One of the first pieces of advice I give entrepreneurs, is to approach starting and growing your business in the exact opposite way you’d read a book. With a book, you start from the beginning and work your way to the end. With a business, you start with the end in mind, then reverse engineer your way back to the beginning. The average entrepreneur then typically responds by telling me that they plan to run their business forever. I then respond by asking if they’ve discovered the Fountain of Youth, since all human beings eventually die!
Let’s also look at this from the perspective of a company. A recent McKinsey study found that the average lifespan of companies listed in Standard & Poor’s 500 was 61 years in 1958. In 2016, they discovered this lifespan had decreased to 18 years. Since it’s unlikely the average entrepreneur is creating one of the next 500 largest corporations in the United States, chances are your venture isn’t going to last anywhere near 18 years. For this reason, it would be irresponsible to not plan for the exit that gives you the lifestyle you want after exiting your venture (whatever that might be).
There are 8 common exit strategies that an entrepreneur can take, and these include the following:
- Sell your business to an interested third party,
- Sell your business to your co-founders (or other owners or partners of the business),
- Have your key employees or management buy the business from you,
- Sell or transfer ownership of your business to an interested family member who’s actively engaged in the business
- Sell your business to your employees using an Employee Stock Ownership Plan (ESOP),
- Refinance or recapitalize your business
- Go public with your business (complete an Initial Public Offering, or IPO), and
- Liquidate your business.
If you don’t want the liquidation of your business to be your fate, you need to plan in advance for one of the other seven exit strategies. The first step in this process is to figure out what you want to do post-exit. For example, let’s say your goal is to retire and buy a house in Aruba (where you can lay on the beach all day for the rest of your life). Conducting a search on most real estate websites will tell you the average price for a home on the island (as well as annual real estate tax and maintenance costs). You can then factor in other monthly costs you might incur, like home and auto insurance, phone, internet, cable, utilities (water, electric, and gas), and food (and anything else you want to add to your monthly budget). Calculating all of this will tell you the amount you need to both purchase a home, and be able to cover your monthly expenses for the rest of your life (your monthly expenses can be covered by investing in an insurance annuity policy). Whatever total you come up with to fund your post-exit lifestyle, is the value that your ownership percentage of your company needs to be worth when you exercise your exit (if you’ve raised investor capital during the life of your business, it’s unlikely you’ll still own 100% of your business at your exit). Now that you’ve determined how much your equity position in your company has to be worth at exit, you can also determine what kind of exit you want to have happen and when. Reverse engineering how much your company has to grow each year to get you from now to your exit date then becomes simple math.
I decided to write this blog post after reading an article that stated that 48% of business owners who want to sell have no exit strategy (this is based on the UBS Q1 Investor Watch Report, “Who’s the boss?”. In the UBS report, it was pointed out that the majority of business owners don’t have a full understanding of what takes place in the selling of a business (shown by the discovery that 75% of the business owners surveyed believed they could sell their business in a year or less). The following statement from Stewart Kesmodel (Head of Global Family Office, Americas for UBS Global Wealth Management), also stated in the press release accompanying the UBS report: “Selling a business successfully requires a great deal of planning, which owners often underestimate. Before pursuing a sale, it is important for business owners to not only have a view on the value of their business to potential buyers, but also an understanding of how that price applies to their personal needs post-transaction.”.
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