Entrepreneurs beginning new ventures are very focused on the startup phase. Meanwhile, ongoing business owners focus on yearly revenue growth. In both cases, their minds are frequently closed to the possible conclusion of their venture.
I propose that if entrepreneurs design and build a “smart exit” into their strategic plan as an ongoing learning project, the chances of success increase. In fact, I advise small business owners to actively prepare their business for sale and keep it ready for transfer in the event of a great surprise offer or if some calamity occurs that could force a sale.
A learning project
We all create learning projects; we do it routinely. We get a new cell phone, start a new hobby, read a book or take a class in college. I propose that if business owners approached their exit and operations as a learning project, they’d find it easier to succeed in the beginning and the maturing of the business as well as at its conclusion.
Everyone knows that the closure rate of businesses is above 80 percent in the first few years of operations. There is a huge cost to individuals and their families who risk everything on ventures only to suffer bankruptcy and even home foreclosure. The loss from failed businesses extends to investors, employees, customers and vendors.
While much has been learned about improving business success in the last 25 years, globalization, technology and cultural change is constantly increasing business complexity. Many entrepreneurs don’t study business before launching a venture. They may hear of venture capitalists, but don’t generally learn that professional investors don’t enter ventures without a clear path out with a return on their investment to take into their next venture.
Typical entrepreneurs focus so heavily on startup and growth, business closure and project completion is a foreign viewpoint and one worked against, not pursued. There are several highly respected management methods for ownership transfer that are really valuable when scaling a business upwards, which I’ll mention here.
One “smart exit” element is periodically evaluating the value of the business. Business valuation is an often overlooked tool that can facilitate moving on from a venture successfully. Cash flow-to-debt ratios are still another tool to measure the current health of a business – for now and for later as you monitor your protégé as you step away from operations. Cash flow-to-debt is a method banks frequently use to evaluate the sustainability of ventures seeking loans.
In my experience, when a person starts a learning project, they consciously commit to being open to new perspectives. When entrepreneurs are genuinely curious, they can be more resilient to surprises and slip-ups. Being curious about your customers, vendors and employees can lead to a healthy business culture. Curiosity about business dynamics and learning from others helps us to craft new ways to solve customer needs and our own.
Building a team
Making a “smart exit” requires several significant shifts in understanding and focus to successfully build a team to operate the venture, identify a new leader to replace the founder and transfer ownership gracefully so the entrepreneur can move on to a new project. Entrepreneurs need enough courage, conviction and confidence to have the determination to start a business. At the same time, open-mindedness and curiosity are required to adapt, learn and be willing to help others succeed. The business’ mission is to help its customers be successful. Specific effort to inspire employees to align their personal goals with your business goals stimulates teamwork and collaboration far exceeding any kind of external motivation.
Ongoing staff training reduces turnover, and allows individuals the opportunity to excel and demonstrate leadership potential and ability. As you work with staff to increase their capabilities, you may identify a new leader to further mentor and train. Someone with special interest can become a manager, first in operations relieving you from more and more daily responsibilities. Stock option vesting and small initial stock sales can be experimented with to discover if that manager has the interest and abilities to become a minor partner. With this foundation, you can see if that manager can then learn to become an owner.
If you demonstrate coaching and mentoring staff with a collaborative perspective, you can help a new leader-in-training to connect with staff and explore new directions for the company they will gradually be buying from you.
In conclusion, business owners at any age or stage of their venture are well served to approach their “smart exit” as a learning project. Like a car or house, keeping your business well maintained makes it more enjoyable to operate now, increases its value and makes it easier to transfer when that time comes.
This edition of Tip of the Week was written by John E. Anderson, president of Longview-based Be Cause Business Resources Inc. The company provides management consulting, coaching and facilitation with a focus on strategic exit planning for $1 million firms. He can be reached at 360.200.5740.