Why All Entrepreneurs Need an Exit Strategy (and How to Plan Yours)
If you’re just starting a company — or your business is in the early stages — it’s likely you haven’t yet thought of an exit strategy. After all, why think about the end of the journey when you’re just getting started?
Yet no matter what stage your company is in, now’s the time to not only consider an exit strategy, but also create a plan. Think of it this way: your business is an asset in which you have invested money. It has a revenue stream that supports your salary and possibly a sizable distribution of yearly profit. It should be increasing in value so that when the time comes, you will be able to harvest additional wealth.
Planning an exit strategy is the most commonly overlooked consideration of a business strategy, yet the exit strategy plays a key role in determining the strategic direction for your company. By not proactively planning an exit strategy, business owners, their heirs or their successors may find that future options are limited.
Some entrepreneurs think of their exit strategy as the means by which the business transitions to the next major stage. From this perspective, entrepreneurs don’t necessarily leave the business, but their role changes significantly. This is why it’s important for you to carefully evaluate your business plan, strategy and vision and determine what a favorable exit strategy looks like for you and your business.
Exiting Means Achieving Your Highest Goals
“I began to see my exit strategy less as a termination and more as a logical part of the high goals I had set for both my company and myself,” says Jennifer Lawton, owner of Just Books, Inc.
“I may pursue an acquisition, take the company public, merge with another company, methodically increase sales to a higher level or shoot for rapid 200 percent growth,” she says. “In achieving any of these goals, I will have, in fact, ‘exited.’ My company will have moved from one phase to the next, its ‘exit’ from one level becoming its ‘entrance’ to the next. The reality is that unless you define that end or change, your business may change in a way that wasn’t in your plan.”
Choose an exit strategy that aligns with your business and personal goals. “You should be thinking about your exit strategy the day you start your business,” says attorney Garrett Sutton, author of How to Buy and Sell a Business. “By keeping the issue of exiting in mind as you build your business, you will have the flexibility to handle the exact strategy at the appropriate time.”
To prevent your business from taking a path other than the one you intended, you can integrate an exit strategy into your business’s vision, goals and strategy. Just because you define your exit strategy now doesn’t mean you have to execute it anytime soon. Some entrepreneurs use their exit strategy three, five, even 20 years later. As the owner, you should determine the expected outcome, parameters and results before you exercise the strategy.
Benefits of an Exit Strategy
Besides having peace of mind that you can exit the business profitably, other benefits of having an exit strategy in place include:
- Protecting the value of the business you’ve built
- Creating a smooth transition for your management team and other stakeholders
- Generating a potential income for retirement or disability
- Enhancing the future worth of your business
- Reducing or deferring the potential tax impact on your estate, spouse or family
- Creating a strategic direction for your business’s growth
Types of Exit Strategies
A successful business builds wealth for its owners by accumulating assets and building future profit potential. The most common favorable exit strategies are to sell the business, sell the assets of the business, merge it with another business or sell shares in the business to the public at large.
Unfortunately, those entrepreneurs who do not plan an exit strategy will, at some point, exit from their businesses unprepared. Some entrepreneurs exit the business for reasons other than wealth, retirement or the desire to pursue other goals. Death, disability, family circumstances, and divorce from partners sometimes lead to an early exit.
Without an exit plan, entrepreneurs who want a favorable outcome for themselves, their heirs or their employees may find that their exit isn’t what they envisioned.
An Exit Strategy in Action (and the Importance of a Second Chance)
Mo Siegel, founder of Boulder, Colo.-based Celestial Seasonings, faced some challenges when planning to exit his company. Siegel had grown Celestial Seasonings to become the largest herbal tea manufacturer in the U.S. Siegel purposefully created an entrepreneurial culture that encouraged new ideas for tea flavors from employees, established a fun and family-like work environment and was rated one of the most socially responsible companies in the U.S.
When Kraft bought Celestial Seasonings in 1984, Siegel watched his company’s culture change significantly. Much of the staff, many of whom Siegel had personally recruited, left. The quality of life and passion that he had created for so many people slowly disappeared. Even though the company met all of its business goals, Siegel felt his exit had not accomplished what he wanted for himself, his staff or the community.
When Kraft was negotiating to sell Celestial Seasonings to Lipton in 1988, Siegel decided to buy it back from the corporate giant. And in 2000, Siegel merged Celestial Seasonings with Hain Pure Foods to form The Hain Celestial Group. He had found a company that shared Celestial Seasonings’ vision, not only for the business but for its people, and knew he could finally retire to pursue another personal dream — hiking the last set of 14,000-foot Colorado mountains he had yet to climb. To ensure he had made the right decision for his company and staff, he stayed on for two years to oversee the transition between the companies.