From the course: Small Business Secrets

The importance of an exit strategy

From the course: Small Business Secrets

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The importance of an exit strategy

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- Consider this question for a moment: Why are you in business? In the end of all this effort, all this risk, all this blood, sweat, and tears, what do you hope to get out of owning your own company? In other words, what's your exit strategy? It may surprise you to learn that most entrepreneurs don't have a clear exit strategy. Why does this happen? Well, a big part of it is because they're so caught up in the day-to-day survival. They're worried about growing the business, and everything is just short-term. At most, they may be looking a year into the future. But the result of having just a short-term perspective is that at the end, perhaps a decade from now, you may find that you're surprised that you really have no way to exit this business. There's no retirement plan. This is why I recommend that entrepreneurs get a financial advisor on their team. Someone in particular who is a wealth manager who can help you plan for the future. A financial advisor is nice because they can help you find the nice balance between your needs, as an individual and your family, and the business' needs. And that's a balance that you need to strike carefully, because the business does need money in order for it to grow, but you need money in order to retire eventually. I also recommend that you discuss this question of an exit strategy with your business coach if you have one. As you're talking with these advisors, there are two major questions to consider: When? And how? By "when" I mean when do you see yourself exiting this business? How old are you going to be? Is it going to be 10 years from now? 20 years from now? Be generous as you answer this "when" question. What I mean is give yourself as much time as possible. This will help you be patient. Sometimes entrepreneurs, because they're dreaming big, create a timeline that's just too short-term. "I wanna get out of this business in five years." And this causes them to make very aggressive, very risky investment choices. But if you can be a little more patient, having a 10, 15, or 20 year exit strategy, then you're going to make wiser, more patient, more cautious investments. The next question is "How?" How do I plan on exiting and retiring? There are three major strategies that might work for you. The first is the asset-based strategy. An asset is something that is sellable, that has value. And you're creating a business in the asset strategy that has value. This means you want to create systems and structure and hire employees. You build something that you can sell to someone else and they can make money from it. You can also sell the model in a franchise-type setting. The second model is the dividend-based model. A dividend is a cash payment that you're making to yourself as the owner or founder. And a dividend-based model means that you're regularly taking extra cash out of the business. This doesn't work well in an asset model because, well, you need cash to grow the asset. But if you're in a professional-based business, such as a dentist, or a doctor, or a lawyer, a dividend-based model works well. Essentially, you're pulling out extra money to create a retirement fund. Now, the third model is something that many entrepreneurs don't think about, but it is a valid model for exit, and that is the royalty-based model. The royalty-based model means that you create something of value and then typically sell it to someone else, and they pay you a royalty over time. In other words, you do work one time and receive payment over a long term. This model works well for creative-type businesses. For instance, an inventor creates a new way of doing something, and then they licence that to another company that sells it and pay the inventor a royalty over time. Now, take the time to consider these two questions: When? And How? And discuss it with your advisors. Come up with a right mix. You don't necessarily need to use just asset, or dividend, or royalty, you may find a nice combination of all three works best for you. But, coming up with an exit strategy, something in mind, in the beginning, will help you plan for the future and not be surprised when it comes time to exit.

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