Starting Your Own Business Series The Exit Strategy
by Gene Muchanski, Executive Director Dive Industry Association, Inc.
If there is one topic of conversation in the business community that is not thought about seriously or is completely ignored in business planning, it is the exit strategy. There are many reasons for that, some logical and some totally illogical. When entrepreneurs are thinking about starting a business, most of them myopically focus on the start-up, growth, and success of the business. No one really wants to plan for going out of business, but that is only a small part of what the exit strategy is all about. We know that bad things happen, and they usually happen unexpectantly. We also know that all good things must come to an end, and when they do, we all hope to be prepared for that type of ending. So, let’s look at the exit strategy in a new way.
Let’s think about our exit strategy as “Contingency Planning.” Our contingency planning chapter will be written as part of our business plan in the days before our start-up. By doing this, we can think about the various options we might have available if our business does not do as well as we had planned or if our business meets or even exceeds our expectations many years down the road. Our exit strategy should reflect what we want and do not want out of the business and when. It is also a reflection of how much we want out of our business. An exit strategy can be as short and simple as you want to make it or it can include as much detail you may need to be comfortable with your future options. A good exit strategy starts with setting your limits. Usually those limits are about time, money, and manpower, but they can also be about your physical and psychological health limits.
The worst-case scenario is that your company does not do as well as expected. If it is unprofitable, how long are you willing to work at it? How much time and money are you willing to lose before you cut your losses and close the business? Your contingency planning options should include what to do when you close your business, sell your business, or file for bankruptcy. Because a business is a legal entity, you should consult with your attorney, tax professional, accountant, business consultant and if you own property, your real estate agent, before you begin the closing process. Undoing a legal entity is a process you must go through to clear your books and tie up loose ends with local, state, and federal government agencies.
If your company is profitable but is not what you want for yourself anymore, then maybe letting go is the best thing to do for yourself and your loved ones. Regardless of your reason for making your exit, if your company is profitable and running well, that buys you time. Some of your exit strategy options for profitable businesses include passing the business on to your children, bringing on a management team and retiring from the business, or selling the business outright. If you plan on selling the business and taking your equity in the form of cash, then you have to have a business that is worth something and is liquid. By liquid, I mean easily sold for cash.
The best way to sell your business is to plan for it in the future. Think about why someone would want to purchase your business instead of starting their own from scratch. Build those reasons into your exit strategy and start preparing for your last day the minute you open your doors for the first time.
Create a Business: The first thing you need to do is create a business, not a practice. A business is a legal entity that can be run successfully with or without the owner present. A business has employees and managers doing the things that businesses must do to sell programs, products, and services to a customer base that is acquired, retained and recaptured if necessary. A business uses modern tools and technologies to achieve the most profitable outcomes with the least amount of inputs. A business is an organization run by people who have a vested interest in its success. If someone were interested in purchasing your business, the first thing they would want to know is if your current employees would be willing to remain with the new owner after the sale.
A practice, on the other hand, is what we refer to as an owner–operator situation, also known as a Sole Proprietor. When the owner is away from the business, the business usually comes to a halt. That means, if the owner is the only one teaching the diving classes, doing the dive trips, and selling the equipment, it is unlikely that activity will continue after they sell the business. Same thing with a dentist. They have a hard time selling their practice if they do not want to continue working for the new owner. The only thing a new owner would be buying is the equipment and the customer base. And there is no guarantee that the customers will continue to do business with the new dentists. So, the first thing you have to do is build a business that will continue to operate with a new owner.
The second thing you need to do is make sure that the business is profitable. You do that by keeping good records of equipment purchases, inventory purchases, customer acquisitions, revenues, and expenses. A good accounting software program will create and maintain your customer database. Having a profitable customer base is extremely important. The next thing is good inventory control. How much inventory are you purchasing? What is your inventory turn rate? What is the value of your current inventory and is it new and saleable? Sales are very important to a prospective buyer. They want to know your sales history in detail. Equally important is how you control your expenses. Are your expenses in line with your sales? A prospective buyer is going to want to see your books. Even before you get into any details, make sure your Income Statement, Balance Sheet, and Statement of Cash Flow is current and accurate.
Even if a business is run professionally, proficiently, and profitably, prospective buyers will want to know if there is growth potential in the venture. A quick look at your sales history may be all they need to know. Sometimes they may even have to look at demographic growth data from the U.S. Census reports.
When you operate your business as if it would eventually be up for sale, you will have tendency to look at your business through the eyes of a prospective buyer. A profitable business that is operated professionally is a difficult thing to start from scratch. That will always be your ace in the hole. With such a business, it is even easier to groom a future buyer. With a good exit strategy in place, you might even make the transition as seamless as possible.
A word of caution when you are selling your business. When you decide to get out, get out. Sell the entire business, equipment, fixtures, inventory, boat, customer list, accounts receivable and accounts payable. Everything. You can keep your own diving gear, but it’s best to make your exit as clean and simple as possible. Some sellers think they can keep their mailing list and run trips or dive classes to their former customers after the sale. Sorry, those customers are now part of the new owner’s revenue potential. If you are thinking about continuing to teach diving (especially instructor courses), then arrange that with the new owner and agree to come onboard as an employee. No one is going to buy your business if you insist on a side-hustle, that’s not part of the new business. A smart buyer will ask you to sign a non-compete contract with them if you are not returning as an employee.
I know this last paragraph may seem a little hard, but in fact, it is proving to be the best thing for both parties in a number of dive store and dive operator sales. A good business sale to the right partner or firm will give the former owners a cash payout, release of business ownership responsibility, possibly a full or part time job, and maybe even with their former staff and employees. What could be better than achieving your lifetime dream of having a successful dive store or dive boat business without all the stress and responsibility of business ownership? So you see, there may still be life after selling your business.
Congratulations on completing the “Starting Your Own Business Series.” For more information on starting your own business, as it relates to a Dive Industry Professional Business, contact Gene Muchanski, Executive Director, Dive Industry Association. Phone 321-914-3778.
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