Planning An Exit Strategy
As of this writing, depending upon whom you read and believe, our economy is somewhere near the bottom of a “U”-shaped recovery, which implies that we will spend a while near the bottom before climbing back to prosperity. Or we are still on the way down. Or maybe we’re on the way back up on a “V”-shaped recovery, which implies that we’re going to bounce back to prosperity.
Perhaps our bounce will be a temporary one, destined to fall back into the doldrums. It’s even possible that we’re witnessing the end of the world as we’ve always known it; we may soon find ourselves living a drastically more Spartan lifestyle since our wealth will have been devoured by hyperinflation and a realignment of social priorities.
There are other theories bouncing around out there, some more disturbing than others, but nearly all of the economic theories have some sort of historical precedent they can point to for justification.
Regardless of the scenario, or a combination of scenarios that ultimately play out, we still have businesses to run. And they require investment and planning. For some of us, we’re beginning to look forward to grabbing the brass ring and getting off the merry-go-round sometime in the not-too-distant future. The looming question is how do we do it? How do we cash in our life investment so that we can enjoy our retirement years without too many cares?
Building Wealth Outside The BusinessOne method for cashing in is to build wealth outside your business and industry. If your business is producing profits, then invest some of those profits into a portfolio of financial instruments such as stocks, bonds, real estate, futures, metals or whatever your financial advisor recommends.
Obviously, we’ve recently seen the downside of this strategy as investors around the world lost huge chunks of their portfolios to the credit crunch. Will things be better by the time you are ready to retire? It’s quite possible since there is a strong precedent for big gains after an economic decline.
There also is a strong precedent for inflation following massive expansions of our money supply. Inflation will create winners and losers, so get some wise advice when investing. If you manage to buy the right growth stocks in this market climate, you could be on easy street by the time you retire. Of course, if you pick wrong, you could just end up on the street.
One more important note about the investment road to wealth: Get professional advice on how to manage your investments. Don’t risk everything on one endeavor.
Selling Your Independent BusinessA more widely discussed “exit strategy” for contractors is to build up a viable business with a big customer list, then sell it for a tidy sum of cash. Every now and then we hear about a successful sale of this sort, but it’s usually a buyer’s market out there and will remain so for the near future.
Most investors want to earn a return on their investment without too much hands-on hassle. They will look just about anywhere but the plumbing/heating/cooling industry and for good reason: PHC contractors historically show some pretty lousy profit margins when compared to the levels of risk inherent in a service industry that is wide open for property damage and lawsuits.
If the money investors aren’t interested, how about fellow contractors? There are a couple of major limiting factors to this approach. To begin with, the pool of contractors with enough cash to buy your business outright is a pretty small club. Be prepared to finance the sale.
Also consider that you may not get the selling price you want. You may have heard of several ways to set a selling price for your business based upon customer count, gross sales, number of transactions sold during a new moon or who knows what. In reality, a savvy contractor who is financially in a position to buy your business will know how much it is worth by simply comparing the cost of buying the business with the cost of acquiring a similar batch of customers using his or her proven marketing practices.
If the contractor has a dynamite marketing machine, then he knows that, eventually, all your customers will become his customers anyway, so it really just boils down to time. How much is it worth to get your customers now vs. later?
The major point to consider is that a business purchaser isn’t really interested in what you need to gain from the sale; he is interested in making a profit from the purchase. That’s a mercenary thought, I know, but that’s exactly how it should be.
Selling Your FranchiseFranchises offer considerably larger pools of interested buyers because franchisees typically have clearer financial performance guidelines. Return on investment remains the primary motivation for a franchise buyer, but at least he or she will understand the nuances of the franchise, presumably giving him or her a broader comfort range when purchasing your business.
Keep in mind that your franchise came at a considerable investment. Depending upon the particular brand, you will have paid up-front fees, visual identity costs, national advertising costs, ongoing franchise fees and perhaps even a percentage of gross sales. Presumably, all these expenses paid off in profits and reduced headaches while building up the franchise, but that’s not always the case.
Regardless of how well your franchise has performed, the purchaser is still primarily interested in profits. The price he is willing to pay will be dictated by the potential of return on his investment.
Groom Your Own BuyerAnother device for cashing in is a twist on selling to a willing buyer. Instead of hunting for a buyer, you groom your own. This method requires time and effort, but the good news is that your business goal will be to work yourself out of a job. The sooner you get it done, the sooner you get to go play at the beach.
To begin with, you’re going to have to build a viable business that must, as in absolutely must, include a career ladder for your employees to climb. If you came up through the ranks of your trade, then the odds are that you’ve never been exposed to a business that includes a career ladder.
In our industries, we typically learn as apprentices what to do and how to do it. Then we advance through the ranks of craftsmanship by gaining skill and experience at what we do and how we do it. Somewhere along the way, as the old back and knees start giving out, we know what to do but aren’t quite sure how to do it, so we take the next logical step, which is to open up a business.
This is why we end up with so many business owners who don’t know what to do or how to do it.
Grooming a buyer while grooming your business means you’ll have to learn new skills, such as reading balance sheets and measuring marketing results. You’ll have to learn how to forecast cash flow, budget for overhead and figure out the most profitable selling prices. More importantly, you’ll have to learn how to share your vision and how to hire people who will help you achieve your vision.
Ultimately, your buyer or buying group will come from among these people whom you have groomed to take over your business. When your employees expect to become owners, it’s easier for you to delegate authority because they will be internally motivated to be prudent. If you’re doing your part, and the business climate is cooperating, then your trips to the beach can begin well before you retire.
You have a better chance at a good exit by grooming your buyer than with any of the other methods discussed.
Regardless of the route you choose, you’re not going to get there by thinking like a craftsman. You have to think like a businessperson. You have to know your costs and how to earn a profit. You have to have the foresight to make a plan and work it. But the overwhelming majority of contractors wind up at the end of the game with barely enough to cover debts.
Right now you are making a choice - act or not to act? Plan or not to plan? What are you going to do?