What is an Exit Strategy?
I own a Successful Company – What do I do Now?
There may come a time when you don’t want to play a daily role in your business. But don’t make the mistake of assuming that you MUST sell your business or SHUT it down. There are other options and factors to consider.
There are really only three strategies to exit a business:
You can Sell it ...
You can Get it to Run without you ...
or you can Shut it down ...
You have likely spent a lifetime building your business. It is almost like a child. You have watched it grow. You have nurtured it and now you would like to see your business live on when you are gone. Or, maybe you are just tired and need to shut it down. While at the outset, most people would think that shutting down a business would be the easiest methods of the three listed above. In reality, none of the three methods are easy; and all require adequate time and planning to implement. Successful business exit strategies are not created in desperation or as a last resort.
"Franchising" your Business....or Turnkey your business?
What is a Franchise or Turnkey?
The term "Franchise" has a way of scaring people into thinking they are getting into something that they don't want or a loss of control. The reason we use the term is to understand what value a franchise brings. The key to a franchise is providing a proven, documented system that can be taken to another market and duplicated successfully. Turnkey refers to the ability to turn the key on the business and have it run successfully. The reason they can take it to another location is the fact that they have a documented Marketing Plan, a documented Financial Plan, a documented Operation Plan and a documented Management Plan. Without those four key plans, the franchisor would have nothing to sell.
When we refer to "franchising" your business, we are talking about taking your systems and documenting them so that eventually you can train other people to manage your business successfully. The most important aspect is to help you understand the value of systems which is important whether you want to sell your business, run it without you or sell in the future.
How can I "franchise" my business?
Imagine that your business is more like a franchise. This is possible because all of the procedures, policies and reports that are in place and committed employees are following them. Still worried about not being able to put all of your trust and the future of your business in the hands of someone else? Create a system to protect yourself. This management system will be designed to protect your business from sabotage, bad management decisions, stealing and cheating, liabilities, lawsuits, uncollected accounts, unreliable employees, and unpaid bills; among others.
While the methods and techniques that you have utilized to grow your business over the years have been successful, those may not be the methods and techniques that will allow the business to survive beyond you.
What makes a "franchise" successful?
We have all been in a McDonald's restaurant at some point in our lifetime. There are around 3
3,000 stores across the world. Have you ever thought about how they could get french fries at your local restaurant to taste the same as those made at a store in Moscow? Or consider Subway, Domino's, Little Caesars. Besides the fact that the examples here are all restaurants, what makes them successful? Some of the tools consistently found in successful franchises are:
- A comprehensive organization chart
- Detailed job descriptions
- Well-documented procedure manuals
- On-going employee coaching and team building
- Development of a variety of reports to monitor items such as: variances, quality and productivity.
- Constant communication throughout the organization through the use of written memos
- Giving talks/discussions
- Making a constant effort to motivate your people at all levels of the organization
- Project management and process maps
- Subcontractor and vendor systems
- Cross-trained capacity and bench strength
- Customer lists cross referenced to projects
- Maintenance and customer service systemized
- Financial analysis
But What do You Want?
But the most important factor in considering exit strategies is you – can you see the big picture? Are you willing to be creative and flexible in response to customer demand? Can you supply the ideas and management necessary? Are you willing to invest in your company instead of drawing out all the profits for yourself?
What you do from this point on guarantees your business will be a success or failure. Now that we have considered your own goals, let's focus on the condition of the business.
What is the Current Condition of Your Business?
Before considering which option is the best for you and your business, we have put together a list of what a potential investor would be looking for if they were considering your business. Ask yourself if your business has the following successful strategies:
- Prove that future excess earnings will achieve a 20 to 30 percent ROI.
- Develop a cash flow plan to prove forecasted cash is a reality and if not what needs to be done to get it on-plan.
- Income and Balance Sheet statements must be accurate and timely to prove profits can be expected to continue.
- If the financial records can show an increasing profit picture the value will increase.
- The returns must verify the business financial statements.
- Prove that the employees are in place with job descriptions and organizational charts.
- Employee contracts
- Complete listing of assets, applications in the business and condition
- Listing of all mortgages, rates payable and other liabilities
- Sales brochures, advertisements and marketing materials
- One-year business and marketing plan.
- Service and product specification sheets.
- Guarantees and warranties that could be liabilities in the future.
