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Know the right time to exit

Wednesday, 11 April 2012 | By Greg Hayes

Knowing the right time to exit your business is a more important decision than deciding to go into business in the first place.

 

When you start a business it is often with an idea, a limited amount of capital and loads of enthusiasm.

 

By the time the business has grown and developed it is likely worth far more than at commencement. A lot of business owners get the exit decision wrong and pay a price for it.

 

A relatively small number of businesses continue through multiple generations. The majority either fail or are sold by the original owners.

 

Timing your exit is about understanding:

  • The best time to realise that value.
  • Whether your business has outgrown you.
  • Whether the business model is changing (for the worse).
  • Whether you have outgrown the business.

It’s always a good idea to exit your business before its value has peaked.

 

A strong business with good prospects is always easier to sell and a buyer is likely to pay a premium for their expectation of the future value to be created.

 

Smart owners monitor not only the value of their business but also the expectations for the future. You need to have a good sense of where you are up to on the value curve.

 

Some businesses outgrow their owners. Some people are great at running micro businesses, some are great at running small businesses and some are great at mid-sized businesses.

 

Success at one level is not an automatic guarantee of success at the next level. Each one has differences in the skill sets required. The smaller the business the more important it normally is for you to be skilled at what the business does.

 

The larger the business the more important it is that you are a good manager – strong in finance, strategy and business planning.

 

If your business is outgrowing you then it may be time to exit before the next stage of growth puts pressure on both you and the business.

 

Don’t believe that your business model will be forever constant. Business models change.

 

This change can be driven by the owners or it may be driven by changes in the industry or emergence of alternate models to what have evolved.

 

For most business owners the danger is that their business model is changing and they do not realise it.

 

If you are in an industry where the business model is changing you need a good radar system to detect this, and then be able to assess whether it is for the better or worse.

 

If your model is changing the message is to be at the front end of the change or to exit the industry before change overtakes you. Sitting in the middle may mean you get squashed.

 

And in the same way that your business can outgrow you, you may be outgrowing it. This does not apply to everyone, but some business owners lose their enthusiasm once the business has grown to a certain stage.

 

Where they relished the challenge of growing the business, they may become bored with the sameness of a mature model. If this is you, plan your exit before your loss of enthusiasm translates into a dilution in business value.

 

All of this says that you need to keep reading what is going on with your business and not just operationally.

 

Doing a periodic health check on your business strategy and forward direction may tell you when your time is up.

 

Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.