Why does every business owner need an exit plan?
Can’t you just focus on building and growing an excellent company, and the rest will take care of itself?
Ultimately, there are two reasons why just building a strong business is not enough to be assured of a successful exit. These two reasons, based on my experience, best explain why every business owner needs to create and follow an exit plan—years before you intend to exit.
Let’s call the first reason the “Unknown Destination Effect.” Imagine you’re out for a drive, but don’t have a clear destination in mind. Without knowing where you want to end up, it’s impossible to predict if the next left or right turn will eventually lead you to anywhere good. Well, sometimes taking a drive on a beautiful day without a known destination can be fun. But when it comes to your business, generally you want to know where you are going. Leading your company without a clear set of exit goals is the same as driving around with an Unknown Destination. You end up making decisions without knowing if they will lead you anywhere good by the time you get to your future exit.
Here are several examples of important business decisions that, without a clear exit plan, you won’t know which decisions will help or undermine your exit success:
- Which will have a bigger impact on your business’s value at exit – top-line revenue growth or bottom line profitability growth?
- How do you decide to add staff, which can strengthen the team in the future but often decreases profits in the short term?
- Should you trim any under-utilized labor, knowing it may cause current disruptions but can increase profits and potential sale value?
- How do you evaluate a strategic initiative that may contribute to long-term growth but will consume significant current resources and reduce profits?
- Which will produce a bigger impact on business value: vertical or horizontal growth?
These are important business decisions, that, without an exit plan to follow, you cannot know whether or not your answers will help or hurt you whenever you finally arrive.
The second reason that every business owner needs an exit plan is the law of “Time Increases Results.” This “law” refers to nearly universal truth that the more time allocated to accomplish a goal or project, the greater the probable results. Well, when it comes to achieving exit success, it’s often a surprise for business owners that many of the essential tools and tactics will take years to implement, and/or produce results that positively compound with years of time. In our experience, five years is the critical mark—if your desired exit is five years or less from now, you already may be running short of time to implement specific tools and tactics, and/or you may see significantly diminished results from your efforts.
Here are a few examples of needs that many owners have to address to maximize results at exit, but which can take years to accomplish fully:
- Eliminate any dependency on the business owner for sales, operations, or key relationship management
- Identify, hire, onboard, and align a leadership team that produces a track record of sustained long-term growth
- Outgrow any customer/client concentration
- Create brand value protected in a defensible IP portfolio
- Time market conditions to your advantage
- Evaluate and implement significant exit tax-saving strategies
- Address any misalignment or disagreements between co-owners
- Design and implement ownership and leadership transfer plans (if exiting to key employees or family)
Having a clear, written exit plan helps business owners evaluate and prioritize needs such as these, early enough so that time helps produce and compound positive results.
Put these two reasons together: The “Unknown Destination Effect,” and “Time Increases Results,” and it becomes clear that exit success requires more than just building a good company. The sooner you get started with your exit planning, the greater your likely success.