To boost your company's value,
have an exit plan from the start
By Pat Curry • Bankrate.com

The day has finally come. After months of hard work, you hang out the sign that says 'Grand Opening.' You're officially a small-business owner.

Now would be a really good time to start thinking about how and when you'll shut the doors and get out of business.

Many business owners might consider it an abysmal lack of confidence to spend any time thinking about leaving the company they've started, but experts in the field say an exit strategy should be a part of your business plan from the beginning.

"Truly, to run a business successfully, it's vitally important to know what your exit is at any moment in time because it impacts everything you do," says Peter Engel, a professor of entrepreneurship at the University of Southern California and author of the book, What's Your Exit Strategy: Seven Ways to Maximize the Value of the Business You've Built. "It's not a question of getting out. It's thinking about maximizing the value at whatever time you intend to get out."

Exit planning affects your business planning
An exit strategy affects how you grow the business.

For example, if your goal is to attract the attention of an empire-building financier, you'll want to do everything you can to boost the value of the company. That could mean making significant investments in facilities or distribution systems.

If you envision you're most likely to sell to a strategic partner or a competitor -- which already has similar facilities and its own distribution -- you might want to put your emphasis on product development or aggressive marketing to expand your customer base.

"We want the company to run every day as if it were going to be sold," says Chris Malberg, a California CPA who specializes in exit strategies. "That creates a lot of opportunities. Now you're a front-runner. You're going to get some offers, which will put you in a position of strength so you can say 'no' or 'yes' as you choose instead of trying to scrape up an offer."

Most business owners already know the basics they need to plan an exit strategy, Engel says. They know how much money they want to have by a certain age and how much risk they're willing to take.

"Once you understand those things, look at your business plan and see if it's likely to tie into your personal objectives," he says. "Is it likely to achieve those? Develop an exit strategy that ties into the business feasibility and your personal goals. If it can't do that, get yourself a different business, because you'll be miserable."

'Manage 'til you drop dead'
Of the seven exit strategies Engel describes in his book, the most frequent one by far is to "manage until you drop dead, or until you don't have enough energy to continue," he says. "That's the worst way of doing it. They continue to run it until they don't want to anymore, they hate it, don't have the energy, or die. They wake up one morning, say, 'Screw it. I can't do it any more.' They start looking for an exit and take whatever they can get, which will probably be a great deal less than if they had planned while they were still enthusiastic about the business."

Aside from not doing one at all, the biggest mistake that business owners make in planning an exit strategy is assuming that "getting out will be easier than getting in," says Dr. Allen Amason, an assistant professor of strategic management in the University of Georgia's Terry College of Business.

"That's generally not the case," he says. "They may be assuming there will be a market ready to buy the business when that's not the case, assuming they can get the price they think is reasonable, assuming the people who they give it to, like their heirs, will be appreciative of what they think is a good offer."

A critical element of any exit strategy is a valuation of the business. There are many ways to calculate a business's value, so make sure it's done in a way that's acceptable to both you and the buyer.

"You can't swing a dead cat and not hit a formula for valuing a business," Amason says. "They're very messy. Reporting requirements for large publicly held companies don't apply to small companies. It's really kind of wide open of how you can keep the books and whether the numbers mean what you think they do. If you have a good series of records, people can at least see the consistency. Without that, valuation is almost impossible. When you value it from the value of the assets, you almost always undervalue it."

Do you plan to stay or stick around?
It's also important to decide what you want to do after your exit.

If you have a business in which your personality and abilities are critical to the value of the company but your personal goal is to visit every country on the globe, you'll need time to hire and train key people, and gradually to put more distance between yourself and the company.

If you'd like nothing better than to die at your desk in between sales calls, but you're just sick of the stress of calling all the shots, sell to a financial buyer who would like nothing better than to see you keep dazzling the customers.

If your exit strategy is to sell your company to your partner, your employees or your heirs, you need to take a hard look at your income needs.

"If you need a lot of money upfront, it will be hard on your heirs," Amason says. "They will have to go to the secondary market for cash, which usually is not all that favorable for small businesses."

If you plan to keep the company until you die, make sure you at least have enough insurance to sustain the business through an interim period when the ownership, valuation and sale is settled. Even if you don't care what happens to the company, you could leave an enormous mess for your family to sort through.

Stay flexible
For all the planning that can be done, nothing says that your exit strategy is carved in stone. It has to be flexible, because business, life and goals change over time. In the end, it all comes down to what's important to you.

"There are truly good opportunities," Amason says. "I'm thinking of a deal where a professional practice was sold. He had an opportunity to buy a piece of property in another state and retire there as part of a group of friends. "He was willing to make this deal to get out quickly. He, to this day, would argue he didn't do badly. He could have made more, but he achieved his goal.

"You need to be very, very clear on what your goals are, and goals vary from person to person."

Pat Curry is a freelance writer based in Georgia

-- Posted: Nov. 29, 1999