- Any patents, trademarks and copyrights
- Corporate charter and by-laws
- Stock option plans, profit sharing and pension plans and retirement plans
- List of shareholders, how shares are held, and value to each person
- Agreements that restrict transfer of shares
- Insurance policies
- Written employment policies and practices
- Union contracts or collective bargaining agreements
- Meet with the bank to discuss credit worthiness and credit limits.
- Meet with the employees to discuss their perspective on how things are going.
- Meet with key vendors for outstanding payables and history.
- Meet with major customers for history and future business plans.
- Check with law enforcement for any charges or convictions against the business, or any officer or key employee charges.
"Ok Holt, I don't want to sell my business, but I want more freedom. What do I do? Can my business really run without me?"
Fearing business failure without your constant presence is a real concern. That fear is resolved through taking multiple precautions that would ensure the success and prosperity of your business for years to come – without you having to be involved on a daily basis.
Nine Steps to Day to Day Freedom in Your BusinessThere are nine steps to regain the personal freedom of your time. It is important to follow each of these steps when implementing selling your business, growing your business or gaining freedom from your business.
Step 1: Strategy Development & Research
Having a detailed strategy that outlines the approach you are going to take to achieve your goals can give you a competitive advantage. Approaching your chosen method with a plan that has been systematically researched and defined is important.
The next steps are the components required to complete your first draft business plan.
Step 2: Financial Plan
Having a financial plan that estimates sales, cost of goods, gross profits, expenses, net profit, assets required, liabilities required (such as debt), etcetera, is another important step. You must also have a detailed budget that covers the next one to three years of operation. Applying this financial approach will allow you to focus on what is important. The financial plan is the role of the CFO or Chief Financial Officer. A CFO's job is to tie each key position in the company to a line on the Profit and Loss Statement. Most small companies are not able to afford a full time CFO. Just ask us for some options on how to bring this together. You must have a solid financial plan in order to be successful.
Step 3: Team Development
Team development consists of several features. One important aspect of team development is to ensure that all of your employees are knowledgeable in each of the responsibilities that they are expected to perform. This should include a strategic thinker, sales and marketing expert and an ace technologist in the industry. Another key piece of team development is to conduct team meetings for those employees that are involved in common projects/goals. This helps to build camaraderie of employees from different areas of the business that may not have a lot of opportunities to get to know each other outside of the team development meetings.
Step 4: Marketing Plan
Having a strong marketing plan and following it is extremely important in achieving your growth goals. In order to be successful, you must match your products and services with the best growing industry segments or market niches. This can be accomplished by developing a method to reach prospective customers such as: market research, competitive research, product research, lead generation, pricing, sales, public relations, Internet and more. By utilizing a needs analysis, you can focus on who your customers are in order to accurately deliver your message to your customer. Marketing strategy and planning is not as simple as buying Yellow Pages advertising. The value of a strong marketing strategy is to understand why your customers use the Yellow Pages before you spend your resources. Companies can no longer afford to waste money on ineffective advertising spending.
Step 5: Operating Plan
A comprehensive operating plan is comprised of multiple effective processes. Your operating plan must include such things as capacity planning, work schedules, product and service profit analysis, input and output levels, specifications, design, machinery and equipment, recruiting and training and project management. Develop a product or service prototype. Don’t confuse your prototype with your final product. Your prototypes are a working demonstration that shows what the new idea will do: debug and perfect your idea.
Project management is an important aspect of the operating plan because the way in which a project is managed can make or break the success of it. If the project manager is thorough across the board when it comes to ensuring the quality of his team’s work and their ability to stay on schedule and within budget; the project manager will be successful.
Step 6: Management Plan
An all-inclusive management plan is something that is difficult to accomplish, but not impossible. The most important point to remember when creating a management plan is to pay attention to the details. Some key aspects of a comprehensive management plan are detailed job descriptions, having an organization chart and employee mentoring. You must also have detailed one, two, and three year plans for both yourself and your business. Without leadership and enforcement, no business will last for long.
Step 7: Deployment
When deploying a new strategy, growth or otherwise, it is always important to have an itemized schedule and enough meetings, whether they are project meetings, in-the-field meetings or sales meetings, to keep critical information out there. You must also be able to delegate tasks to others with the knowledge that they will meet their deadlines and goals on schedule with minimal follow up. See step six.
