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THE QUESTION
A few years ago I co-founded a company. I’m putting all my energies into expanding the business and we are doing well so far. People tell me I should already have an exit strategy in mind, but is it really necessary, given I have no immediate plans to sell?
THE ANSWER
Every owner needs an exit strategy. Eventually you will leave your business. When you do, you will want the most money for your company that you can get. It’s really that simple.
Some entrepreneurs build to sell as soon as the value reaches their threshold to sell, some build to accommodate family succession, others to accommodate their lifestyle needs and maybe you will have an opportunity to go public.
An exit opportunity might present itself unexpectedly. You should be ready for that.
Whatever the reason and however it happens, you should always run your company to maximize its value.
Here are a few key areas that you should pay attention to as you operate and expand the business to ensure that you maximize the value when you exit:
Team strength
The ability of an organization to continue to expand profitably is critically important to a buyer. In most cases, the continuity of key management will influence the price positively. With that in mind you need to consider the expected tenure and capability of key people on your team. If you want to exit and leave new owners with a strong CEO, you might focus on acquiring such a person so that your departure does not interfere with the operation. If family succession is important, you should start grooming successors early. Take inventory of their strengths and weaknesses and get to work building their leadership capabilities. The same is true with all key personnel. The stronger they are, the more assured potential new owners will be.
Capital investment
Investing in current manufacturing technologies, software and possibly real estate can make your company more attractive to potential purchasers. When valuing your company, the amount of investment that they will have to put in these areas can influence the purchase price.
Operating capital such as machinery or software that is current can help ensure that the company is competitive in the marketplace as well as minimizing necessary investments for a new owner.
Building a customer base
Reliance on a single or small number of customers can reduce the value of your company unless they are strategic for the buyer. Generally, a buyer wants to see a diversity of customers in your company. For them, it reduces the risk of ongoing operation of the company.
Ensuring that you are not reliant on a few customers is a good business practice. Try to diversify your customer base as much as possible while ensuring that you are growing with profitable customers.
It is impressive to see that customers are good quality, meaning that they pay on time with a minimum of disputes and are profitable to deal with.
It is a reflection on how well your company is managed.
Life after your exit
There is nothing worse than having nothing to do, especially if you have no plan. Many people say that they just want to kick back and relax, enjoy their new wealth, etc. This is rarely what happens, especially with entrepreneurs. You really need to think about hobbies, investing or philanthropic initiatives or maybe another startup or purchase of a company that you feel you can expand.
Whatever the activity might be, it is important to do something.
Having a vision of where you want to end up with your company will ensure that it stays healthy and profitable until it is time for you to move to your next venture.
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