You've likely been flooded with information about starting and growing your business, but exiting effectively is just as important. In fact, it can be one of the best parts of your entrepreneurial story, for several key reasons.
Exiting can be an opportunity to realize a robust financial return on all the time and other resources you've put into growing your business. Passing along a thriving company also garners you a good reputation within your marketplace. Similarly, you want your résumé to be built on successes, so you should also want your company to continue thriving even after you've gone.
But why would you exit from your profitable business in the first place? You may require liquidity, possibly for another project. You may have achieved your startup goals and want to shift to something new. It may be a gut instinct that tells you, "It's time." Or you could simply be approaching retirement.
Whatever the reason, once you commit to exiting, consider the best method for doing so. One common way is direct succession, in which you pass ownership to family members, business partners, or employees. Or you might sell the company to outsiders -- even competitors. For companies with massive growth potential, ownership can also be handed off by initiating an IPO.
As with starting a company, good execution is everything. Here are a few key areas to focus on to make sure your business will remain successful through your exit and beyond.
1. Prioritize customer retention.
A key concern for any business is holding onto its customers. Before you pass along your company to others, take a long, hard look at your customer retention processes. Customer retention is vital in several ways.
First of all, it costs between 5 and 25 times as much to acquire new customers to retain existing ones. A reliable customer base makes budgetary planning much easier, which will doubtless be a consideration for potential buyers. Loyal customers can also turbocharge the acquisition of new ones since such "brand advocates" provide the most authentic form of advertising available. This is evidenced by at least one study that found 92 percent of respondents trust peer reviews over all other kinds of marketing.
Ensure customer retention through a customer-centric culture, leaning on technology where appropriate. McDonald's, for example, has been leveraging a social media management system to carefully collect, analyze, and act on the customer feedback it receives through social platforms and other online channels. You can also link employee compensation and evaluations to positive customer experiences and outcomes. All of this can go a long way toward retaining engaged customers in the present and post-exit.
2. Get a financial checkup.
Well before exiting, check the financial health of your company. "Just as you seek a doctor's opinion on your physical health, you should seek out expertise when assessing the big picture of your company's health," advises Terry Lammers, managing member of Innovative Business Advisors.
A valuation performed by a certified valuation analyst (CVA) will provide important insights into the overall state of your company's financials. This step is necessary given how many common financial mistakes owners make prior to exiting their companies. These include inaccurately reporting inventory stock (which can have unfavorable tax consequences), not having a proper accounting system in place, and underreporting cash sales. The latter may save on taxes, but it also depresses your apparent cash flow--definitely not something you want prior to a sale of your business.
In tandem with this step, seek to show would-be buyers the ways your company is not just financially healthy but well-positioned for growth. Those should be organic indicators such as evidence of a loyal customer base, at least three years of profit, and customer requests for new locations or service lines, among other factors. Savvy investors want solid signs of your business's growth potential, not hype.
3. Ready your team.
A strong management team can ensure an effective handoff to the new owners. It also bolsters confidence among possible buyers. In fact, without the clear presence of a first-rate team, you may be forced to sell your company at a sharp discount.
Don't wait until your last day to transfer your responsibilities to your managerial colleagues. Begin well ahead of time to allow them to become acclimated to and ask questions about their new roles. That said, resist the urge to share news of the transition with your entire team.
Instead, limit the disclosure at first to the controller or CFO so that you can collaborate on documentation and interaction with your investment banker or a business broker. Wait until the sale has gone through to tell the entire team, as doing so prematurely may introduce uncertainty into their roles that could have disruptive consequences for the company.
An exit can be successful and smooth, but only if you manage it effectively. By preparing well in these three areas, you'll know you did all you could to command a fair price for your company. You'll also leave it with its best opportunity to grow and reflect positively on your legacy in the years to come.