In the hustle and bustle associated with launching a business, the last thing on the minds of many entrepreneurs is their exit from the enterprise. While some business executives decide up front that their involvement in an organization will last for only a few years, many small business owners find it difficult to imagine the day when they wont be required to show up at the office.
Ten, 15, or 20 years down the road, however, things can change. While some entrepreneurs ponder retirement from the professional world, others dream of leaving their company to start up their own. In both instances, the lack of a clear-cut exit strategy can result in severe financial and emotional consequences.
Leslie Shiner of The Shiner Group, a business consultancy based in Mill Valley, California, says that entrepreneurs should be planning their exit as soon as they enter into a business venture. The most important factor is to start early. A lot of contractors have an unrealistic expectation that the process can happen quickly. Its close to a 10-year strategy, she said. You need to check with all of the different professionals to look at pension plans, tax consequences, buyout strategies, and potential buyers. How you create your company is based on who is going to ultimately take over.
Rachel Owens, principal at consulting firm, Succession Strategies in Santa Ana, California, adds that an entrepreneur giving up his or her business should have the ability to maintain a lifestyle. There must be some source of income or investment built up over time that will allow them to retire with ease.
To do this properly, Shiner urges owners to enlist the help of knowledgeable professionals, such as accountants and lawyers specializing in succession. These individuals can examine current agreements with business partners and employees to ensure that they will not have any negative effects on ones departure from the company, and subsequent financial security.
However, business owners in the custom installation field face a unique challenge because there is a very low barrier to entry into the industry, a point Shiner concedes.
The question is, Should I spend all of this money and buy your company when I could just go ahead and start it myself, and hopefully steal all of your clients? she illustrated. The issue is, as a company, you need to create a saleable product. This requires process, clients, and reputation.
Business processes, Shiner emphasized, should be established in such a way that anyone may carry them out. Its how you go about doing sales, how you finish your jobs, what communication is like and how information flows, she said. It needs to be a repeatable process. So many times, you start a job and reinvent the wheel every time, and that isnt a saleable commodity.
This requires business owners to begin delegating to other staff members well before its time to leave. When the company is based on the owners charisma, that is when you end up with a problem, Shiner said. These contractors are the business. This is why they need to create a process, so that when they step away from it, the process can continue. The value of your company is your process.
Owens agreed that management and systems must be in place that will enable the company to function with its owner present. In small businesses, everything is often inside the head of the person who owns the business, he said. If you dont have management and systems in place within the business, then it will be difficult to survive beyond the short term.
One of the most important defining factors in creating an exit strategy is to decide to whom you are selling your business, whether it be family, existing employees, or a third party. The issue has to do with the entrepreneurial spirit, Shiner said. So many of these people started their businesses with that spirit, they hire employees, and if they ultimately want to sell to their employees, the employees, too, must have that entrepreneurial passion. They must be willing to take on those headaches and those risks.
This requires careful preparation well ahead of time to ensure that the company survives long after its founders have made their departure. If you want to ultimately sell it to your employees, you must teach them to be managers, Shiner said. If you want to sell to your family, you need to make sure that the family gets along and that the structure is there. If you want to find an outside buyer, you need to have everything worked out so that someone can come in and take over the process. Each one of those options has a different strategy around it.
Some individuals, Shiner noted, may not be cut out to run a business, even if they think they are. Its up to business owners to make this determination. If you want to involve your family, they need to be interested in the business. If you think you have some good employees that are interested in and willing to take over and continue the business, you must nurture them, she instructed. You cant sell to employees unless they actually are the kind of employees that can do it. The fear is the owner who sells to employees with either an earn-out or buy-out option, will end up, three years later, back at work on a daily basis, because the transition never happened. Thats why it requires training and educating everyone involved.
Bill Sornstein, principal at Succession Strategies, noted that good successors should have some knowledge of what it is like to work at other companies. If all they have ever done is work for the business is probably not a good model. Not just because they dont have any other work experience, but also because they have a limited perspective of what works in a business and what doesnt work, he said. If they have had the chance to work outside of the business for someone elseeven if its in a different industrythey bring perspectives and ideas back to the business that they wouldnt have otherwise.
Emotions also come into play. Before leaving, business owners should, above all, be sure that they are ready to go. What often gets in the way of an exit is that the person leaving the business may not be emotionally ready to leave and to stop being that entrepreneur, Owens said. They instead move into a CEO or chairman of the board type of position, where they are advising who they left the business to.
Carolyn Heinze ([email protected]) is a freelance writer/editor.