Believe it or not, it pays to think about your exit strategy before you start a business, just like buying a house. Is it an investment, do you want to flip it, or do you plan to live there forever? For entrepreneurs seeking investors like me, it’s especially critical, since investors want to see an exit event plan, like going public or acquisition, to get a return and their money out for that investment.
In fact, every element of your company and your personal strategy should be tuned to that exit (or lifetime commitment). Your team, your customers, and certainly your investors, will be listening for a consistent message and will respond accordingly. Here are the key points I recommend as an advisor to business owners relative to their exit strategy:
- Focus first on your personal strengths and interests. Running a startup is quite different from running a mature company. Most entrepreneurs don’t relish the thought of managing repeatable processes, greedy stockholders, and endless regulation reports. Yet they often fall into these roles by not grooming a partner or planning for acquisition.
- Establish a personal goals roadmap and desired legacy. Exiting any business need not the end, and may be the beginning of something even better, like Bill Gates philanthropy, or your next plan to change the world. For many entrepreneurs, the real joy is the next startup challenge, or the potential to help other entrepreneurs as an investor.
- Seek relationships early with the right people for your exit. The best business people make things flow smoothly from one stage to the next. They don’t wait for a distress situation in the business or your personal life, and hope that the ideal people magically appear to facilitate your ideal solution. Start now with a mentor and business advisors.
- Set metrics to track progress toward the desired exit. If your intent is to be acquired or go public, you need to show consistent and dramatic growth, as well as opportunity. If your legacy objective is long-term social impact, progress may well be measured by a totally different metric, such as positive impact on climate change or world hunger.
- Build the business team to complement your direction. Make strategic team hires and organizational decisions consistent with your personal exit objectives. For example, if your intent is to go public, it makes sense to bring in executives early who are known and respected by the investment community who are key to making this happen.
- Maintain a convincing story with a supporting data. Well ahead of any planned move, you need to assemble hard data to and a presentation to support your historical performance and exit strategy. If it’s a sale or IPO, your valuation depends on the credibility of this effort. Budget time away from running your business for this effort.
- Manage the customer base and profitability for evidence. Some unicorns, such as Uber and Airbnb, achieved their goal with a focus on growing the customer base, versus profitability, to increase their valuation and attractiveness to important players. Whichever you choose, you need to manage customer and valued-supplier reaction to any change.
- Track the market and your industry and retain flexibility. Some business owners shy away from creating an exit strategy because they believe that once their plan is developed, it’s written in stone. In fact, smart ones always have a Plan B, and monitor market and financial appetite shifts, as well as the potential for personal interest changes.
Despite the common business sense of these recommendations, according to data from a recent UBS Investor Watch and other experts, 50 to 80 percent of business owners today still don’t have any formal exit strategy. That means they may well be executing the wrong strategy for their own happiness, or are candidates to be pushed out of their own business on terms they don’t like.
Contrary to the popular belief that working on your exit strategy is negative thinking, I find no downside to efforts in this direction. Thus if you are like most business owners, who look forward to a life of pride and profit even after their current effort, it’s time to take some steps to make the transition and ultimate legacy more than a wistful dream.