November 6, 2014 Business Planning en_US Learn how one expert has helped business owners cash out big after building and selling a profitable business. See why to start with an exit strategy. 5 Reasons Why You Should Start With Your Exit in Mind
Business Planning

5 Reasons Why You Should Start With Your Exit in Mind

By QuickBooks November 6, 2014

During the critical early years of starting and growing your business, your top priorities will always be sales and marketing. However, there is an additional small but critical decision that business owners forget to make a priority as well: How you will one day tell your exit story. Will it be with pride and prosperity? Or with disappointment and unnecessary regret?

I know that you’re focused on selling and are probably not worrying about being sellable, but I promise that if you take the time to craft your exit vision with the same amount of care that you used to craft your growth vision, you will have a clearer, more exciting and faster path to success.

When you have an idea of your eventual exit story, it will subtly help you build a business that you love now because it will be strategic, focused and will run like a well-oiled machine. And as a bonus, if you start and grow a profitable business that you love, then the chances are high that somebody else will love it just as much and will some day pay you handsomely for it as well.

There are many ways to exit your business, such as a merger with a competitor, employee buyout, a partnership dispute or one of the disheartening D’s: divorce, dissolution or death. But for our purposes, we will focus on selling to an outside buyer.

Over the last 10 years, it has been my pleasure to help countless small business owners cash-out big, happy and free after building and selling a profitable business they loved. As such, I know the many reasons why you too should start with your exit in mind. Let’s have a look at those reasons.

1. You Will Determine Your Most Profitable Business Model

Starting and growing a small business is challenging, to say the least, but when you have an exit plan in place, it can help you make better overall business decisions, especially regarding your economic model.

When you are growing a sellable business, you’ll do your research to determine the most profitable business model for your offerings because you’ll understand that profits drive business value. And when your business is profitable, it can put more money in your pocket sooner rather than later.

So the primary benefit of having an early vision of your exit isn’t just about building something to sell down the road; it’s about building a better business for you to enjoy and benefit from in both the short term and the long term.

2. You Will Understand the Value of a Rinse-and-Repeat Revenue Stream

Rinse-and-repeat revenue is a fun way of describing a re-occurring revenue stream within your business. Examples of re-occurring revenue streams are monthly service agreements, subscription-based services that automatically renew, products that are auto-shipped, and memberships that are ongoing until cancelled by the customer (which is the best kind of re-occurring revenue stream there is!).

As you can see, the ultimate advantage of re-occurring revenue is predictable income.

Every growing business struggles with cash flow, so wouldn’t it be great to know exactly how much revenue you can expect each month? If you don’t have these types of agreements in place, brainstorm with your team (even if you’re a team of one) about new re-occurring revenue streams. This can help you make proactive hiring, marketing and other growth-oriented decisions because you know exactly how much revenue you have coming in each month.

3. You Will Make the Extra Effort to Document Your Processes

The success of franchises like McDonald’s is based on a documented, step-by-step process that any high-school kid can follow to ensure their signature burgers and fries are cooked the same every time. To ensure your long-term success, you should strive for that same kind of consistency.

If documenting your processes seems unnecessary and too time-consuming at the early stages of your business, try using one of my favorite and simplest business tools: the checklist.

Keep a yellow pad, paper or even your favorite mobile device next to your desk, and start a running list of the tasks that you do throughout the day. If you have staff, they should do this as well. As you create your checklists, you will begin to see a pattern of repeated steps that can be organized into a “proprietary process” to be leveraged as both a marketing differentiator and a training program for new hires.

A business that runs smoothly with documented processes gives a buyer confidence that the company will continue to be successful after a sale. More importantly, a smoothly run operation gives you, the business owner, more freedom, less stress and more time to focus on the activities that fuel your entrepreneurial passion!

4. You Will Know How to Value Your Own Business as a Measurement of Success and in the Event of an Unsolicited Offer

When your intention is to grow a business that is sellable, one of your key measurements of success will be its current potential market value. Knowing the value of your business at any given time (annually at a minimum) is like your business’ private report card that shows when and where it’s “exceeding expectations” and where it “works really hard but needs improvement.”

To value your business for your own internal purposes, use this “Back of the Envelope” Valuation (BOEV) formula:

Net Profit + Owner Benefit (i.e. your salary, payroll tax, retirement contributions, personal car leases and other owner perks) + Depreciation + Amortization x 3 = Back of the Envelope Valuation

Depreciation and amortization can be found on your tax returns. When you add these line items together and multiply them by three (also referred to as a “3x multiple”), you will have a general idea about the potential market price of your business. Of course, certified valuations and appraisals are serious business, but for your internal use, the BOEV will empower you to keep pushing ahead, to consider cashing out or possibly a thoughtful combination of both.

5. You Will Naturally Think Bigger, Grow Bigger and Have More Fun in the Process

Last but never least is your mindset. When you dream about your ideal exit from the start, you will be inspired to think bigger, because a bigger, more profitable business puts more money in your pocket, creates an exciting environment to work in and ultimately allows you to build something greater than yourself that someone else values as much as you do. And as a small business owner, it doesn’t get much better than that.

Hopefully you can now see why starting and growing your business with an exit vision from the beginning isn’t just for tech companies and IPO-bound entrepreneurs. You will benefit greatly from an exit that is planned, beautifully executed and comes with a pot of gold at the end of your entrepreneurial rainbow. If you remain resistant to your exit vision, you could find yourself at the other extreme with only one option: quietly and painfully shutting down your business for good.

In closing, always remember that your exit journey began the day you started your business, so understand it, embrace it and journey towards the biggest, most profitable and sellable business you can imagine!

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