The Entrepreneurial Exit Strategy -- Prepare Yourself
When you started your businesses early on, you were not likely planning to sell it. You had a big idea, a skill that no one else could quite match, a passion for changing the world in some way. And if any investor asked you about your exit strategy, you would placate them by noting the three giants in your industry, but would likely be clear to state, “but I intend to execute against my business plan. As long as my business is making money, there is no need to exit.”
I wholeheartedly believe that nearly every founder feels this way in the beginning. But running a business is hard work. It requires untold hours of blood, sweat and tears and has no sympathy for its founder’s illnesses, family needs or mental stress.
It is inevitable that you, founder, will one day retire or pass (let’s hope you have some easy days before you go). Knowing that you cannot run your business forever, and assuming that your company will be wildly successful, it is good to begin planning for succession earlier rather than later in your company’s life cycle.
Follow these four tips for building good habits early on so you have an easy exit when you are ready to pass the reigns:
1. Form a board of directors or advisors from Day 1.
It may seem a bit harrowing to set up a board in the early days when you are launching. Once you take on investor dollars, this will be required, but if you are bootstrapping, you likely want to maintain complete control for as long as possible. Inviting directors prior to a fundraise would unnecessarily create a reporting and decision-making structure that you and future investors do not want.
However, setting up a board of advisors and treating it as if it were a board of directors can be quite useful in later years. Structure your board so that your advisors do not have voting power, but offer them small compensation or equity instead, and treat them seriously. Schedule monthly board meetings and come to your board with a meaningful agenda around key inflection points your company will need to meet in order to succeed.
Organizing a board will help build accountability into your business model and will organize your business according to goals that can be tracked in the future.
2. Send monthly investor/board updates and take meeting minutes.
Writing down your meaningful milestones is just as important as making yourself accountable to a board of peers. If you don’t write down your goals and accomplishments, it is hard to prove, at a later point in time, that you accomplished them in the first place.
Consider sending a monthly investor and/or board update, outlining your successes from the previous month, upcoming inflection points and key hires and needs from your board. Not only will this garner favor with investors and show openness and responsibility; it will also give you a written report card to include in any potential acquisition package down the road.
3. Make friends with your competitors.
If you are in a cutting-edge new industry, you are likely not alone. And if you are spinning off from a previous employer, you know exactly who else serves your customer. You should not only do your research to know exactly who your competitors are and how you differentiate. You should also take the time to get to know each of the founders in your industry. Attend industry events and shows. Seek out opportunities to joint venture or create industry trade groups.
Should your company take a turn for the worse in the future, your competitors are most likely to seek out your assets. And should you succeed, you may want theirs. Either way, building strength in your industry through openness and communication can help you significantly at the time of exit.
4. Train your staff to seek out upward mobility and offer employee ownership.
When we craft our exit strategy in our business plan or add the exit slide to our investor deck, we often look outward for a potential acquirer. However, companies are purchased by their employees quite often, and employee-acquired businesses are growing by 10% each year.
Offering stock to your employees builds loyalty within the company and helps you to diversify potential future buyers over time. Whether you plan on selling your business or not, you will want to build trust and investment with your team, and offering some form of an employee stock ownership program (ESOP) and internal promotion structure are two ways to build this opportunity for yourself.
In the end, you will want to follow the tips suggested above whether you ultimately sell your company or not. Building good habits now will only help you to succeed later, whether that success comes while sitting at the helm of your business or sending it off under new control.