You Need an Exit Strategy Before You Even Start
Before you start your business you should have your exit planned. Not everyone agrees with me but that’s what makes life interesting, right?
In my opinion, Wikipedia’s definition of an exit strategy is flat out wrong as it pertains to business:
An exit strategy is a means of escaping one’s current situation, typically an unfavorable situation. An organization or individual without an exit strategy may be in a quagmire. At worst, an exit strategy will save face; at best, an exit strategy will peg a withdrawal to the achievement of an objective worth more than the cost of continued involvement.
(That 2nd sentence saves the definition a bit.)
Exit strategies are not about getting out of bad situations. Once you’re in a bad situation you’re already in trouble, exit strategies are designed in part, to avoid trouble in the first place.
Exit strategies force you to:
- Really, really, really think about where you want your business to go.
- Plan for disaster (in this case the definition above holds true.) Often people lump succession planning in with exit strategies.
- Laser focus on accomplishing your goal. An exit strategy is a goal.
And saying, “I want to sell my business in a few years,” isn’t enough. That’s the start of a potential exit strategy but a heck of a lot more planning needs to go into it.
Vinay Kumar, in his post 10 Crucial Exit Strategies Leading to a Successful Sale of Your Business says, “Good deals don’t just happen. They take preparation and work. Often a great deal of work and years of preparation are consumed before a sale can even be contemplated.”
He later uses an example from Bruce Barren, Group Chairman of The EMCO/Hanover Group:
“If you want to ensure a successful transition, you need to develop a package of exit strategies as part of your overall succession plan. Everyone in business has heard horror stories detailing what happened when there were limited or no exit strategies. The more exit strategy capabilities, the higher the success rate for transactions. Success is, of course, contingent on being realistic, particularly in relation to the reliability of financial projections.”
To some an exit strategy sounds negative. Or, you might think you’ll never exit because that’s not the point of the business. That’s fine, you don’t have to give up the business (although eventually we all give it up) but thinking in terms of an exit strategy will help crystallize that goal nonetheless.
Bill D’Alessandro talks about this in his post Exit Strategies when he references lifestyle companies.
If you’re looking for venture capital, planning exit strategies beforehand is paramount. Ted Patrick recommends having 3 exit strategies in place when you go to pitch VCs.
Bottomline, think about your exit strategy. And do more than think about it, plan it, write it down, discuss it with others and gun for it.
I’ve always viewed exit strategies from a single point of view: how much would I have to be offered to sell the business, or, if a larger company, a portion of the business?
There are, of course, different aspects to consider then just selling, but that is my frame of reference.
I remember participating in one of those big management meetings with the CEO and the question was asked if the company was going to stay independent.
He asked how many in the room owned more than 1000 shares of stock (including 401(k) type stuff) and virtually everyone raised their hand.
The stock at the time was about $26. Then he started the bidding up with the question of how many would sell at $30? $40? $50 per share?
At some point, everyone had their definition of an exit strategy.
Having the strategy in place doesn’t necessarily mean you have to follow the strategy. But at least you have a framework for what is happening around you.
Another good post, Ben. Thanks.
Scot
Thanks Scot – that’s a great example of developing an exit strategy!
Exit strategy or at least “written down ideas” are good, BUT I’ve seen too many startups waste endless time on exit strategies when they should have concentrated on “survival strategies”
Ha! Ted…your comment made me laugh — survival strategies vs. exit strategies.
My take on that would be – survival is all fine and good, it might pay the bills, but does it get you anywhere? “Fight for another day?” Till you blink, it’s been 10 years and you’re still just surviving.
Sometimes you have to dream big, glorious exits to realize it’s time to walk away from survival mode.
Great post! Yes, there should always be an alternative plan because Not every plan will materialize.
Aleish – there’s no question that all your plans won’t materialize – that’s life really, but I do like the idea of having several strategies for exiting and moving forward and adjusting as you evolve the business.
Thanks for the comment!
This one makes sence “One’s first step in wisdom is to kuesstion everything – and one’s last is to come to terms with everything.”
I have a question. I know what an exit strategy is, but i am uncertain how it should read. I have a 41 page business plan and i need to write up my exit strategy. i know my preference in exits, and options. but when an investor (angel or VC is the most likely buyer) reads the exit strategy, what should it say, how long should it be etc. I cant find any examples of a solidly written plan. Is it as simple as a 1 paragraph “XYZ’s (company) has a 5 year IPO exit strategy. by year 5 the owner (name here) plans to take XYZ public. (owner name) plans to keep most of his/her equity as possible, and at retirement age, sell his/her share to the public as well. in the event of his/her untimely death, his/her shares will be passed down to his/her next of kin.” then from there do i go on to talk about the “4 d’s”.
i guess i am simply looking for a real example of a solid exit strategy that was used, so i can figure out how to word it.
Thanks so much!!!!