disinvest from your business, and you want to make it a choice rather than something that happens to you. Look up the different ways to exit, such as management buyout, IPOs and liquidation, and plan for the outcome you want the most. When you have a strategy in place, it will guide decisions like ownership, legal entities, etc.
15. Keep Building Your Business
Always keep building, especially during due diligence. I’ve seen several companies fail during the due diligence process because they let up on their efforts, assuming they had a done deal. What happened is their revenue slowed and this made their company look weak to their buyer, so the result was a lost deal or a devaluation for the company. Always keep your foot on the pedal.