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"Begin with the end in mind," says Stephen Covey in his book, "The Seven Habits of Successful Living." Those who have created a successful business know it does not happen without planning, hard work, and luck. Yet many have no exit plan for leaving their business.  

The Four D's of a Business Exit

Take the time to look at the four D's of a business exit strategy: death, disability, divorce, and departing. 

• Death: The death of a business owner should be considered during the early stages of a business. 
• Disability: Death is not as likely to end the business relationship as completely as a physical or mental disability. 
• Divorce: Divorce may be complicated by the personalities involved. Partners not even be a part of the dispute may be affected financially.
• Departure: You may decide to leave for another opportunity or to take life easier. Who is going to do the work? Where is money coming from? All important considerations for your business exit strategy.

For the small business owner, each one of the four D's has special demands on: family, income, taxes, and transfer of control of assets. The concerns of the family or income can conflict with the business. Reduce conflict by developing a fair agreement before the exit occurs. 

Creating a Business Exit Strategy

If you plan to exit your business and transform your equity into cash through a sale, merger or IPO, you need to prepare for that every step along the way. To help, here is an overview of some business exit strategies for you to potentially pursue.

1. Sale - The most common exit strategy for any business owner is to sell the business to someone else or to some other company. A sale typically results in the seller of the company receiving cash in exchange for the assets of the company. The tricky part of any sale is preparing the company for sale and valuing the company.

 2. Mergers  - A merger is when two companies get together, establish a value on each company, and then combine the two to form one bigger company. In most mergers, one company shareholders receive stock in the other company which is usually worth more than each independent company.

3. IPO - You can also sell your company via the stock market in an initial public offering or IPO. The good news is that you stand the chance to get the biggest dollar payout of any exit strategy. The bad news is that it is very expensive to obtain an IPO, and you can easily spend half-a-million dollars on attorney and accountant fees. 

4. Buyout - A buyout is when someone comes in and takes over your business. You'll usually see this happen with small- to mid-size businesses that provide professional services. Usually, you'll get a better deal if the acquiring company can pay upfront rather than doing a "leverage buyout" where future earnings are used to pay buyout debt.

 

The Danger Zone in business occurs when "the cash needs of the company greatly exceed cash availability." Although cash flow problems can occur at any point in the business cycle, there are predictable problems at each phase of the cycle which can slow the growth of a company. By anticipating some of these problems, corrective action can be taken to minimize their impact on the company. For example:

Business Development Cycle 

• Initialization Phase. This is usually the start-up phase of the business when the initial direction of the business is determined. Typically, business problems focus on survival, such as:
  • Running out of cash
  • Making a fatal mistake
  • Dealing with personal problems

Solutions to these problems often focus on operating procedures:

•  
  • Tracking cash flow before profits.
  • Staying within the budgetary limits.
  • Maintaining the operational control.
• Expansion Phase. This is the growth phase of the business when employees are trained to do the right things, at the right time, for the right reasons. Typically, business problems focus on managing resources, such as:
  • Spreading the Founder too thin.
  • Running out of cash.
    
  • Relying too heavily on debt.

Solutions to these problems focus on management experience:

•  
  • Track cash flow before profits.
  • Stay focused on the core values.
  • Strengthen flow of funds through the company.

• Stabilization Phase. This is the maintenance phase of the business when business decisions are made proactively rather than reactively. Typically, business problems focus on professional management, such as:
  • Lack of internal controls.
  • Failing to delegate responsibilities.

  • The most critical aspect of cash management is understanding the flow of funds through the business. Starting with the company’s business plan, identifying future revenues and corresponding expenditures, you can determine the timing of each cash flow element in the cash flow cycle.  

    13-week Critical Plan

    Cash flow budgets should be planned in 13-week intervals. To do this, each source and use of cash should forecasted and budgeted as accurately as possible. The cash flow budget should be reviewed and updated on a weekly basis. This review will allow you to test your cash flow assumptions and make adjustments for unexpected cash flow items. Using the cash flow budget will allow management to be proactive in preparing for the timing of both cash receipts and cash disbursements.

