By Del Chatterson,
Special to the Financial Independence Hub
What, no pension plan? No early retirement package for the owner?
Of course not, you’re an entrepreneur and not dependent on anybody else to look after your welfare. But have you looked at the hard realities of exiting from your business to a comfortable and happy retirement? There are some special challenges.
When you do start looking it’s hard not to be envious of the friends and family on well-funded civil servant or big corporate pension plans. How did you miss that concept? Well, it may be too late now to change career paths, but it’s not too late to plan your exit strategy.
First, take a moment to remind yourself of all the fun you have had and the money you have made and put away for your golden retirement years. OK, perhaps that’s not very reassuring either. So the first step is to take stock of your current financial status and the age and expected longevity for you and your business. Then ask when you plan to exit and what needs to change so that it can happen the way you want.
For most entrepreneurs with whom I have worked, the exit is some distant concept that gets continuously shelved as a vague idea of what they will get, when and from whom. They would rather not get distracted from current challenges by worrying about the messy details.
Plan well ahead for an exit
My advice is simple: don’t wait until it’s an emergency before you find the exit. If it’s less than ten years away, you should have a plan for exit and the transition to new management and ownership. In fact, it should have been part of your original business plan. The strategy for any entrepreneur from start-up to exit should be the evolution from self-employed to owner/manager, to passive investor to former owner. You do not have to wait for freedom at 55 or 65; young entrepreneurs can exit at 35 and go on to new adventures and career plans, perhaps several times.
So take that vague idea off of the shelf and start doing your homework to develop an exit strategy and plan that will affect your business decisions immediately.
I recommend these three steps in the process:
1. Determine the current valuation of the business and the steps required to improve on it.
2. Start working on management transition to make the business less dependent on the current owner.
3. Develop and analyze the options: sale of the business, merger/acquisition or management buy-out before initiating a specific action plan.
The first step is usually the first big disappointment: your business is not worth what you want for it.
It is too dependent on you as the owner/manager and applying reasonable multiples to your past earnings yields a lower value than you expect. You can argue, negotiate, rationalize and explain all you want; a new owner will insist on realizing a satisfactory return on his investment in your business. You may be able to justify your price based on the potential of better results, but why have you not achieved those results yourself? And if the buyer can do better than you have, why would he pay you for what he achieves with your business? Tough questions that are hard on the owner’s ego; but better now than later in discussion with a prospective buyer.
Reducing dependencies on owners
The business valuation analysis will give useful insights into how you can improve the value of your business. These usually include the obvious, like sales growth, profit improvement, better cash and asset management. But the most important observation affecting your exit strategy is usually the recognition that the business is too dependent on the owners, their management roles and their key relationships. Reducing those dependencies leads to consideration of solutions through organization development; bringing in a new partner or management buy-out candidate; and, developing strategic partners with the potential for future merger/acquisition.
In summary, your exit strategy starts with steps to improve the value of your business and make it less dependent on you. The early results will help you decide when and how to exit. Still not simple to do, but it is important to have a plan before it gets more difficult to make an elegant exit.
About the Author:
DEL CHATTERSON is your Uncle Ralph.
He is dedicated to helping entrepreneurs to be better and do better.
Del is an experienced and successful entrepreneur, executive and consultant. As an entrepreneur, he grew his computer products distribution business from zero to $20 million per year in just eight years. His consulting company, DirectTech Solutions, provides strategic advice to business owners at all stages: from start-up through the challenges of managing growth and profitability to the exit strategies for management transition and business succession.
Del is an Engineer and MBA and has lectured on entrepreneurship and business management at both Concordia and McGill Universities in Montreal. He continues to share his experience and offers ideas, information and inspiration for entrepreneurs worldwide under the persona of “Uncle Ralph”. He has recently published two books for entrepreneurs: Don’t Do It the Hard Way and The Complete Do-It-Yourself Guide to Business Plans.
Learn more here.