No two exit strategies are identical – industries and markets, as well as individual businesses and founders, simply vary too much. Any program or course that presents one exit strategy as “the best” should be apprehended with caution. It probably underplays the importance of individual variations, as well as the choices available to founders.
That said, there are four general factors that every business owner should consider when thinking about their eventual business exit.
1. What’s your “Big Why”? (or: what’s the most significant reason you would want to eventually exit your business?)
A founder should always start by asking themselves a few basic personal questions: What are your short and long-term life goals? What do you most want out of your business exit? What’s the “post-exit life” you want to create for yourself and your loved ones? What productive endeavors will you want to spend your time doing post-exit, and where and how will you be engaged in them?
Without clear goals and a logical rank-ordering of reasons for wanting to exit, the target itself becomes fuzzy. And fuzzy targets lead to missed bull’s eyes. The quality of an exit is ultimately measured against the extent to which it allowed a founder to achieve their personal goals. That’s why the first general factor is clearly establishing the goalposts and defining what constitutes a victory.
When considering all these goals and reasons, one should stand out as the highest priority one. Not as the only one – but simply as the most important one, relatively speaking. Most exit strategies will require choices and sacrifices at some point. It’s critical, then, to know: out of your many goals and reasons, which one would you least be willing to compromise on? This gives direction and structure to the entire exit planning exercise, and increases the chances of victory.
In our experience, there are typically three big “why”s for wanting to exit: (a) maximizing your net financial payout, (b) achieving time freedom from the grind of daily operations, and (c) pursuing one’s purpose or mission at a higher level.
Without clearly knowing one’s “Big Why” – an ideal exit strategy is bound to lack focus and direction.
2. What’s your timeline? (or: when do you want to exit?)
In your current vision for your life, when would you like to complete your business exit?
A realistic timeline is partly out of our hands: it will ultimately be a function of one’s Key Exit Player (the person or entity who will eventually take over the business), the flexibility of one’s goals, and the performance of the business. Until the business is attractive enough for the Key Exit Player to deliver on enough of a founder’s goals to drive them to exit under the right terms, a quality exit cannot take place.
That said, timelines are also a function of external factors. For example, if the exit type requires a founder to sell equity in their business, some tax planning strategies may take years to make them qualify for some tax exemptions. If the goal is the highest net payout, this delay will very likely need to be built into the timeline. Many of the legal exercises needed to truly beef up the exit readiness of a business so it can ace due diligence can also take months or years to properly implement.
For these reasons, timelines can vary tremendously. We believe a reasonable exit readiness timeline is virtually never shorter than 18 months (within which founders are really in the “transaction zone”, where they could perhaps patch up elements here and there, but can’t really benefit from advanced exit planning). On the other side of the spectrum, it will usually not stretch out much beyond 5 or 6 years, years unless the exit type is a succession exit. Based on our experience, we believe a 3 to 4-year timeline pre-exit remains a good “sweet spot” for most exit planning exercises.
A realistic exit timeline also establishes a framework through which you can establish interim goals or steps, that you can consult and stay focused on as you get closer and closer to the finish line.
3. How much do you care about legacy (if at all)?
Is it important to you that the business keep running in a particular way after your exit? Will you pass it on to longtime employees or family members that you’ll have ongoing relationships with? What steps can you take to set them up for success and maintain the business’ identity? How will employees, clients, and strategic partners be treated once you’ve exited? How will the business keep serving the communities it touches? How much do you really care about factors like this?
Legacy can be seen as a “swing factor” in exit planning: for some founders, it’s the most important factor, for others, it has zero importance. It seems to occupy an emotional place, almost divorced from more rational or utilitarian concerns.
Every founder needs to figure out where they fit along this spectrum when it comes to legacy. It comes in two basic forms: (1) the business’ relationships with its stakeholders, and (2) the founder’s relationships with the business and its stakeholders.
Caring about legacy will have a definite impact on the structure, terms and conditions of an exit. In any event, legacy, like all goals, is more likely achieved if properly planned for.
4. What are your business’ and industry’s current conditions, and how are they evolving?
Business and market conditions virtually always impact the execution of an exit.
All kinds of factors can impact the timing of an exit transaction. From lending practices adding or reducing the amount of available cash in the market, to the fate of one’s competitors, to current performance, growth rate, and cash flow position, to a new disruptive technology or a massive new regulation, to the rise and fall of market incumbents – as in other areas of life, timing is key to an exit.
Some exits are less contingent on timing than others. For example, a stable professional services business can be exited by implementing an internal exit via a key team member, often irrespective of market conditions. Even then, compensation practices in the industry and the business’ growth curve compared to its competitors remain material.
One thing is certain – no business operates in a vacuum, and the surrounding environment must be looked at, in parallel to the nature of the business and of the exit at hand, in crafting the right exit strategy. As Yogi Berra once said, “You don’t have to swing hard to hit a home run. If you got the timing, it’ll go!”
Once these general factors are well defined and understood, a founder will need to decide which of the 8 general business exit archetypes best suits their needs.