Your Exit Strategy: Accidental or Purposeful?

By Tom Cramer

Failure in business is a part of the free enterprise system, and it is often beyond one’s control. Changing economies, hyper-competitive, disruptive technologies, and other factors often bring about unanticipated challenges and difficulties. While effective planning and strategic oversight are just a few of the factors to help anticipate these threats, they are often not enough.

Planning for Success or Failure

However, the exit strategy you adopt and work towards should never be left to circumstances.
Waiting for a heart attack or a disruptive market player is not choosing an effective exit strategy.

One of the more intriguing business books over the past few decades is The Millionaire Next
Door. It examines the many American small and mid-sized business owners who have created
significant wealth but live very “normal” lives from a financial perspective. However, one insight
into this important aspect of our economy is how many successful small businesspeople do not
1) create long-term wealth or 2) protect the wealth they create.

There is a debate in the academic world over the definition of entrepreneurship and its
relationship to risk. Many individuals and professionals build very successful practices and
generate enviable annual incomes without showing entrepreneurial traits. A more classic line
between the successful small business that has “plodded along” to success and the
entrepreneur is the risk factor.

Many classify the entrepreneur as the risk taker who gambles it all to hit a home run. The
contrast is with the small businessperson who settles for singles and doubles but still wins the
game.

While neither of these contrasts is truly accurate, it does provide one insight into the failure to
plan for an exit. The individual or husband and wife who spend twenty, thirty, or even forty years
slowly and methodically building a business with no plan for maximizing their wealth are, in
reality, taking an extremely significant risk.

When to Plan

Likewise, those who wait until they or a partner has a heart attack, major illness, go through
divorce or face other life events have many fewer options than those who start very early. It is
true that an entrepreneur struggling to secure seed financing or a small business scraping
together cash to support growth is unlikely to think of the need for exit planning. Therein lies the
risk.

If you are not thinking of an exit strategy, you are not thinking you will be successful. If there is
no value created, it matters not how the business ends. On the other hand, if you are creating a
business that is creating wealth, and not just a job to pay the bills each year, your exit strategy
is the ultimate benchmark for your success.

Consider these common scenarios:

 A family business enjoys thirty years of success and then a new competitor comes in
and takes over the market segment. In another scenario, a major customer is lost. Sales
plummet, costs rise, and the business closes.
 Another family business achieves similar success, and the husband and wife work
together, making an equal contribution. However, one of them dies or gets chronically ill
and the business ceases to operate profitably.
 A divorce causes another business to look for a buyer. However, the structure of the
company means the taxes on the sale will consume far more than a third of the sales
price, barely covering the existing debt and liabilities.
 A profitable business must be sold at a less than top valuation after the owner dies
simply to ensure all the taxes are paid.

There is a multitude of other stories that are played out daily with small to mid-sized businesses
that either fail or face extreme conditions for the transfer of ownership. This is the fundamental
reason less than 5 percent of family-owned businesses make it to the third generation of
ownership.

Likewise, mid-size company ownership faces many similar challenges because of a lack of
planning for an effective strategy.

In our next post, we will examine a few of the simple, inexpensive, and powerful ways to plan
your exit strategy to capture the maximum wealth from your efforts.