How to Plan Your Exit While Building a Business

It’s worth stating at the outset that while there’s nothing wrong with building a business with the intention of exiting successfully, it’s not a sure thing. First, the business idea and its execution have to be successful (most aren’t).

Second, even if your idea is successful, depending on the sector you operate in, you will need to convince the buyer of its value and growth potential in a fairly crowded market.

Third, you need to find a way to enjoy the process even as you focus on the ultimate reward. Whether you’re in tech, fintech, insurtech, or any other sector, you’ll likely feel safer planning your exit even if you don’t intend to sell.

Exit

As I mentioned above, building a business that leads to exit is not in itself a red flag. But what about the successful long-term entrepreneurs who claim that exit will take care of itself, as long as the founders focus solely on building a successful business? And are the experienced entrepreneurs who claim that entrepreneurship is probably not for you if you are looking for a quick exit within four years wrong?

According to some, many founders have to be dragged kicking and screaming to the M&A table, and few go willingly, eagerly reaching for the cash. For many who have been in the startup world for a long time, it’s a bit like marrying off your first daughter; you’re happy for her, but part of you wishes it hadn’t happened.

Founders’ ambitions vs. investors’ ambitions

Entrepreneurs need to understand the tension between the different agendas of founders and investors. Investors will look for an exit as quickly as possible, paying little attention to your future plans.

The truth is that investors typically don’t share the same agenda or goals as most founders, and some, one could argue, don’t necessarily put the startup’s needs above their own. The investor agenda is focused on exit, which isn’t always helpful when an entrepreneur is trying to build a business.

With such a strong focus on exiting an investment, investors can act as a drag or distraction from the serious, important and absorbing work of building and growing a business.

But since only about 1 percent of startups have a chance of attracting venture capital—which might convince early investors to keep their money a little longer—why are entrepreneurs wasting time thinking ahead to consider an exit? Because it’s become mandatory Get used to including an exit slide in every startup pitch to investors. After all, the exit is top of mind for investors. Sure, they’re almost certainly evaluating your product or service, or they wouldn’t be spending their money. They might even rate you as a competent or talented entrepreneur, but their focus is on the exit. And entrepreneurs have gotten used to that. So much so that it’s become customary to include in your exit slide, if you’re going to make an acquisition, examples of specific organizations that are likely to acquire your company, including details about the value of any recent acquisitions by those potential buyers.

Some argue that it is important to consider an exit strategy early because no matter what strategy you choose – whether it is an initial public offering (IPO), a management buyout or an acquisition – it will impact decisions about how the business will grow.

There is certainly some truth to this, as well-planned early exits can positively impact strategic decisions made as the company grows over the first four or five years.

Even if you don’t currently have plans to sell your business, another important reason to consider an exit plan is to protect yourself and mitigate those scary unknowns. Events beyond your control have a way of coming your way. Health issues or personal crises can get in the way of running your business with 100 percent focus, especially if you don’t have a succession plan, while economic surprises like currency spikes and inflationary geopolitical events—think the Ukraine crisis or uncertainty in the Strait of Hormuz—can have a variety of negative effects on your company’s future plans.

And sometimes an unexpected offer to buy your business can leave you unable to take full advantage of it if it’s too good to pass up.

Digitalization makes your startup more attractive

Unless your business is operating in a technology space where digital platforms and high-quality data are the norm, it’s crucial to think about digitizing your business before you sell it. Why? Many founders think they’re great at serving their most valuable customers, but digitizing allows business owners to explore and analyze data that can often reveal where certain customers could be generating more revenue. And digital transformations don’t have to be expensive, now that many platforms like Microsoft Azure are cloud-based as a subscription service.

Digitalization offers business owners an additional dimension of data that can directly translate into revenue growth and higher value for your business. Pain points can be more easily identified and workflows can be improved, leading to higher net margins and a more solid business valuation. In short, don’t let a potential buyer see the hidden value in your business before you do. Without it, there’s a chance they’ll acquire your business at a significant discount. Remember: the value of your business is ultimately your primary KPI.

Building and Selling: What to Avoid

Selling a business requires a lot of persistence, which inevitably involves a sacrifice of time.

Depending on the industry or sector, due diligence, as well as the increasing prevalence of forensic technology due diligence, can drive down prices and, in the worst cases, potential buyers may simply walk away. No buyer likes risk, especially if it is hidden or wrapped up in historical contracts, actions or events that keep those risks secret or opaque.

To prepare for a successful sale, it is important to mitigate or eliminate all risks, and most importantly, document the removal or mitigation of these risks using technology and data. This will make the process more transparent, leading to a much faster sales agreement.

Don’t skimp on legal costs. Having the right legal help to guide you through a potential sale – or series of potential sales – means you’re less likely to fall into the hidden risks that usually come with unfair legal agreements.

The truth is that potential buyers are eager to know all the risk factors associated with your business, but they are unlikely to offer you the same luxury on a plate.

Read: Abu Dhabi is the fastest growing startup hub in the MENA region, study reveals

The author is the CEO of Creative Zone.