“What’s Your Exit Strategy?”

A couple of years after I opened my small business, one of my customers – a gentleman who, prior to his retiring, had been a top executive at a major corporation – asked me what my exit strategy was. Confused about why he should make such an enquiry, I interpreted his question as an awkward attempt at making conversation. I smiled and replied, “Oh I am happy doing what I am doing” – which was true – and then changed topics.  However, the question lodged itself in the back of my mind and, eventually, I realized that the man had not been making awkward conversation at all. He was giving me advice: It’s always a good idea to have an exit strategy. You should start thinking about this.

An exit strategy is a plan for how the business owner is going to leave the business. At the most general level, this involves thinking about questions such as the following:

• What is your time frame for staying with your company? (3 years? 30 years?)
• What happens to your business when you leave it? (It shuts down? A family member takes it over? You sell it?)
• What arrangements do you need to make in order for things to go as you want and when do you need to start making them? (What is the value of your company? How do you best capitalize on the value? What are the tax implications for your plan? What happens to your employees? Do you need to bring in transition staff?)

Business owners, sooner or later, need to address such questions. Every business eventually either changes hands or closes doors. It is good to put forethought into which of these it is going to be. In other words, if you are a business owner, the long terms goals for your business should include how you are eventually going to leave the company.

Some entrepreneurs are clear in their minds, before ever starting their company, that their aim is to sell it within a few years. Their primary goal in going into business is not to make the business their life’s work. It is to make money off the sale of the company. This requires building the business, making it attractive to potential buyers, having a plan for how to profit from the sale, and making arrangements for the transition of ownership. These entrepreneurs are not tied to the company. The exit is one of their main sources of motivation in starting the company; and it shapes what they do with the company from the outset.

Many entrepreneurs, however, have an entirely different mindset when they start their business. The business is their work. It is what they do, sometimes even to the point where it comes to form a part of their sense of identity.  The owners, the work, the company become tied together. Solopreneurship might be held up as the paradigm of this owner-work-company relationship, though solo’s are not the only business owners who identify with their work or company. Some people go into business as a way of following their life’s passion. Others because they see owning a certain type of business as enabling them to have their desired style of life. Still others start their companies just because they see running their own business as something that they can do to support themselves. In all of these cases, to one degree or another, the entrepreneurs’ objectives in opening a business are tied up in the business – if not to the work directly – rather than to selling the company. I am doing this because it is my passion. I am doing this because it lets me lead the life I want. I am doing this because it supports me financially. These mindsets all tie the business owner to the work or the business. For that reason, it is especially important to be cognizant of one’s goals.

For those whose goals are tied up in the work or the business, thinking about an exit strategy might be a difficult task. Small business owners often feel too busy running their businesses to think through their long term goals or to plan for the far off future. It might even seem impossible to think about an exit strategy when one never knows what life has in store. Procrastinating about exit planning seems easy to rationalize. However, this is a case of appearances being deceiving.

If your life is your work – or your work is your life – you should want to make the best of it.  Without long term goals for your business, how are you going to know what counts as making the best of it?  For a small business owner, what constitutes making the best of it is going to be shaped by your end goals and that includes for how long you want to stay in business.

To help think about long term goals and eventual exit strategy, a business owner might start by putting the basic question on the table, why am I in business? and then seeing where that leads. Suppose, for example, that I am in business to enjoy a certain quality of living for me and my family. Then I might ask, Do I have a business model and business plan that allow for both the desired quality of life and necessary amount of income to support it long term? If not, then what changes need to be made to the business? What happens when I am ready to retire? Will I need to sell the business to help support our retirement? If so, what would make my business attractive to potential buyers and what do I need to do to maintain it in that state?  This can all get more complicated when there are business partners or employees involved. Nevertheless, understanding why one is in business can help establish goals for the business. The goals of the business give one something against which to measure the business’s performance. Awareness of the long term goals, including the exit strategy, can help shape the direction in which a business owner takes the company in order to achieve those goals.

Some small business owners are very aware of the issues surrounding exit planning and are conscientious about making sure that a satisfactory plan is in place. Others have an I’ll cross that bridge when I come to it mentality, that is, if they have even given exit planning any thought at all. If someone has invested a lot of themselves, their time, and their energy into a business, this might not be a good approach; and if their financial security and that of their family is tied up in the business, procrastination is definitely not the best approach. To be done profitably and beneficially, getting out of business is typically something that requires planning.

This does not mean that you have to have all of the answers from the day that your company opens for business. It also does not mean that whatever plan you come up with must be at the front of your mind every day or that it needs to be written in stone. For many years, I was quite happy running my business and I was very good at it.  Retirement was going to be my exit and that shaped my business goals. At a certain point, however, I could see a time coming when I would be ready for different challenges and new opportunities. This meant forming a new exit strategy. Keeping thoughts in mind of why I was in business and how that related to my exit strategy, enabled me to shift plans and set new goals for my business accordingly.

At the WU KSBDC, we cannot set your business goals for you or guarantee that they will never change.  But we can help you figure out what you need to do to achieve them.

Laurie Pieper, Ph.D.
WU KSBDC Advisor