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Financial Adviser: Why should you have an exit strategy now

Because it will be your succession plan to sustain the business in the long run.
By Henry Ong |

exit strategy

Question: I have ventured into startup food business this year and it is doing well that we are already planning to expand in multiple locations by year end. This is my first time to go into business after being employed in an IT company for many years.  As the business is growing fast, some people are advising me that I should have an exit strategy right from the start. Why should I have one, considering this is a business I am passionate about?  – Robin S by email

 

 

Answer: It could be discouraging indeed to think about quitting the business when you are just starting. However, having an exit plan is not about planning to fail, but it is about creating a succession plan that will sustain your business in the future.

 

Related: 5 ways technology can help you with your exit strategy

 

How do you envision in the business when you are no longer around? Do you pass on the business to your children? Do they have the same passion in the hotel business? Do they have the capability to manage business?

 

Many previously successful companies have folded because the founders failed to properly turn over the business to their successors. Having the end in mind even before you start the business enables you to establish the proper mindset.

 

 

Strategy 1: Get your successors involved early

Normally, the children take over managing the business, but perhaps because of lack of training and desire to continue the business, many second generation businesses fail from mismanagement or are displaced by competitors.

 

If you want to pass on the business to your children, you should be able to select who among them could help you set up and manage the business. Expose them early and provide them with the proper training.

 

Of course, there are those who simply do not share your interest and do not want to work in the family business. If that is the case, do not force them to join you. Asking them to do something they are not happy with would only result in business disaster.

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Related: Q & A: Young marketing executive gets hands-on training as she joins family business

 

 

Strategy 2: Groom a professional

If no one in the family wants to take over the business, plan to delegate the management to professional. Hiring people with right experience and competency is one way to sustain the business. Be warned that this may be easier said than done, and may be costlier because of competitive salary packages in the industry. You will need to start hiring people you could train for the business. Look for promising people who could be part of your management team.

 

Related: 4 tips to hiring the right candidate

 

 

Strategy 3: Plan an exit sale

There might come a time when you would want to sell the business, either to your professional team (a management buyout) or to your competitor. If so, you need to determine now at what price you intend to sell. How much do you want your business to be worth in the future?

 

You can also compute backwards—how much money do you need to make your retirement years comfortable? Use this amount as the minimum target of your company’s selling price. Let us say you have 20 more years before retirement, you need to plan now how much your hotel business needs to grow in sales and income over the years so that its valuation would approximately match your retirement goal.

 

Related: Ease into retirement: Succession management in 5 steps

 

Should you go public before leaving the company?

 

If your business does well and expands financially, you may go public and sell company shares through an IPO (Initial Public Offering). This way, you could get more than the amount you need for retirement without losing control of the company.

 

Related: What it takes to go public?

 

By going public, you could also afford to get professional managers and get the public investors as your partners to help you monitor their performance. You can use your publicly listed company status to attract the best people to work for you and use your shares of stock as incentive to management through stock options.

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If your company does well, your management would be rewarded automatically through higher stock prices. If it performs poorly, they would be penalized by the market through lower share prices and may face possible replacement.

 

This is perhaps the most ideal exit strategy for any business owner.

 

 

*****

Henry Ong, CMC, is president of Business Sense Financial Advisors. You can follow him at @henryong888 or email hong[at]businesssense.com.ph.

 

Photo from Thinkstock

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