Entrepreneurs typically think of themselves as starters or creators. It’s in their blood to take an idea and turn it into something really exciting. This is great; it’s what makes entrepreneurs such a special breed. However, this desire to be at the forefront often takes the focus away from the end, which in a business can sometimes be the most important part.
A surprisingly small number of entrepreneurs don’t have a solid plan in place for how they are going to exit their business, and this is a big mistake. Not convinced? Then consider these reasons why it’s so important for an entrepreneur to have an exit strategy:
#1: An exit strategy helps with investors
One of the biggest challenges small and medium-sized companies face when they’re first starting out is getting support for their business. A lot of time is spent meeting with potential investors trying to sell them on the idea so that they will inject the necessary funding into your business to get it off the ground.
Quite frequently, entrepreneurs forget one fundamental fact about pitching their business to investors: they want to know how they’ll get their money back. By having a clearly defined exit strategy, and one that seems realistic, you are demonstrating to investors that you’ve thought through how you will pay them back.
It’s also important that you choose something that can actually happen. If you go into a meeting and tell potential investors you will be returning their money after a multi-million-pound IPO, you’re going to have a hard time convincing people, as this is a pretty infrequent occurrence. However, if your plan is to sell the business or possibly merge it with another, then you’re presenting a far more likely scenario and boosting your chances of acquiring that necessary funding.
#2: An exit strategy gives you a plan for the future
Something that stands out amongst entrepreneurs is how little thought they’ve given to retirement. It’s easy to think while you are working on the business that you are going to continue to do so for the rest of your life, but this is just unrealistic. A day will come when life tells you it is time to do something else, and if you don’t have an exit strategy, then you’ll be left improvising the best way to walk away without losing tons of money.
Try to avoid this as best you can. The important thing to remember is that having an exit strategy doesn’t mean you are going to use it. It’s merely a plan for properly walking away, and not having one does far more harm than good.
#3: An exit strategy gives you some insurance
Small businesses tend to rely heavily on a small amount of people. This makes sense, as it’s usually the vision of one person or a small group that helps drive the company forward. However, even though we don’t want to think about this, things can happen that will take you away from the business.
People get sick, accidents happen, grandchildren come along, and so on. There’s really no telling what life will bring to your front door. If you have an exit strategy in place, then you basically have a contingency plan for what you’ll do in case you become incapable of running the business yourself. Perhaps you have to step aside during this process, but this only increases the value of the exit strategy since having one in place already means all that others need to do is execute.
#4: An exit strategy encourages better business practices
When you start looking further into what goes into selling a business, you’ll see that many of the things you need to do to maximize business value are actually just sound practices you should be doing anyway.
Some of the key things to focus on include keeping good records, devising risk management plans, optimizing business processes, and creating sustainable drivers of key sales. When you read this, you should be thinking: don’t I want this in my business anyway? The answer is yes! Yes, you do! So, by devising an exit strategy, you are essentially making an active commitment to improving the way you run your business right now.
#5: An exit strategy promotes long-term thinking
Entrepreneurs are too often guilty of focusing too much on the short term. It’s understandable, as there are tons of problems and issues to overcome in the beginning, but if you lose sight of where you are headed, you’re setting yourself up to run into a wall in the future.
Coming up with an exit strategy is an effective way of escaping this type of thinking. It forces you to ask questions such as: Where do we want to be in five years? What’s preventing us from getting there? What problems or risks are we facing but not addressing? These are great questions to be asking, and taking the time to create an exit strategy is a great chance to answer them.
It’s important to be focused on the here and now, but losing sight of the end goal is a common pitfall for many entrepreneurs. There’s a chance you’ll need to use your exit strategy someday, but if you don’t, the type of thinking it requires can only make your business better.
If you would like some guidance with preparing exit strategy and would like to increase your business value in preparation for a sale, download this FREE whitepaper ‘So you are thinking about selling your business’
About the author: Jock is an internet entrepreneur who has started and run several online companies throughout his career. After selling his first business somewhat unexpectedly, he learned the value of coming up with an exit strategy. Now, when he advises other entrepreneurs, he always stresses the importance of this way of thinking.