Hobbit Business Review

Every Business Owner Needs an Exit Plan — It’s Time You Develop Yours.

Key Takeaways

  • What is an exit strategy and why do you need one?

Opinions expressed by Entrepreneur contributors are their own.

Have you considered how your successful business venture will end?

It might seem counterintuitive, but planning your business exit strategy from the start can significantly improve your entrepreneurial journey. When you set out on a road trip, you don’t drive around aimlessly — you have a destination in mind. Similarly, as an entrepreneur, having a clear end goal in mind guides your decisions and actions, leading to a more satisfying outcome for all stakeholders.

Let’s explore why looking at the end from the beginning is a strategy that pays off, how to consider various exit options and what steps to take in preparation for a fulfilling and profitable exit.

What is an exit strategy and why do you need one?

An exit strategy is like the GPS guiding your entrepreneurial journey. Often thought of as a way to end a business, its core purpose lies in propelling it closer to its long-term goals and facilitating a smooth transition into a new phase or venture.

Envisioning your exit isn’t just about business but also about harmonizing your professional aspirations with your broader life objectives. Whether it’s financial independence, travel or creative fulfillment, your strategy should mirror these objectives. Additionally, proactive exit planning attracts, builds credibility with, and encourages the loyalty of stakeholders (investors, partners and employees) who share your vision.

Even if an exit isn’t imminent, constructing your business with a future exit plan promotes a continuous drive to elevate operations and forecast potential exit valuations. Much like assessing a home’s value, getting an inspection, and making improvements before listing it for sale, an exit strategy applies similar principles to increase the value of your business. Gaining insights into its potential exit value provides a heightened market perspective, influencing your strategic choices and supporting your credibility.

Crafting your exit strategy, you also project what comes next: What’s your next venture? Where can you put your wealth to protect it and ensure growth? A well-thought-out exit plan carries you effortlessly to your next entrepreneurial or personal endeavor.

Exit options: Picking your path

In defining your exit strategy, you have various options to consider. There are as many unique paths as there are entrepreneurs; however, here are the typical high-level approaches:

  • Selling outright: While not always the goal, selling might be strategically advantageous, especially if a business is declining. Exiting before financial troubles worsen can protect your investment and prevent further loss.
  • Keeping it in the family: Passing the business to heirs can create a meaningful legacy. It’s important to ensure they are prepared to take on this responsibility and have the necessary skills or management support required to operate a business.
  • Initial public offering (IPO): An IPO generates substantial funding and rapid visibility, advantageous for fast-growth firms.
  • Mergers and acquisitions: These deals involve another entity purchasing either a majority or all of your company’s assets, driven by strategic and financial objectives.
  • Private equity investment: This route involves private equity firms purchasing companies, granting capital inflows and specialized resources to maximize profits.

In my business practice, in which I’ve sold several well-established companies, I’ve learned another thing to consider: How your financing impacts your exit strategy. Self-funding gives you more control over your exit strategy and may encourage you to remain independent. In contrast, outside equity can come with investor expectations for specific ongoing or exit outcomes.

Before bringing in any partners or investors, consider how the additional stakes may influence your long-term objective. If you bring in capital partners, have an open discussion with them about what the possible exits could look like and what they can expect.

Preparing for the grand exit

As you move closer to operation exit, careful preparation is essential. You’ll need to ensure the approach you’re considering is feasible for your organization and business model, and that all stakeholders share the same vision.

Here are best practice steps to take:

  • Retain expert council: Bring in legal, strategic and tax advisors to ensure you’re making informed decisions. Hiring a business broker can also prove invaluable in finding the right buyers or investors who align with your goals.
  • Get your financials ready: Having organized financial records increases transparency and makes the due diligence process smoother for interested parties.
  • Optimizing revenue and expenses: To maximize your exit valuation, focus on optimizing your revenues and managing expenses.
  • Negotiate for the best terms: Effective negotiation ensures you get the best deal and your interests are protected. Aim for terms that align with your objectives and minimize economic risk.
  • Vet your buyer/investors: Ensure that whoever acquires your business will maintain your vision and treat your team well.
  • Determine post-acquisition management: Will you still be involved? What happens to your team? Clarify what the management structure will look like post-acquisition.

In 20-plus years of founding and operating successful businesses that naturally scale up and lead to profitable exits and observing the wins and failures of peers and competitors, I’ve distilled a crucial principle that applies to all businesses: Innovation fuels efficiency, growth, credibility, and operational sustainability. This applies even more to dynamic industries subject to significant social, technological, regulatory, and economic change.

Always being open to (and embracing where appropriate) innovation in tech, business models, production/fulfillment methods, marketing, compliance and other areas of operations helps you thrive in a competitive landscape, demonstrates your resilience and potential longevity, and supports the interest and trust of stakeholders.

Diligence and advance planning ensures you’re taking the most strategic approach to transition into the next phase of your journey

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