Step 8: Recruiting & Hiring
When finding and choosing new employees, it is important to have a comprehensive screening process in place so you ensure that the person you choose will fit into your organization; which in turn helps increase the success of your employees overall. When looking for new employees it is important to identify where your prospective employees are and then design ads that can be placed in the newspaper, on television or on the Internet and then have a method to obtain the resumes in a confidential manner.
Step 9: Revisit the Business Plan
Translate all that you’ve learned into a better plan. You may be focused on the wrong market, or the wrong product.
This comprehensive list may look simple to implement. How long does it take to implement these steps? It really depends on the goals of the ownership and management of the company. Implementing the 9 Steps to Day to Day Freedom will typically take 1-3 years to complete. If you are planning on selling your company in the next 5 years, the best time to start preparing is now.
To discuss gaining day to day freedom in your business, contact firstname.lastname@example.org for a FREE 30 minute phone consultation.
"I am thinking about selling in the future, what do I need to consider now?"
Day to Day Freedom vs. Preparing to Sell
Preparing your business to sell has a lot in common with "Can My Business Run Without Me?" Why is that? Because an investor does not want to buy a job. He or She does not want to buy something that will take up even more time. The 9 Steps to Day to Day Freedom could also be titled The 9 Steps to Preparing your Business for Sale. Absent owner management is always very appealing to an investor.
Think Like an Investor
In this scenario, you must think about what an investor would be looking for if investing in your business. Ask yourself these questions;
Would you want a business with steady or declining sales?
Would you want a business that has consistently not shown a profit?
Would you want to buy a business in which you yourself had to spend 50-60 hours per week?
Would you want to buy a business that is not bringing in new customers on a regular basis?
Would you want to buy a company that had too much debt or declining equity value?
These are just some of the factors that an investor will be looking at. An investor takes an non-emotional approach to evaluating your business. In order to place your business for future consideration, you must have an investor mindset. An investor will not invest in something that does not have a chance of success. Below is a list of strategies an owner must embrace in order to set up their business to sell in the future.
Strategy for Continual Cost Reduction
You must reduce your costs in order to increase your profits on a continuous basis.
Capacity Planning Strategy
The management team must make informed decisions regarding staffing requirements. These decisions will directly affect the profit and loss statement.
Process Management Strategy
Define, create, document, implement and enforce the use of processes to ensure success. Be prepared to either improve processes where necessary or hold the employee that is responsible accountable for the success of that process.
Financial Education and Strategy
The management team must understand the financial reports that are necessary for running the business. If necessary, supplement your team with a financial expert.
Technology Implementation Strategy
Research shows that having an increased investment in information technology gives a company an edge over their competitor. In fact, an increased investment in IT has been proven to be the single biggest factor for increased productivity in the past 10 years.
Employee Rewards Strategy
Rewarding employees helps to create loyalty and with it the desire to work harder to be more productive. Use scorecards to determine what levels of achievement are necessary for rewards to be earned by each department and each individual within each department.
Checks and Balances
Creating a system of checks and balances throughout your company will assist in protecting both your personal financial well-being as well as that of your company. This system can be as simple or complex as necessary to meet the individual needs of your company. An example of a simple system of checks and balances is having employees cross-check each other’s work to ensure accuracy and honesty. (Have the accountant’s work checked by the accounting/finance manager and vice versa.) In order to ensure that these two individuals stay honest and do their jobs correctly, they will also be checked by the general manager on a routine basis whose work is, in turn, reviewed by a governing body such as yourself or a board of directors or trustees that you have set up.
To discuss selling your business in the future, contact email@example.com for a FREE 30 minute phone consultation.
"I don't want to sell it, I don't want to run it, I just want out, NOW!"
Shutdown of an Existing Business
You have used up all of your available finances, have a health issue or are just tired of working. It is time to develop a Shutdown Strategy. Shutting down a business is not as simple as closing the doors and walking away. To minimize your losses, you must take a systemic, timely approach to shutting down. Listed below are 11 steps to shutting down a business.
11 Steps to Shutting Down a Business
Reach agreement and obtain authorization from the owners.
Engage professional consultants, such as Lawyers, Business Consultant, CPA, etc, as team members.
Prepare a list of assets and perform a physical inventory.
Prepare a plan and assign responsibilities.
