Should I focus on the exit plan for my business or not?
When you go into business, many people will tell you to know your exit strategy. Like just about everything else in business, there's two sides to this, there's a spectrum in between and your job is to figure out where you sit on that spectrum.
What is an exit? This is where you build a business that has standalone value and either the entire business, or the majority of the assets within the business, can be sold to a buyer.
You as the business owner (and any investors) bank the proceeds - the media is full of stories of spectacular exits where the business owner goes from rags to riches overnight. It really is the "pot of gold at the end of the rainbow". Hence why it gets so much focus.
There are 4 questions you need to ask yourself to figure out the right answer for you:
1. Do you have other people's money?
If you're in a business that is capital intensive up front, such as most early stage technology ventures, anything in medical devices, mining or property development, then chances are you've taken investment from other people.
Normally this is in the form of "equity", where you sell a portion of your company to the investor.
Anything early stage involving large amounts of research & development up front is high risk, the reward for investors is a substantial payback on sale of the assets built out of that R&D process. For example, Facebook and Google acquire as much technology as they build.
If this is you, then an exit strategy is mandatory. It's something you'll get asked about early on as a condition of those investors buying into your venture in the first place.
If you don't have other people's money (ie: you own 100% of the business), then you have a lot more flexibility here.
2. Can your product or service be delivered without you
This is a big one that comes up in something known as "succession planning", which is another term used for your exit strategy.
If you run a services business where you're a large part of the reasons customers will buy from you, it takes time (several years) to bring someone else into the business, build that trust with your clients and gradually transition to them.
The legal and accounting firms are built on a partnership model that does exactly this. Usually a partner who's coming up for retirement works through a plan to sell their share of the partnership to a new partner, with a transition process for the existing client base.
This concept is baked into most partnership agreements in the professional services firms from day one, it is assumed it'll be necessary.
If you're not part of one these partnerships, then again there is more flexibility here.
3. Can you build the business to a certain size, then bring in a GM to run it?
If you're in a products based business, or in a services business where you're not part of the delivery of the service, this then becomes an option.
You build the business to a certain point, then bring in a general manager (GM) to run it in the way you want.
The GM will of course draw a salary however if you're no longer involved day to day you may not, or not as much, hence the profitability of the business remains the same. The profits from the business then become your income.
Can you ever 100% step out? No. The vision was yours in the first place and the culture of the company has your stamp all over it. If you want to back out completely then an exit (sale) is your best bet.
This model also only works as long as the business turns a decent profit (including the cost of the GM's salary). A profit share arrangement with the GM normally helps ensure you're both on the same page here.
4. What are your reasons for being in business in the first place
Why did you go into this in the first place? For many people it's to build a decent income stream during their working lives which gives them far more flexibility than being an employee, and to balance between work and family commitments.
If you love what you do, then chances are you won't want to build a large team to allow multiple people to deliver what you do as that would move you away from what you love and into management (which may be the reason you stopped being an employee in the first place). If this is you, chances are an exit strategy is not a high priority for you.
For others, it is about building something that will make a difference, disrupt an industry or solve a problem. Those models tend to be capital intensive up front, hence if this is you then assume there is an exit in your future.
For some others, it's about building an asset they can sell which becomes their retirement fund.
The reasons you go into business are not necessarily financial, however you do need to make sure your choices will serve you financially now and in the future.
Are you a freelancer with a flexible income stream? Exits aren't your priority, however make sure you're billing enough to put money into pensions and other investments. A good financial planner is an essential part of your support crew here.
Are you a business owner who'd like to step out in part and draw a dividend, but keep the business for a while? Recruiting that GM, making sure you trust them and ensuring their compensation model will ensure you're both on the same page is key.
Are you a business owner ready to step out completely, where you have a business model that can grow in revenue and also where the product or service can be delivered without you? Then something called "business succession planning" is for you. You need 2-3 years to implement the plan, with some good tax planning included to make sure you maximise your nest egg.
Are you building something disruptive or heavily research focused to change the world? To start with you need to develop your product and, more importantly, have deep insight into what value customers place on it. Once you've done that, understanding your options for an exit are crucial. For those that get to exit, you will maximise the return on all the blood, sweat and tears if you've thought this through.
Many lawyers and accountants in particular will tell you early that you need to be clear on your exit plan. Why is this? It's much easier for them to give you good advice on structuring if they know what the end result needs to be. A good lawyer and accountant will understand the need for flexibility in this process as things always change, and build in that flexibility early.