    Some of the key elements of the cash flow budget are:

    • For accounts receivables, establish procedures to improve:
      1. Average collection periods and aging
      2. Monitor credit quality of the receivables
      3. Improve billing procedures to reduce invoice payments
      4. Enhance the conversion of receivables to cash
    • For inventory, establish procedures to improve:
      1. Determine economic forecasted inventory balances
      2. Improve inventory turnover
      3. Turn obsolete inventory into cash
      4. Focus on cash as well as gross profit margins
    •   For accounts payable, establish procedures to improve:
      1. Remain less reactive to vendor requirements
      2. Consistently stretch out average payment terms
      3. Obtain discounts when faster payments are made.

    The most critical element of a cash flow budget is to recognize that there will be no long-term cash flows without accurate short-term cash flows. Growth requires cash availability to provide for new products or services.  Cash will always be the life-blood of the business and there will be no long-term business if you ignore the short-term cash flow needs. 

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    Small Business Strategic Plans - May 19, 2010

    Posted by: Richard Allen Foster in Articles

    Most small business owners don't see the value of Strategic Planning. They usually jump from crisis to crisis and seldom have time worry about the future plans of the business. But, Strategic Planning is not just for big business. It is for every business that eventually hopes to make a profit.

    Strategic Plans do not need to be complex, but they should include such fundamental business topics as core business values, current business opportunities and on-going financial plans. The hardest part of the Strategic Plan is to "write it down!" If you don't write it down, you will never remember what you planned!

    To get you started in preparing your own Strategic Plan, the following fundamental steps should be included in every Strategic Plan:

    Fundamental Step #1: Situation Audit.

    The situation audit is a systematic approach to defining the current status of the business. Most often businesses use a SWOT analysis to describe their business situation. This means to define the business strengths (S), weaknesses (W), opportunities (O) and threats (T). This analysis will provide the status of current operating conditions of the company. The Situation Audit should be updated periodically as the situation significantly changes.

    Fundamental Step #2: Business Objectives.

    Business objectives define what the business is trying to accomplish. Initially this can be a simple task but can become more complex as the number of employees increase and products or services expand. In general, because of the impact on business resources and funds, business objectives should be focused. The benefits of meaningful business objectives will be effective business operations. Since business objectives are imbedded in core business values, they will rarely change.

    Fundamental Step #3: Tactic Formulation.

    Tactics are the operational tasks of the business needed to accomplish the business objectives. Although the specific tasks vary from business to business, the ability to define effective tactical operations can determine the success or failure of the business. The key factors will be the interactions between the various tactical functions of the business. Although new functions needed as new objectives are defined, the basic tactical requirements of the business do not change often.

    Fundamental Step #4: Data Collection.

    Business activities produce data that must be collected and analyzed. Generally the data comes in the form of operating statements, financial reports or statistical data. Most of the data should remain within the operating functions. Enough technical description of the operations is needed in the Strategic Plan to give credibility to the business objectives. This task will undergo constant changes during implementation of the operations and should be changed as often as possible.

    Fundamental Step #5: Business Metrics.

    The final task of the Strategic Planning process is the definition of the business metrics that monitor the failure or success of the business. Business metrics include operational measurements as well as financial measurements. Some metrics are unique to the business industry such as operations, sales and customer service. Other metrics are common to all business such as financial indicators that measure profit and loss. Business metrics are usually consistent during the fiscal year.

    Strategic Planning Conclusion

    A simple Strategic Plan can benefit both big and small business by enabling them to focus on common objectives and common plans. If the business owner will just take the time to develop a basic Strategic Plan, they would be far more successful in their business, and probably much more profitable, too!    

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    Spyeglass, Inc. (Electrical Engineering and Manufacturing) - Feb 17, 2010

    Posted by: Richard Allen Foster in Testimonials

    Mr. Foster has been a true source of business clarity for our business,  both financially and strategically. He is experienced in all facets of growing and running a business and, like a good coach, helps us "toe the line" to ensure that we get the most out of our business and out of him as a resource. I strongly recommend his services to businesses, big and small!

     Paul Krumrich, President

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    Source Lending Corporation (Home Mortgages) - Jan 15, 2010

    Posted by: Richard Allen Foster in Testimonials

    "When the mortgage market collapsed in August 2007, we needed someone one help us get back on track, re-establish profits and help us avoid insolvency. Rich did all these things and helped us continue to maintain a postive attitude in ourselves, the business and the industry."

     Chris Hacker, President

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