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5 Reasons Why You Should Start With Your Exit in Mind

During the critical early years of starting and growing your business, your top priorities will always be sales and marketing. However, there is an additional small but critical decision that business owners forget to make a priority as well: How you will one day tell your exit story. Will it be with pride and prosperity? Or with disappointment and unnecessary regret?

I know that you’re focused on selling and are probably not worrying about being sellable, but I promise that if you take the time to craft your exit vision with the same amount of care that you used to craft your growth vision, you will have a clearer, more exciting and faster path to success.

When you have an idea of your eventual exit story, it will subtly help you build a business that you love now because it will be strategic, focused and will run like a well-oiled machine. And as a bonus, if you start and grow a profitable business that you love, then the chances are high that somebody else will love it just as much and will some day pay you handsomely for it as well.

There are many ways to exit your business, such as a merger with a competitor, employee buyout, a partnership dispute or one of the disheartening D’s: divorce, dissolution or death. But for our purposes, we will focus on selling to an outside buyer.

Over the last 10 years, it has been my pleasure to help countless small business owners cash-out big, happy and free after building and selling a profitable business they loved. As such, I know the many reasons why you too should start with your exit in mind. Let's have a look at those reasons.

 

1. You Will Determine Your Most Profitable Business Model

Starting and growing a small business is challenging, to say the least, but when you have an exit plan in place, it can help you make better overall business decisions, especially regarding your economic model.

When you are growing a sellable business, you’ll do your research to determine the most profitable business model for your offerings because you’ll understand that profits drive business value. And when your business is profitable, it can put more money in your pocket sooner rather than later.

So the primary benefit of having an early vision of your exit isn’t just about building something to sell down the road; it’s about building a better business for you to enjoy and benefit from in both the short term and the long term.

 

2. You Will Understand the Value of a Rinse-and-Repeat Revenue Stream

Rinse-and-repeat revenue is a fun way of describing a re-occurring revenue stream within your business. Examples of re-occurring revenue streams are monthly service agreements, subscription-based services that automatically renew, products that are auto-shipped, and memberships that are ongoing until cancelled by the customer (which is the best kind of re-occurring revenue stream there is!).
 
As you can see, the ultimate advantage of re-occurring revenue is predictable income.
Every growing business struggles with cash flow, so wouldn’t it be great to know exactly how much revenue you can expect each month? If you don’t have these types of agreements in place, brainstorm with your team (even if you’re a team of one) about new re-occurring revenue streams. This can help you make proactive hiring, marketing and other growth-oriented decisions because you know exactly how much revenue you have coming in each month.

 

3. You Will Make the Extra Effort to Document Your Processes

The success of franchises like McDonald’s is based on a documented, step-by-step process that any high-school kid can follow to ensure their signature burgers and fries are cooked the same every time. To ensure your long-term success, you should strive for that same kind of consistency.
If documenting your processes seems unnecessary and too time-consuming at the early stages of your business, try using one of my favorite and simplest business tools: the checklist.

Keep a yellow pad, paper or even your favorite mobile device next to your desk, and start a running list of the tasks that you do throughout the day. If you have staff, they should do this as well. As you create your checklists, you will begin to see a pattern of repeated steps that can be organized into a “proprietary process” to be leveraged as both a marketing differentiator and a training program for new hires.

A business that runs smoothly with documented processes gives a buyer confidence that the company will continue to be successful after a sale. More importantly, a smoothly run operation gives you, the business owner, more freedom, less stress and more time to focus on the activities that fuel your entrepreneurial passion!

 

4. You Will Know How to Value Your Own Business as a Measurement of Success and in the Event of an Unsolicited Offer

When your intention is to grow a business that is sellable, one of your key measurements of success will be its current potential market value. Knowing the value of your business at any given time (annually at a minimum) is like your business’ private report card that shows when and where it’s “exceeding expectations” and where it “works really hard but needs improvement.”

To value your business for your own internal purposes, use this “Back of the Envelope” Valuation (BOEV) formula:

Net Profit + Owner Benefit (i.e. your salary, payroll tax, retirement contributions, and other owner perks) + Depreciation + Amortization x 3 = Back of the Envelope Valuation

Depreciation and amortization can be found on your tax returns. When you add these line items together and multiply them by three (also referred to as a "3x multiple"), you will have a general idea about the potential market price of your business. Of course, certified valuations and appraisals are serious business, but for your internal use, the BOEV will empower you to keep pushing ahead, to consider cashing out or possibly a thoughtful combination of both.

