How to develop a successful exit strategy

2/21/2011

For many small business owners, the ultimate goal is to sell their company in order to fund their retirement. However, the majority of entrepreneurs have trouble designing a clear and concise exit strategy, which makes accomplishing this goal difficult. After all, if business owners don't have a defined plan, it's hard to know when they should begin looking for buyers or how much they should be asking for their companies.

As Josh Patrick, founder of wealth management firm Principal of Stage 2 Planning Partners, recently explained to Inc. magazine, this is called the "Perma Five" cycle.

"If you ask a business owner when they are going to leave their business, they'll say five years from now. If you ask them three years later, it will still be five years from now," Patrick told the source. "Business owners know they can't afford to leave their company because it doesn't have enough value to fund their retirement. They're not sure what they need to do to increase its value, but they think they will be able to fix it in five years."

Becoming operationally irrelevant

When entrepreneurs first start their companies, they tend to be the head of both everyday operations and long-term planning. If small business owners are looking to sell their companies, they need to first become operationally irrelevant - their companies must run without them at the helm.

"A business with an owner who is operationally irrelevant yet still strategically involved has a lot more value than a company in which all the little decisions are run through the corner office," notes the source.

Patrick suggests that entrepreneurs do this by splitting time between solving strategic and operational problems, rather than trying to do both simultaneously. Then, business owners should look to eliminate operational tasks one by one.

The best approach to doing this is to come up with an operational checklist that details the elements that are crucial to everyday business. The ideal checklist includes information such as cash position, revenue on the books, customer retention rates and customer satisfaction. Having a checklist like this helps business owners objectively manage the numbers without becoming a crutch for administrative and managerial staff.

"If you can make yourself operationally irrelevant, you'll be able to sell your business if you want to, or, if you don't, you'll have more fun running it knowing you can focus on the strategic issues without getting marred in the operational details," concludes Inc. magazine.

Using newly available resources to create an exit strategy

The past few years have been challenging for many entrepreneurs, with most focusing on simply staying in business. However, as the economy slowly starts to make a recovery, many business owners are now better positioned to begin planning their exit strategy. The easing of small business lending practices should help entrepreneurs gain access to the resources needed for long-term planning.

One way small business owners can begin eliminating operational tasks is by hiring new workers and training and promoting existing staff to managerial positions. The employees who have stuck with a company through the recession have proven their loyalty and their value to the company. Small business owners can show how much they appreciate their efforts by giving them more responsibilities and better positions.