I’ve been hearing that phrase, exit strategy, for about 30 years now. I used it a lot as a standard component of business plans back in the 1980s when I made a living writing them. And I ignored it myself as I built my own business, for really good reasons, for a long time. I figured out what it really meant, fairly late in the game, but in time for me. I think I can make it easier for you.
1. The exit is when you sell the business.
Sorry if that’s obvious, but not everybody understands. In the classic high-tech high-end startup context, it’s either going public (meaning you get all registered up and sell your stock on a stock exchange, to anybody who wants to buy it) or being acquired by a larger company for publicly traded stock or money. In the small business, it’s selling the business to a buyer, or, in some cases, passing it on to the next generation of your own family.
If you don’t need outside investment, and you’re in the business for the long term, you might think you don’t need an exit strategy. You’re right, at least for a while. But even the long term becomes short term eventually.
2. Investors need exit strategies.
If you want outside investment then you have to have an exit strategy. Real investors don’t make money on your healthy company unless it sells all or part of itself. It’s cut and dried with outside investors: either you have a believable exit strategy, or investors don’t make money.
By the way, maybe I should say “if you need” outside investors instead of “want outside investors.” If you don’t need outside investors, believe me, then you don’t want them.
And if you don’t need outside investors, exit strategy can wait. But it will come.
3. Every entrepreneur eventually needs an exit.
OK, you’ve noticed I have a theme here. You need the exit strategy for sure, and right now if you need outside investors. But even if you don’t need outside investors, you’ll need the exit eventually.
You get older every day. Eventually you’re going to exit, whether you like it or not. Better to plan it. You get tired, you get health problems, you get older, and life changes. I was lucky, because we had a hard-working, loyal, smart next generation ready to go. That was more from good luck than good planning.
Think ahead. Look for the right opportunities. For example, there are some baby-boomer entrepreneurs feeling the need to sell during the great recession, having to take what they can get during a very bad market. I’m not saying they could have predicted the recession (black swan, in my opinion); but they could have been thinking about exit or succession.
Ultimately, it’s about people. Nobody lasts forever. You can aim for a business that survives a succession, or one you can sell. Aiming and planning doesn’t mean it will happen; but it can help.
(Image: Eugene Sim/Shutterstock)
Bonus material: 6 tips for involving your kids in your business
10 thoughts on “3 Things Every Entrepreneur Needs to Know About Exit Strategies”
Great points on exit strategies. I few things that I would add:
*Many entrepreneurs have a good deal of their wealth tied up in their business, so an exit can be necessary to make sure you get the full value of what you have created
*However, you have to have a business that is “exitable”- if you ARE the business, there is nothing for someone else to buy
*You can also do your exit in stages, whereby you sell a portion of the ownership in your business to a financial or strategic partner- this lets you “take chips off of the table” and still have some participation in the growth of the company
*Having an exit strategy up front can help you guide the strategy of the company and help you make good decisions based on your company’s core competencies.
Carol, thanks, that’s an excellent addition, I appreciate those extra points. All of them very much worth making. Thanks, Tim.
Great read Tim! We see this theme a lot in our business. We try to reach owners daily and encourage them that even though they are not thinking about selling today this month or even this year they should think about making an exit strategy. One of the greatest tips I pass along to owners is give yourself sufficient time to enact said exit strategy. Sometimes owners will decide its time to sell and then realize that they may still be bound to the business by the course of the deal for 1 or 2 more years. Planning and time are a owners best friend. Well done again good read Tim.
Thank you for all your posts Tim.
I am an aspiring entrepreneur, and I am currently putting together a business plan for my new company using your Business software.
My company is an online paid membership site. Since I am not going to be charging for taxes, do I still have to register my company with the State revenue agency?
Thank you in advance.
Thanks for your comment. Re your question, I don’t know. Of course it would depend on which state, but even if I knew which state, I probably wouldn’t know. I think everybody in business needs to have a relationship with an experienced local attorney, because these questions come up; and in the litigious world we live in, you need an attorney you can trust before you actually need her (or him). Minimize your hours, do your own research, but have a relationship with an attorney.
Another good idea is a relationship with your local Small Business Development Center (SBDC). There are about 1,000 of them in the United States. They are the best deal in business consulting because of their knowledge and their availability for relatively small fees. You can get a list at this link at bplans.com.
Kinda new to this site, but I have it very helpful in my quest to start my event promotions business. I do have a question: I am planning a dance competition and plan to make a substantial profit but am in need of start up funding of $15,000. I plan to repay the investment to the lender along with an additional $10,000. My question is this, what is meant when they ask what my exit strategy is, I am starting up and plan my other similar events . Do I need an exit stratgy when I am just beginning?
Dino, no, you have to produce $25,000 instead of an exit strategy. Your lender will want as much reassurance as you can provide that the $25,000 is actually going to happen. And check with an attorney on this one too. In some cases these innovative deals are illegal.
I wish I would have seriously thought about exit strategies earlier. There is so much focus on setting a business up, then on making it grow., but little emphasis on an exit strategy (and when and why). Appreciate this post!
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