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Paul Burri: Planning an Exit Strategy for Your Business

Thinking ahead will help ensure the long-term viability of a small company

Many entrepreneurs and most start-up entrepreneurs never consider a very important business issue when planning their business. It’s called the exit strategy. To put it in plain English, it is, “How am I going to get out of the business when it’s time to do so?” (It’s also sometimes referred to as “harvesting the business.”)

I can understand why start-ups never think about this because they are so focused on “birthing the baby” that putting it in a retirement home is the furthest thing from their mind. And I agree that it is probably one of the least important things to worry about when you are just starting a business.

But let’s say that your business — even a relatively new one — is doing well and is growing nicely. You should soon start planning what you need to do to eventually harvest it. The planning will surely be concerned with the legal structure of the business.

How you exit from it will be different if you are a sole proprietor, a partner or some sort of corporate entity. Especially if you are in a partnership, the terms and conditions of one (or both) partners exiting will have to be clearly spelled out in the original partnership agreement and is too complex to be discussed in this short column. Certainly legal counsel should be used for these issues no matter what the legal structure of the company.

But let’s talk about some things that you should be considering beyond the legal issues. Over the years I have been associated with many businesses and many businesspeople. A recurring mistake that I frequently see is in the one-man business where the owner does practically everything himself.

Harry opens the doors in the morning, Harry answers the phone, Harry takes care of the books, Harry hires the employees, Harry runs the machines, Harry does the packing and shipping and at the end of the day, Harry closes and locks the doors. And the business is successful. Harry has been doing this for the past 23 years, and he is making a nice living from his business.

But now he is thinking that perhaps it’s time for him to take it easy a little more. (His wife is probably telling him that, too.) So he decides to sell the business. But when prospective buyers look at the business, what they see is a one-horse operation that is totally dependent on Harry. The prospective buyer thinks, “Once Harry is gone, there is no one here who knows how to run this business. Could I run it without Harry being here? Do I want to be like Harry and do everything myself?” Without Harry, there really is no business except perhaps for a customer list and a few pieces of equipment.

So what’s the solution? The solution is an exit plan. Here are some of the things that need to be part of an exit plan:

» Establish and document the procedures for running the business (so it’s not all in one person’s head.) How do we order material? How do we set prices? Do we have an employee manual? How do we hire new employees? How do we fire them? Do we have a vacation policy? How do we train new employees? Do we have documented safety procedures? Do we have documented quality procedures?

» Train your employees to do the jobs that you are now doing. Train people to supervise the work of other workers.

» Delegate authority to key employees (so the work can get done even when you’re not there).

» Decide how you will exit the business. Sell it for cash or finance it personally? Pass it along to your children? Sell it to your children? Sell it to your employees? Sell it to a competitor? Sell part of it and keep part of it? Merge it with another company? Sell it to your partner? (There are lots more possibilities.)

» Decide when you will exit the business. When you reach a certain age? When sales reach a certain point? When the “business climate” is right? When you get bored with it?

Having an exit strategy will make your company stronger, more competitive, more efficient and will make your business more sellable and more valuable when the time comes. It will also let you sleep better at night.

— Paul Burri is an entrepreneur, inventor, columnist, engineer and iconoclast. He has been a counselor with the Santa Barbara chapter of SCORE (Service Corps of Retired Executives) for the past eight years. SCORE offers free business counseling to local businesses. He is also the membership director of the Channel City Camera Club. The opinions and comments in this column are his alone and do not reflect the opinions or policies of any outside organization. He can be reached at .(JavaScript must be enabled to view this email address). Click here for previous Paul Burri columns. Follow Paul Burri on Twitter: @BronxPaul.

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