 

5. You Will Naturally Think Bigger, Grow Bigger and Have More Fun in the Process

Last but never least is your mindset. When you dream about your ideal exit from the start, you will be inspired to think bigger, because a bigger, more profitable business puts more money in your pocket, creates an exciting environment to work in and ultimately allows you to build something greater than yourself that someone else values as much as you do. And as a small business owner, it doesn’t get much better than that.

Hopefully you can now see why starting and growing your business with an exit vision from the beginning isn’t just for tech companies and IPO-bound entrepreneurs. You will benefit greatly from an exit that is planned, beautifully executed and comes with a pot of gold at the end of your entrepreneurial rainbow. If you remain resistant to your exit vision, you could find yourself at the other extreme with only one option: quietly and painfully shutting down your business for good.

In closing, always remember that your exit journey began the day you started your business, so understand it, embrace it and journey towards the biggest, most profitable and sellable business you can imagine!

{Video} We're Talking Tactics! How to Grow Faster with a Peer Advisory Group

If you want to know the secret to my success over the last 7 years, click play to find out how you can use this secret to grow your business faster (and bigger!) too... Enjoy! jgw

Fish Where the Fish Are

When I was the Director of Sales & Marketing for the Sheraton at Fisherman's Wharf in San Francisco (way back in the 90's lol!),  I always used to tell my sales managers to "Fish Where the Fish Are". What I meant was that it's much easier to attract a customer (fish) if you drop your sparkly lure into a pond stocked with those that will most likely be attracted to what you offer them.  

In your business, what is the overflowing pond 
that your most targeted fish swim in?

In many cases, trade associations are great places to find raving customers.  Trade associations are groups of people who gather for a common interest, so if your product or service can support their interests (as end users or referral sources), your company will quickly become the shiniest lure and your net is guaranteed to overflow! 

Are you currently marketing your business to trade associations? Post a comment to tell me about it or ask a question below! 

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Ask Julie!
America’s Business Broker
Weekly Syndicated Column, February 21, 2012

Question: Why would a buyer want to buy MY business?

Answer: There are 5 reasons why there will ALWAYS be a buyer for your business (whew! :):

1) To avoid the Risks of Start-Ups or Organic Expansion
Experienced entrepreneurs know how difficult it is to start a business from zero. You probably remember that it takes hours and hours of dedicated thought, implementation, mistakes, and correction. If a buyer has started a business and failed, or started a business and sold it, they understand the value of an established entity. They will value all elements of the infrastructure you have created and will pay you a fair price for your enterprise. They also have the ability to perform, or as brokers like to say “pull the trigger,” and make an offer if most of the information they learn about your business fits their criteria.

2) To achieve Growth More Rapidly by Acquiring New Products, Technology or Markets
Once a business has achieved the milestone of a million dollars in sales, owners begin looking for ways to grow faster and easier than it took them to get to the first million, so acquisition often becomes a key strategy. By acquiring a new product line, technology, or market share, a similar business with a strong cash position can be an attractive buyer candidate.

3) To acquire an Established Presence or Strengthen Market Position

We are now getting into competitor territory, so qualify the buyer thoroughly and advance information slowly. If you have a business that serves the western region, regional players in the central or eastern states may be interested in growing their market share with a synergistic purchase of your company. These buyers are competitors, so they are professionally qualified, but make sure that they have a strong balance sheet (a lot of cash and a small amount of debt). You should also be prepared that you will probably be asked to stay on in a management capacity to continue running the region after the merger. This is a big decision because if you sell and merge your business, you will become an employee of your own company!

4) Acquire Undervalued Assets
At the writing of this post, we are experiencing the worst economy since the depression era. With so many businesses with declining revenues, there are bottom-feeding buyers with cash to burn and an appetite for acquisition. Be sure you are sitting down when you read their offer, but really, can you blame them? Don’t throw in the towel just yet—if you are willing to participate in the financing and help grow the company back to profitability, there just might be a pot of gold at the end of the rainbow.

