Entrepreneurs, how are you going to get out of this one?
September 5, 2019
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
Much of this blog is devoted to the later phases of business ownership, when an owner considers transitioning into another adventure in his or her life. Accordingly, with one door closing, another inevitably opens. Today is about looking forward.
Take for instance a couple I know, Mike and Susan. They are experienced professionals, having worked their respective careers successfully, including running their own business together years ago. They are now embarking on starting a new business. Their new-business concept sprung from an interest that was purely recreational. Mike liked puttering with and learning about making a certain product. As he experimented and developed his knowledge, the idea for the business gelled. Eventually, Susan quit her job and joined Mike in launching the business.
Their enthusiasm and excitement around the new venture lights up the room when they talk about it. They’re passionate about developing their product and bringing it to market. It will be a labor of love, and hopefully one that is fruitful.
Listening to Susan as she talked about their new adventure, one thought kept coming to mind — what does success look like for you when you want to exit the business?
I don’t mean this in a negative way. Stephen Covey’s “begin with the end in mind” drives this thought. The timing wasn’t right to ask Susan and Mike this question, yet it’s an important one to consider. It gets to the heart of their “why” for taking the risk and making the investment in the first place. If they fast forward to the end of their ownership of this new business, what are their expectations? Do they have a plan that will meet those expectations, particularly in two key areas?
Return on investment (ROI)
Return on investment comes in many forms — personal satisfaction, benefit to your customers and community, and, of course, financial. Every entrepreneur seeks a return on investment from the business. The difference between those who achieve what they are looking for and those who don’t has a lot to do with how clear the ROI goals are from the outset.
Take Mike and Susan, for example. What is it they want out of this venture? Is the goal to build income, wealth, and a nest egg for retirement, or are the goals less financially motivated? In their case, this venture comes at a later point in their working lives, so the priorities are different than when they started their first business together decades ago.
Path to exit
As you start a business, you should simultaneously envision how you hope to get out of it. For instance:
- How long do I think I want to do this?
- Do I envision someone else continuing the business when I’m “done”?
- What does my ideal buyer look like (family, colleague, third party)?
- Is this business purely for my lifestyle or do I want to be able to sell it to someone else for more value?
This critical thinking is often given little or fleeting thought when starting a business. It’s understandable why it’s pushed to the back burner. There are so many other pressing decisions to be made when launching the business. But budding entrepreneurs need to pause and devote attention to these two areas. Your answers should form your business plan and decisions from Day One on — intentionally.
Let’s walk through it: Mike and Susan have their business concept. It has great potential and an ongoing market. They believe they can grow the business into something that could generate several million dollars in sales if they took a national view of the market. Ultimately, the product line and business could be acquired by a multinational company.
Scenario one: Mike and Susan want to grow the business and flip it to larger company within 10 years and earn a substantial return on their investment.
Scenario two: Mike and Susan have plenty of gas in the tank, yet also want to strike a balance in their lives. Starting the business is fueled by their interest to work together and create something fun and rewarding for them to share over the next 10 years. The business needs to pay for itself in the form of reasonable compensation and profits. However, there isn’t an interest in growing the company beyond a local reach. This is for them. When it’s all said and done, Mike and Susan have the resources to either close the doors and wind the business down or find a buyer to continue the business.
Clearly, these are two very different scenarios regarding the return on investment and acceptable paths to exit. The implications on the investment, strategic direction, and daily actions needed to achieve the outcomes are also considerably different.
Knowing what “the end” looks like up front should shape your actions and decisions from the outset. From where you locate the business physically to how to best go to market, which customers to nurture, how to manage product development, inventory, and fulfillment, etc., should spring from the outcome desired. It could make the difference between having control of the situation versus unwittingly finding the situation controlling you.
Think about the adventures in your life. What are your goals? What are the “whys”? What’s the plan? If you don’t know, give me a shout. We can work on it together.