For most entrepreneurs, the thrill of the beginning is addicting. The idea of taking an idea, something so small and abstract, and then turning it into a full-fledged and functioning business is invigorating.
Sometimes this feeling can be so exciting, though, that it causes entrepreneurs to lose sight of the end of the road. It might not seem like it now, but there will come a time when you will want to exit your business and move onto something else.
But few entrepreneurs accept this reality. In fact, around 65 percent of small business owners do not have a plan for selling their business, according to a study conducted by BMO Wealth Management.
Yet for ecommerce entrepreneurs, the need to build in an exit strategy is particularly important, mainly for three reasons:
- The world of ecommerce is changing constantly, so it is useful to have a plan in place for when it is time to move on
- Building towards an exit helps make your business run smoother and therefore more profitably
- Investors often want to see a designed exit strategy so that they can have an idea as to when they are going to get their investment back.
Let’s dive a little deeper into exit strategies and why they are so important for your ecommerce business.
Why You Need an Exit Strategy
While right now it might seem like blasphemy to consider exiting your business, there are actually lots of reasons why you need to be making these plans right now. Here are some of the most common:
Life Throws You Curveball
This is the obvious one. While you may think everything is going smoothly, you can never predict the future.
Some unexpected event can cause your market to implode or prevent your customers from being able to spend money — think of the Great Recession.
If this were to happen and you were caught without an exit strategy, you’re putting yourself in a real pickle. You’ll either have to opt for the worst of all the exit strategies (total shutdown), or you’ll have to settle for a vastly lower price than what your business is worth. Neither scenario is even close to ideal, so take the time to plan your exit strategy now.
Investors Want to See When and How They’re Going to Get Paid
This is a big one that a lot of small business owners don’t always think of. Whether you are just starting out or have been at this for a while, you may find yourself in need of some cash to get things moving.
Investors will obviously be concerned with things such as the gap you fill in the market, your target market, marketing strategy, revenue forecasts, etc., but they will also be looking for how they are going to get paid.
Including your exit strategy upfront is a great way to win over investors. Imagine if you pitch your business to a group of investors and then say that they can expect to recoup their investment and get their return in two years because you are going to search for a merger with X corporation.
This type of foresight is not only practical, but it makes you a much more attractive option and increases the chances of securing the investments you are looking for.
Even young entrepreneurs need to pay attention to this one. Someday you won’t want to, or can’t, work and you need to be prepared for that day. Most entrepreneurs don’t save enough for retirement, often saying that, “the business is their retirement.”
What sense does this make, though, if you don’t have a plan in place to sell the business for a price that will make it possible for you to retire? Designing and beginning to implement an exit strategy will have you moving along a smoother path towards retirement.
Moving on to New Projects
This is the reason that plays most to the spirit of an entrepreneur; by nature, entrepreneurs love to start things. The thrill that comes from launching a new project is, as we mentioned earlier, exhilarating.
But you can’t experience this if you are still caught up in your last project. Be realistic with yourself and know that someday you will want to move onto something else.
Develop an exit strategy so that when this day comes, you can leave your current project profitably and move onto the next one on sound footing.
The Different Types of Exit Strategies
One of the most important things to remember is that not all exit strategies are the same. Some are designed so that you can continue to work on the business or receive an income from it, while others are meant to allow you to wash your hands clean and move on.
Here are the main exit strategies that will apply to your ecommerce business:
Mergers and Acquisitions
This one involves being bought out by a larger company or combining with a similar one. There are a few advantages to this, such as:
- By combining resources with another firm, or by gaining access to them through an acquisition, your company can explore new growth areas and expand into areas you were perhaps hesitant to explore before.
- You can receive assistance in paying off investors. Either the company buying you out will pay them, or you can do so with the company you are merging with.
- You may be able to negotiate a way for you to stay on and continue to work with the business, if you want.
However, there are some disadvantages to consider:
- You’ll likely have to get rid of some or all of your staff. There are likely to be redundancies that do not make business sense to maintain.
- You’ll lose some autonomy over the business. You may have a boss to report to — something few entrepreneurs are willing to accept — or you may need to gain approval before taking certain actions.
- You may have to change the name of the company, sacrificing any branding efforts you’ve done.
Initial Public Offerings
Back in the day, this was the tried and true method for exiting a business. Get started, build it up and then turn the business over to shareholders.
However, this option isn’t what it used to be anymore. While IPOs in general appear to be making a comeback, there are a lot of things that need to be taken into account for a small ecommerce business owner such as the types of securities to offer, which underwriting firm to use and so on.
Plus, since the internet bubble bust back in the 2000s, IPOs for online businesses are down. Investors are hesitant to buy into high-valued companies, and this can create a lot of headaches for your down the road.
This isn’t to say an IPO isn’t the best way for you to go, but rather that you need to give it serious consideration before pursuing it as your exit strategy.
Sell to an Individual
This is a relatively straightforward exit strategy that involves a simple transfer of ownership from you to someone else. This is a good way to go if you have an employee who is interested in taking over, or if you have a family member looking for a new opportunity.
If you do this, you’ll likely be able to negotiate some sort of an agreement where you retain some of your income. This is a great plan if you are looking to retire.
But you do not need to limit yourself to people you know. In fact, the most likely scenario is that you will not have someone in your inner circle willing to take over your business.
