Jason Hennessey is the founder & CEO of Hennessey Digital, and an SEO expert, author, speaker, podcast host, and serial entrepreneur.
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As entrepreneurs, our career paths differ from the traditional, corporate path, where you join one company (or multiple companies), work for many years, then retire. An entrepreneur does not have a standard path to retirement, and as a result, our exit strategies differ. Entrepreneurs have several options—they can sell the business to a third party, pass the business on to a successor or transfer the business through management or employee buyout.
Entrepreneurs turn their ideas into companies. In the beginning, you have an idea and the business revolves around you. As you start to generate a revenue stream, you may be doing everything yourself—from answering phones to meeting with prospective clients. Once you start generating consistent revenue, you bring in people to help in different areas. You begin to build a strong management team. As you grow and build a strong team, you may start to get recognition from outside investors, such as private equity firms. They may proactively reach out to you. They want to set up calls to introduce you to their company and talk about how exciting it is to sell right now. But at that point, you’re in fast-growth mode and they know they would be getting a good deal. Figuring out the best time to sell is always a tricky decision.
Warning: Don’t succumb to flattery or let outside interest become a distraction.
You might find it very flattering when you hear that someone wants to talk to you about the little business that you started six years ago. Your ego may get the best of you and you may start to go down that path. They may begin by asking just a few questions about your business, but it starts taking up more and more of your time. It becomes more of a distraction, so now you have to make a decision and ask yourself: “Am I really for sale right now?” If not, you need to decline respectfully and let them know that you would like to revisit things in a few years.
If you let it become a distraction, it can prevent you from concentrating on what’s important: the growth of your business. Instead of being laser-focused, you are thinking about investors and spending your valuable time answering their questions.
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Strategy #1: Selling your business
If you know you want to eventually sell your business, the best time to start planning is about three years before you’re prepared to sell. One of the most important first steps is communicating with your management team and getting their buy-in. They are crucial to the continued success of the company, and investors will want to know that they will be around for the transition. Be transparent about your plans.
Next, work on your business valuation, make yourself leaner and increase your EBITDA (earnings before interest, taxes, depreciation and amortization). Investors will want to look at your books, so make sure they are in order. If you expect a valuation based on projected growth, make sure your path to that growth is clear. Be prepared mentally if you have a number in mind and you are offered that number. You have to be ready to accept what you asked for. If you have hesitation, then perhaps you are not ready to take this step.
Strategy #2: Passing it on to a successor
If it is a family business, I would encourage a lot of succession planning. Make sure that the children and grandchildren of family-based businesses are prepared for what they are taking on. They may not understand the sacrifices and mistakes that you made in order to get where you are today. They may have to make their own mistakes in order to learn valuable lessons. We all grow by learning from our failures. Good succession planning advice is essential, as is instilling old-school traditional values of hard work and learning from our mistakes.
Strategy #3: Management buyout
A critical part of a successful transition—from a startup to an established company—is hiring a competent management team. When you have a strong team, you know the company is in good hands. This is how I “worked myself out of a job.” At one point, my COO said to me that I wasn’t needed on a team call. It was then that I realized I had put in place the structure I needed to keep the company moving forward. Your management team is also a potential exit strategy for you. They have a long-term, vested interest in the success of your company and should be involved in all discussions about its future.
Warning: Don’t make an exit strategy your primary focus.
Don’t create your startup with a focus on exit strategy. I’ve heard many young entrepreneurs say they want to start a company just so it can be sold and they can sail off into the sunset with their billions. Being an entrepreneur means finding a solution to a problem and creating something of value that generates recurring revenue. If you are not committed to the long-term success of your company, then employees, management and investors will sense that.
Are you thinking of selling your business? If the time is right, you can choose to entertain offers from outside investors, pass the business on after thorough succession planning or proceed with a management buyout. This should be three to five years ahead of the actual time you want to exit. If you are not ready, it’s important to cut out the distractions so you can focus on continuing to develop your business. Then when you are ready to sell, everything will be in the best possible shape to garner the most value.
Take a moment to really consider your future and the future of your business: You’ve put so much energy into growing your business, doesn’t it deserve your thoughtful consideration for its future?
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Author: Jason Hennessey, Forbes Councils Member
