The How-To: Building An Exit Strategy For Your Business
Building an exit strategy even before starting your business!
Tealfeed Guest Blog
It seems strange to be planning to exit your business before you even get started. But this is something that all savvy entrepreneurs do when preparing to launch a new company.
It only makes sense. You owe it to yourself, your employees, and your other stakeholders to have a plan in place for the time when you need to move on. This kind of change, even if it’s a positive move for the business, can be difficult and distressing for people who’ve been with you from the start. How much more so if the exit happens in complete disarray, confusion, and uncertainty?
There are many reasons why exiting your business at the right time is actually a rational and sensible decision. Having helped many businesses at the start of their corporate journey, I know that moving on is absolutely last thing on a new entrepreneur’s mind in the early stages. But I also know that fitting an exit strategy to your company retroactively doesn’t work.
So, it’s important to start thinking about your options as soon as possible. Here are some of the things you should be considering –even at the start of your journey– in preparation for an exit scenario.
1. Bring in a CEO When you start a company, you’re in full control, and everything is done your way. It’s a big part of the appeal of launching your own venture. But there comes a time where you may want to –or need to– relinquish some of this control.
The tempting path is to stay on as CEO yourself even as your company moves through the gears and starts fulfilling your growth plans and expectations. But is this always the best path for your business? A 2016 paper by Joseph Picken, From Founder To CEO: An Entrepreneur’s Roadmap, noted that “the skills, motivations and behaviors that make a good entrepreneur are not the same as those required to lead a high growth organization.” It’s possible that, inadvertently, by staying in sole charge you’ll end up stopping your entrepreneurial pursuit dead in its tracks.
Which takes us to that tricky question– is it time to relinquish the CEO role? For some entrepreneurs, the thought sends shivers down the spine. This is what is known as the “control dilemma” outlined in Noam Wasserman’s 2017 study The Throne vs. The Kingdom: Founder Control and Value Creation in Startups. Wasserman finds that startups in which the founder is still in control of the board of directors –and/or still holds the CEO position– are up to 22% less valuable than those in which the founder has given up control.
A further report from the Scheller College of Business on investor involvement in startup leadership argues that replacing the CEO can lead to better company performance– specifically when the CEO comes from outside the company, has previous CEO-level experience, and is selected by the startup investors.
So, whether as an exit strategy –or even as part of a proactive longer-term plan– the appointment of new blood in the leadership team is something we should at least have in mind, right from the start.
2. Consider an IPO Essentially an Initial Public Offering (IPO) involves selling part of your business in the public markets. And what’s not to like about that? It’s the ultimate dream of many who set up new businesses, to make such a success of it that eventually flotation on the public markets is a rational step for the next stage of growth of the business. And of course, bringing your company to an IPO will often yield a significant financial benefit to you as the business’s sole or majority shareholder.
But this is not the whole story. Even if you remain in place as CEO after the IPO, you’ll have to deal with the raft of additional regulations and responsibilities that come with being a public company. And before you get anywhere near that step you of course need to convince investors that your company is in great shape and stock market-ready. It often takes many years of work to prepare for an IPO issue, during which time your company might have to evolve beyond all recognition, including in the way it’s managed and organized, as it attempts to display stock market-readiness. Change is good but too much change for the wrong reasons can be adverse for a new and growing company at a critical stage of its development.
And even if you get to issue-readiness, what’s the outlook? Well the picture for IPOs in the UAE and wider Gulf Cooperation Council (GCC) isn’t clear-cut. One study published in 2016 looked at the years 2000-2014 and concluded that “currently the GCC stock market is more a follower in the international arena and results can be expected only after the world’s IPO market recovers from its current stagnation.” Admittedly it noted that the GCC has the opportunity to grow into a “prominent regional market,” and added that the UAE was a key investment site in the region. But there are no guarantees.
Still, if your business is successful and sufficiently well-run to be a viable candidate for a public issue, eventually you would be wise to at least keep that under consideration as one of your potential exit moves. That way you’re much more likely to prepare yourself and your company, well in time, for the higher standards and expectations that an IPO demands.
3. Get yourself acquired Though selling your company means avoiding a lot of the red tape and complex processes of using the stock market, it’s still not something you can decide to do on a whim. In his book Starting a Creative Firm, Rick Webb asks the difficult question: “When is the right time to consider selling? The first immutable truth is that there’s really not much you can or should do to sell your company until people start asking about whether you are interested in selling. Repeatedly.”
Webb’s advice may sound a bit extreme, but it is sound. If you want to have a strong negotiating hand it’s vital that you’re the one being approached, not the one doing the approaching. What’s more, this exit strategy really does benefit from careful forward planning and ensuring everyone associated with the business is on the same page. A sudden decision to sell is likely to come as a shock to everyone concerned. But a clear statement and well-defined strategy, even if sale is the eventual aim, will help attract people who can help you with your long-term goal.
Having this as an exit strategy means emphasizing your competitive advantage from day one. Then as the business grows and matures, supported by a clear program of communication on what your company does and what an outstanding purchase it would be, potential buyers will have a clear reason to enquire.
4. Build a cash cow A cash cow is usually referred to as a business with a large market share in a mature industry, which produces consistent cash flow over its lifespan without requiring much investment capital. If you’re looking to develop new entrepreneurial ventures and want to be funded by a steady, reliable income stream instead of a large lump sum, then this is the exit strategy for you. If your business reaches the stage where it can operate as a cash cow, you won’t need to sell or look for investment– your exit strategy here is defined by the lower attention your original business now demands.
If this is your exit strategy it will need to be deeply embedded in everything you do, from the very earliest stages of setting up your company. The market you operate in must be low-growth and your chances of commanding a large share of that market must be viable.
Even in a low-growth market, this is no easy option. It could take years for your business to become strong enough –and create enough market share– to be really classed as a cash cow. But if you can achieve this, it will generate the long-term income to secure finance for your new ventures.
The ending before the start
Every successful entrepreneur has a clear aim: to make a success of their company. Thinking about the endgame –what you’ll do once you’ve achieved the success you crave– will not only help you move on and find new paths to entrepreneurial success, but will make your present journey easier as well.
What you have to ask yourself is what you want to do after your business has reached the peak of what it can achieve under your direction. Many successful entrepreneurs find that the drive and excitement of setting up a new company just isn’t satisfied after a single outing. If you have a clear plan in place to move away from your current venture, you may find yourself with a precious opportunity– to pursue your entrepreneurial obsession in a new field.
This article was originally published on Entrepreneur and was written by Neil Petch.
Image credit: Shutterstock
Tealfeed Guest Blog