Why Exit Strategy Planning is important?
In this blog, I will share specific information about ecommerce business valuation, factors that drive higher business value, profiles of buyers who are looking for web based businesses ( and who is likely to pay the highest price for your website ), deal structures, how to prepare your internet business for sale, owner financing, using escrow services and more. I welcome comments, questions and constructive criticism.
There are two types of people in the world – reactive and proactive. Reactive people decide their course of action based on the situations they are presented. They usually end up making decision or taking action based on emotions and under circumstances that usually have many limitations. Proactive people on the other hand create situations they want by planning them ahead of the time. They decide their goals beforehand and set things in motion to make their goals come to fruition.
One of the most important decisions you can make as a proactive internet business owner is envisioning your exit strategy or succession plan. It is important to think about these questions in the beginning because the building blocks you put in place to build your company could be different depending on your desired final outcome. Do you want one of your kids to take over your company, or do you want to sell it? For example, ecommerce businesses that demand the highest price in the market are usually not tied to the owner or any key employee – in other words, these businesses have procedures and processes in place that makes it possible to run them on “auto pilot”. On the other hand, if your succession plan is to transfer the business ownership to a family member, you want to ensure this person understands mechanics of the business by getting involved in the business early enough and learning by “doing”.
Nothing is certain but death, taxes and the fact that one day you will exit your business. Owning a successful profitable ebusiness that provides income, an identity and a pride is not enough in itself to guarantee that you can maximize your business value. I have known business owners who were hardworking, experienced, knowledgeable, and owned a very successful internet business yet could not demand the value their business deserved because they never developed an Exit Plan. So, what exactly is this Exit Plan that will help you create maximum value for your company? There are many different types of businesses and so everyone’s exit plan will vary, yet almost all businesses have certain common elements that need to be considered. In addition, there are some unique situations for ecommerce business owner that affects their exit planning process.
In general, exit strategy planning will involve understanding following aspects:
Step 1. Determine Your Exit Option: Although there are many variations of business owner’s exit options, generally they fall into one of the following broad categories
- Transfer of ownership to heirs during owner’s lifetime or at death
- Sell to other owner ( if partnership ) or Employee
- Sell to a third party
- Liquidation and/or close down
Since ecommerce business owners are younger as compared to their brick and mortar counterparts and because the rapid changes in technology makes it more challenging for internet business owners to create a business that can be passed on to their heirs, first option is generally not applicable. Most internet entrepreneurs choose to sell to a third party as their exit strategy because this option offers the highest opportunity to maximize the return value from the business.
Step 2. Know Your Business Worth And Put A Plan In Place To Grow It's Value Keeping The End In Mind : Good Start is Half the battle. Based on what I know about my internet business, what is my best guess time frame of exiting the business? Remember, If your business is growing and there are lots of opportunities for expansion, you may not have the clarity to define your exit strategy as you don’t know where you will be in few years from now. Even when you don’t have specific plans of exiting in near future, thinking how you will want to exit the business will get you thinking about important questions about your business. e.g. How much is your business worth ? What are the value drivers that create sustainable advantage and increase your business value ? Once you have pondered on these questions and done some homework, your next logical step is to develop a strategy to consciously integrate these drivers as part of your business planning and growth process so when it is time to sell your business; you are best prepared to get the most out of it.
Step 3. Maximize Your Cash Minimize Your Risk: Start educating yourself about the best way to sell your business to a third party that minimizes your risk and maximizes your cash. Business selling process can be daunting for the first time seller and entire process ( from preparing for sale, listing and closing the sale) can take from up to six month to a year. There is a lot to consider - how do you prepare your internet business for sale? How long does it take to sell ? Should you offer owner financing or not? What information will buyer expect to make an informed decision? Learning about these things will help open your eyes about missing processes and procedures in your business that buyers value when comparing your business with others available in the market.
Is now the right time to think about exit strategy? You are quite busy so maybe you will look into it after… Just like purchase of a life insurance, the decision to plan an exit strategy can be continually postponed. For your exit strategy to be most effective, it must be planned well ahead of the actual exit. Unfortunately when business must be sold, it is usually too late. The prudent address the inevitable and prepare. Remember when it comes to exiting the business, it is either Grow or Go, There is no Status Quo.
Have you thought about your exit strategy ? What questions come to your mind when you think of one ?
Ken Perine, CFP® says:
Good observations Manny. I also suggest biz owners think about diversification. For the average business owner, the business represents 70-80% of their net worth. Utilizing qualified retirement plans (like a 401k) is a tax efficient way to grow assets outside the business, giving the business owner more flexibility in the event they want to sell or pass it on to the next generation.
As the recent economic environment has demonstrated, sometimes there are factors beyond your control that can have a significant impact on your valuation. Not having all your eggs in that one basket can be very helpful!
Manny Shah says:
Ken, you bring up very important aspect of considering the tax implications while deciding your exit strategy. For example if your objective is to sell to a third party, you want to maximize your valuation. But if you prefer to sell to an "insider" ( partner, employee or family member ), you want to establish as low a value as possible due to double taxation ( in case of a partner or employee ) and gift tax ( in case of family member). This can be done by implementing methods that maximize the income to you by minimizing taxation.
That's your last hope in case everything fails.