When this is the case, you can look to a brokerage service to help you find a willing buyer. They will come in and help you determine what your business is worth and then they will use their network to find a buyer who is willing to pay this price.
This will likely mean your personal exit from the business, but it will also mean a higher selling price.
Another way to exit your company is to simply step away. If you’ve done your job right, you should be surrounded by competent, capable employees who are willing to continue the business without you.
All you need to do is hire or promote a management team and then turn the reins over.
This is another great option when considering retirement, as you’ll likely be able to negotiate a decent cash settlement or annuity. But you may need to negotiate payments for investors, as they will likely not like that you are stepping away.
The last method to discuss is a simple shutdown. This means exactly what you think it does. Close your virtual doors and liquidate, moving onto the next thing.
This might sound like failure, but it doesn’t have to be. However, it is probably not going to be the ideal strategy for an ecommerce business as there will likely be little you can liquidate, leaving you with very little cash as a result of the closures of your business.
The goal would be to avoid this approach, but keep in mind that it is always an option, and it might be the only option if you don’t take the time to design and implement an exit strategy now.
Implementing Your Exit Strategy: Understanding Value
You now understand why it is so important to have an exit strategy, and you also understand the different strategies that are out there for leaving your business. So, what’s next?
It’s time to implement different processes into your business so that the exit strategy you have chosen will be possible when that moment finally comes.
The ultimate goal of any exit strategy is to get as much as possible out of the sale of your business. To do this, you need to have a good understanding as to what makes a business valuable.
Let’s go into four different aspects of business value so that you can see how you can focus your efforts today towards achieving the highest value tomorrow. As you will see, implementing an exit strategy is code for striving for best practices within your company. That’s good for business whether you’re on the brink of selling or not.
Here’s what you should be focusing on:
The first thing you will need to take a look at are the risk factors your company faces. Are there any concerning trends in your industry? Any reasons to expect an increase in prices? A shortage of supply?
No industry is risk-averse, but you need to have a good idea as to what challenges stand in the way of your company’s success, and you need to have strategies in place to overcome them.
This is something you should be doing anyway, as it’s just good business practice. But often times smaller companies don’t pay as much attention to this as they should, and this will have a negative impact on the success of your exit strategy.
Take some time now to identify where your company is at risk and implement your mitigation strategies, helping to improve your current business prospects and image with future investors.
Nobody will want to buy a business that is in decline. They do sell, of course, but often for far less than what the owner was expecting or planning.
You should be focusing on new growth strategies anyway, but this is particularly important when dealing with an exit strategy. You need to be able to prove that the company you are selling will grow not only in the short but also in the long term. This will involve a deep dive into the trends of whatever market you are dealing with.
Something that will become a major factor in the ecommerce world is branding. With so much noise out there and so many companies for consumers to choose from, it is really hard to stand out. If you are able to build some degree of brand recognition and brand awareness, you are giving yourself a major boost.
This obviously isn’t the only thing that goes into your future growth, but it represents a level of sustainability in your business that investors will want to see. And that is really the keyword here: sustainability. How are you going to maintain your current growth trends and then expand upon them sustainably?
These are questions you need to be answering no matter what, but looking at them through the lens of an exit strategy can help you see the situation in front of you a little more clearly.
Ease of transfer
Every company does things a little bit differently, this much we know, but you don’t want to be so unique that someone else can’t come in and take over. This is a really good way to scare away an investor. If they look at your business and get a headache just imagining what it would be like to run your company and implement new processes, you’re not going to get a good valuation and will likely end up selling for less money than what your company is worth.
So, the first step here is to turn inwards and to optimize your processes. Go step by step, asking each employee or each team to take a look at what they do and determine where they could be operating more efficiently.
As a manager, you’ll need to be delicate here. You don’t want to tell your employees to change how they do things so that anyone can do them; this might scare them away. Instead, ask them to identify areas where you could be doing things more quickly and more easily. There are sure to be countless areas where you need to improve.
By looking at your business as if you were implementing an exit strategy, you will be entering into a state of perennial self-improvement, something that will dramatically improve how you function as a company and that will help make your business more attractive to investors.
Lastly, while it is important to be trustworthy in life, you should know very few people will take you at your word.
If you walk into a meeting to sell your business asking investors to trust you that your business is profitable and valuable, you can expect them to pretty much laugh you out of the office. However, if you walk in and can show detailed records with the appropriate verifying documents, you can expect a much different response.
Now, this might seem obvious — of course, you need to keep good records. But not all small business owners do this. And there are lots of other things you need to keep track of besides just sales and revenues.
In ecommerce, it is important that you have records of traffic sources, conversion rates, SEO factors, etc., as all of these things will be relevant to your investors and will factor into the offer they make you. Doing this will also help you succeed as a business, as it will allow you to identify promising and concerning trends, giving you the chance to address your business’ needs before they become too serious.
A Business Worth Selling is a Business Worth Owning
This really sums up the value of an exit strategy for a small business. As you can see, the main things you need to do to implement your business strategy and to help get the best price at the time of sale are also things that will help make your business run more efficiently and profitably right now.
Don’t think of exiting your business as a failure or as you turning your back on your passion. Often times it is exactly the opposite. It’s your chance to cash in on all the hard work it took to transform an idea into a successful, functional business.