I am still often surprised at how many entrepreneurs set out to create a business without a clear destination in mind before they begin. Imagine getting on a plane without knowing when or where you’ll land. It would be a preposterous idea, wouldn’t it? If being a passenger on that plane sounds scary, imagine being the pilot of such a flight. How would you know how much fuel you need, which direction to fly, or what type of weather conditions to prepare for along the way? Essentially, you’re flying blind. That is what it’s like to start a business without a proper exit strategy, and it’s how we end up with “zombie” companies. By now, thanks to the rise of popular shows like Shark Tank, most Americans are familiar with the concept of venture capital. One of the most dreaded things in any VC fund (perhaps second only to a complete loss of the investment) is having “zombie” companies in your portfolio. A zombie company is a company that has no clear path to exit. In many cases, it will be profitable, but there’s just no way to cash out on it. VCs try to avoid this situation like the plague, but what’s even more interesting to me is that most businesses I look at these days (especially small businesses – which account for 99.7% of US employer firms), according to the SBA, fall into this category. In some way or another, we must all know of a business like this, either directly or indirectly. The corner supermarket or convenience store, your uncle’s insurance agency, and everything in-between. These businesses usually provide just enough to support the owner-operator throughout his life and, in the end, will either end up being wound down, inherited by a successor in the family, or sold for pennies on the dollar.

Exit Strategies

We know what ends we want to avoid, but before we move any further, I believe it would be beneficial to first discuss a few potential outcomes. I am going to list them in the order in which I would find them appealing:

1. Merger/acquisition

2. Harvest

3. Management buyout

4. Family succession

5. Bankruptcy

Let’s approach each of these one by one, as, within each of these categories, there is a myriad of options.

Merger or Acquisition

Simply put, you create a business that has some value above and beyond its assets. That value is called goodwill. Perhaps explained in the simplest terms, it is your “bonus” for doing a good job, and it’s what you’ll end up taking home as “profit” for all your hard work building your business over the years. Goodwill generally manifests by creating a strong brand, having great employees, having a lot of unique intellectual property, or any combination of these. Essentially, you must be providing the buyer with something that they could not easily build for themselves or purchase elsewhere. Buyers typically will be competitors, private equity, or individual investors. You could also consider an IPO a type of acquisition, although this is a much less common exit outcome for most entrepreneurs.

Harvest

This strategy works for profitable businesses with a strong cash flow that can run with minimal owner involvement. Things like insurance agencies or other businesses with strong recurring revenue are a great potential fit for this type of exit. Essentially in this strategy, the owner cuts all expenses that he feasibly can while keeping the business operational and rides off into the sunset while “harvesting” all the profits he can until the business eventually finds its final resting place. If the business is not profitable or does not have cash flow, I would consider liquidation (the act of selling off business assets and shutting the business down) a form of harvesting as well.

Management Buyout

If you’ve ever seen a company advertise itself as “employee-owned,” all that means is that at some point, the original owners sold their company to their employees. Usually, as the owners grow old (and usually in technically difficult industries like aviation, engineering, etc.), the owners will enter into an agreement with management and employees to slowly sell their company shares as compensation paid to their staff. In the end, over some number of years, the owners have “sold” all of their shares to their employees, and their employees have “bought” shares in their employer’s company by way of a reduced paycheck (the same way you would put money into a 401k). I put this one after harvest because it can get complicated, and obviously, you need employees who are willing to participate.

Family Succession

Although it is a noble endeavor, and we all want to leave some legacy for our heirs, I find this strategy very weak. Sure, there are some situations where your next of kin will have a passion for your business and be good at it. But more often than not, that’s not the case. This exit strategy can leave you “holding the bag” at an age where you really would not like to be in this situation and may lead to being forced to sell the business in a hurry.

Bankruptcy

I find nothing wrong with exercising this option. I think it is a beautiful thing that we live in a country where if you take a risk and you fail, you can walk away. Of course, one should always avoid finding themselves in this situation. It is undoubtedly the worst of the exit possibilities (and the one that scares away more entrepreneurs from ever trying), but you should never discount any option. If you find yourself in a situation where your liabilities far outweigh your assets, and you have no chance of recovery, bankruptcy is your way out. There is no sense in working in indentured servitude for the rest of your life, and thank God we don’t have debtors’ prisons. Cut your losses and run!

To Sell or Not to Sell!

Similar to getting on a plane without knowing the destination, I think it would be foolish to pick a destination without knowing what’s available to us. Now that we have some background, we can determine which makes the best sense for us. When I start a new venture, my goal is always to sell. Selling your business successfully means that you have created something worth buying, something real that generates profits with or without your involvement.

Before you do anything else, write down when you want to sell and what you’d like to sell for. Be realistic here. If you’re starting your business with $10,000, you’re not going to sell it in 1 year for $1,000,000. You should be setting a 5-year time horizon when considering when to exit most of the time. The exit amount will vary greatly, but with some research and arithmetic, you should be able to create a reliable estimate. So, how do you build a saleable business? Obviously, you need to pick the right idea, which I’ve discussed in my other post. But once you’ve done that, you need to plan for your death. I mean it quite literally. If you were to die, how would your business run? I wouldn’t work for a company where if my boss were hit by a truck tomorrow morning, I’d be out of a job by the end of the week. Would you?

Start by creating processes, even if you are the only employee. Figure out the best way to do things and how you want them done, then start writing them down; even just in a notebook is fine to start. Eventually, you’ll formalize it into an employee handbook and maybe even put it onto an LMS (learning management system). This will help you when you’re scaling and when you finally want to sell the business; this will be the ultimate intellectual property. The vast majority of businesses don’t have these, so buyers will love it, and it will give you a competitive advantage when selling and allow you to ask for top dollar.

What’s Your Brand?

Invest in your company brand. Over the years, make some investment into your company image, get press, do service in the community, and create valuable content. These things are not easily reproduced and make your brand more valuable to an acquirer.

To avoid mixing your personal brand with your company brand, do not become the spokesperson for your company. It is a huge taboo, in my opinion, for people to associate your face with your company, especially in a service business. It is like binding your own shackles. Now, you are the business, which is exactly what you want to avoid.

The goal is from day one to create a company in which you are redundant. This is not to say that you won’t be involved in the business’s operation; quite the contrary. Typically (especially when starting bootstrapped), you will be heavily involved in your day-to-day operations. But you’ve set it up in a way that you can be easily replaced (either internally by managers as you delegate more of the remedial work and “move up the chain” of command as your company grows) or finally by a new owner entirely and be relieved of your duties. Next destination, drinking Mai Tai’s in Aruba!

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