Develop a schedule for implementation.
Release announcements and notices to customers, suppliers, bankers, and employees.
Implement the plan.
Transfer or conclude contract obligations such as uncompleted work, leases, etc.
Plan time and date to close the operation. This would be the time when operations must cease.
Net Cash flow and value plan and schedule of stopping operations.
Select security and maintenance services.
This is really a summary list of all of the activities. Shutting down a business is an emotional process. Don't beat yourself up. You're not a failure and you may not realize that now, but everything you learned through owning a business will benefit you in the future. There are so few people who even attempt to become business owners, you should be proud of yourself and what you have accomplished. The tricky part is getting rid of the emotions attached to the concept of your business. The fact is that you must take the time to think clearly about what your goals are going to be after shutting down the business. Take the time, set your goals, create a plan of action and move forward.
To discuss your shutdown strategy, contact firstname.lastname@example.org for a FREE 30 minute phone consultation.
"Hey Holt, I am doing pretty well in my business, sales are even and I have some money to invest. Would you look at real estate or the stock market?"
Typically, owners of small to mid-sized businesses feel that they should invest their profits in a conventional manner; such as in either the stock market or real estate. Although both of these avenues of investment have proven to be profitable ways of securing a positive return on your investment over time, they both have significant uncontrollable risks. Reinvesting in your business can become a less risky way of balancing your portfolio for both long and short term investing.
Investing in the Stock Market
When investing in the stock market, you usually must have the luxury of time for your investment to grow substantial enough to make it worthwhile. For example, if you are 30 years away from your retirement, the money that you invest in the stock market or mutual funds has the luxury of time. Your level of risk is reduced with short term negative fluctuations in the market because you have the comfort of knowing that eventually the market will come back up and you have the time to wait.
However, if you are nearing your retirement age and are fortunate enough to be the owner of a successful business, it is a more lucrative investment for you to put some of the money back into your business. This investment will grow the net worth of the company and increase the assets; thus increasing your share of the profits and building your net worth at a much faster rate. If you take money out of your company and invest it in the stock market when you are nearing your retirement age, you may be negatively affected by short term fluctuations in the market. For example, if you continue to invest the bulk of your money into the stock market, you are more likely to experience a loss on that investment because you may have a sudden need for the money and therefore may be forced to sell stocks that are below what they were valued when you purchased them.
Investing In Real Estate
Investing in real estate is another conventional investment practice that may be a better fit for someone who has time for their investment to increase in value. One of the downfalls of tying up your investment dollars with real estate is that it is not a liquid asset. For example, if you own a piece of property that is worth $500,000, this is not money that you can readily access when needed. You would have to find someone to buy the property at the price that you list it for in a time frame that is convenient for you in order to make the investment worthwhile. If you are in a hurry to sell the property because you need cash, you may not receive the full amount of what the property is worth and will possibly take a loss on the original investment. When you have finally sold the real estate, not only might you have incurred a loss, but you will also have to pay taxes on the money you earned from doing so. Of course, you could borrow against the equity, but how much debt do you really want to incur as you get older? Real estate investment, like stocks, is a long-term play.
Investing or Re-Investing in Your Company
When you reinvest some of your money back into your company, you will turn a quicker profit and grow your business. Ensuring the continued success and growth of your company into the future will benefit you in ways that other investments cannot. Reinvestment can generate much larger returns, which will then create more money for you and more money to reinvest back into the business again. This is a perpetual process that improves with every fiscal year; if done correctly. Now you have created what I call the perpetual money machine. Reinvesting is less risky than other investment options and you suffer fewer penalties on the money that you receive in hand from the investment. Unlike other investments, when you reinvest in your business you have some control over how that money is used to benefit both yourself, your employees and your company’s future. Reinvesting in your company to make it more successful will also help to better the futures of your children and grandchildren; allowing them the fortune of inheriting a successful company that will provide the kind of future that you have worked so hard to give.
What Exit Strategy is Right For You?
Exiting a business is one of the most difficult transitions a business owner can go through. The various options can often seem daunting. An objective viewpoint is often necessary to help sort out all of the different aspects available to a business owner. Gary Holt and the Holt Marketing and Management team have helped several business owners make the transition.
To discuss your exit strategy, contact email@example.com for a FREE 30 minute phone consultation.