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August 1, 2022

Entrepreneurs, business owners must have an exit strategy

Entrepreneurs are investors, both in terms of time and money. But how good of an investor are they?

Ken Cook

When they get it right, the best venture capitalists and investment bankers will get returns in the 200% to 300% range or higher, often within five years. Since we don’t often get those outsized returns in our lives, what do they know that most of us don’t?

One thing they know is how they’re going to exit before they even enter a deal.

That raises two questions: 1. How does one maximize the return on their entrepreneurial investment. 2. How and when does an entrepreneur know when to exit and realize optimal value?

Getting to the point of a viable and desirable exit involves two management modes.

The first is the entrepreneur as a business operator. This is a sleeves-rolled-up, get-the-job-done role. Entrepreneurs have to operate in this mode because that is how the value of the business gets built in the eyes of the most important constituency — the customer.

Operating entrepreneurs improve their products, service and value, identify the best customers, hire the best people, etc. Of course, doing the right operational things drives sustainable and profitable revenue. It is sustainable and profitable revenue that drives owner’s equity on the balance sheet.

The second management role the entrepreneur should incorporate is the entrepreneur as asset manager. Asset managers are decision makers, not doers, managing the assets of the business — the people, management team, money and markets.

Becoming an asset manager is a significant shift for an entrepreneur, because the majority of entrepreneurs are business operators. Asset management requires a change of thinking and approach to the business.

And what are some of those changes?

Recasting company financials, focusing on EBIDTA (earnings before interest, depreciation, and taxes) as a primary financial measure of strength and success.

  • Establishing and managing assets through Key Performance Indicators (KPI). These are a few key measurements that are insightful indicators of success.
  • Changing spending habits, tightening up on unnecessary expenditures.
  • Looking at the past for a true picture of company status, not looking at future projections as a statement of what a company aspires to become.

Becoming an asset manager and manager of the business entails truly separating from the forest, and viewing the business as others would view it. And how do others view a business? Five factors come into consideration:

  • Financials
  • Management team and staff
  • Customer pipeline
  • Technology
  • Intellectual property

These are the assets that interest an acquirer. Frankly, acquirers always ask a simple question: How will the business run without the entrepreneur being there? Acquirers buy a customer base, technology, staff, and the processes and systems that deliver value to customers. They don’t usually buy the owner — instead, they buy him or her out.

The asset manager recognizes this and builds their business accordingly by asking the questions: How do I leverage the business’ assets to optimize value? What is my exit strategy?

Focusing on these issues means the entrepreneur is both an operating manager and an asset manager. Keep one eye on building value, and the other on ROI. It’s your time and your money. You have the ability to control the return you get on that investment, both up front and on an ongoing basis.

Ken Cook is the co-founder of How to Who, a source for expertise on how to build strong relationships, and how to build business through those relationships. Learn more at howtowho.com.

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