5) To achieve the American dream of being self-employed.
You know this one from personal experience. Enough said. :)

Do you have a question or comment for me? Just leave it below and I promise to reply!

Talk to you soon and remember...

Your Exit Journey Began the Day you Started Your Business!
_______________________________________________________________________

Julie Gordon White, CBB, has worked with hundreds of business sellers and buyers over the last 10 years as a Certified Business Broker, and is the bestselling author of “EXIT! 12 Steps to Sell Your Business for the Price You Deserve”. Julie is a trusted resource for Inc. Magazine, Entrepreneur, Bloomberg BusinessWeek, San Francisco Business Times, and Enterprising Women; the Current Past President of the California Association of Business Brokers; and has been a member Women Presidents’ Organization since 2007. Discover more EXIT! info + videos at www.TheExitBook.com.

Ask Julie!
America’s Business Broker
Weekly Syndicated Column

Question: I heard that a lot of businesses never sell. Why is that?

Answer: When you finally make the tough decision to sell your business, you deserve to achieve the highest market price for your company, and to do so, you must plan your exit strategy with the same amount of thought and detail that you used to to grow the darn business in the first place!

But what if you don’t plan? What might your fate be? Instead of a smooth and painless transition out of your company, you may be forced to exit your business by one of the following unfortunate scenarios:

1) Closing the Business
This is obviously the most painful option. To be forced to close a business that you have put your heart and soul into developing is a sad misfortune and could have likely been avoided with proper planning. To receive any cash at all, the owner will probably need to have a fire sale for any remaining assets.

2) Receiving an Unsolicited Offer from a Competitor
I get called in frequently to assist a business owner after a business owner has been approached by a competitor seeking to buy them out. In this scenario, the owner rarely understands what the market value is for their company, let alone how and what to communicate (or hold back) from a buyer that is probably a close competitor.

3) Succession Without Adequate Tax Planning
So your daughter decides that she is having a midlife crisis and wants to buy your business and just before you present her with the Asset Purchase Agreement, she tells you that she was hoping that you would just give her your company (she is your daughter after all!). However, you must proceed with caution! If you are not aware of the tax consequences of a parent “gifting” a business to a child, you need to find out ASAP.

Selling to a child without adequate tax planning isn’t the only way to end up giving your business proceeds to Uncle Sam. If you are a C Corporation and you sell only the assets of your corporation and not the stock, you may be subject to paying taxes on the consideration (consideration is cash, loan payments, etc.) received for the sale at the corporate level and then again at the personal level when you take the cash. There are ways to mitigate your tax burden, so spend the time and money to review and understand your options as they relate to the tax consequences of the sale.

4) Accident, Illness, Divorce or Death
Dependence on a key employee without documented systems in place is very risky.
Equally devastating, a sudden illness, divorce or death of a key employee or partner will have the same effect or greater, so plan for the best but prepare for the worst. Treat your business as if you were planning to franchise it and document every single step just like McDonald’s. There’s a reason why every burger tastes the same no matter where you go, so take heed and write everything down.

Now that you understand what you don’t want to happen, you can now see why planning your exit is so important. Simply put, exit planning or lack of, can either make you, save you, or lose you, thousands (if not millions) of dollars!

In part two of this series, we will talk about the positive side of the equations- 6 Reasons Why Businesses DO Sell, visit again next Monday to discover how you can secure your pot of gold at the end of your entrepreneurial rainbow.

Talk to you soon and remember, your Exit Journey began the day you started your business…

Cheers and keep emailing me your questions at Julie@TheExitBook.com!
______________________________________________________________________
Julie Gordon White, CBB, has worked with hundreds of business sellers and buyers over the last 10 years as a Certified Business Broker, and is the bestselling author of “EXIT! 12 Steps to Sell Your Business for the Price You Deserve”. Julie is a trusted resource for Inc. Magazine, Entrepreneur, Bloomberg BusinessWeek, San Francisco Business Times, and Enterprising Women; the Current Past President of the California Association of Business Brokers; and has been a member Women Presidents’ Organization since 2007. Discover more EXIT! info + videos at http://www.theexitbook.com/.  Use policy: This column is available for re-print if used in its entirety including the author bio and contact information for non-commercial purposes without any editing whatsoever unless approved in advance by the author.