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Is your business a lifestyle business or does it have an exit route?

I was asked this question by someone from Investec who I was having lunch with whilst I was Sales and Strategy Director at Voyager Networks. ( He probably noticed the red Porsche that I was driving around in at the time !! ).

To be honest I did not really know what it meant at the time but the question got me going and sparked considerable Board discussions and plans that eventually led to a very timely and successful exit some few years later. ( I owe that guy a beer !! )

Typically lifestyle businesses exist to provide their owners and shareholders with a continuous and ongoing income stream. This income stream might ( put a little cruely ) be spent on nice houses, fast cars and great holidays !! ( Hey, I’m not knocking it !! )

It could mean ( but may not necessarily mean ) that there are no particular timescales, milestones or financial objectives or targets for the business. ( The business may actually be very driven and targeted but simply used to fund a lifestyle ). There is no intention to criticise or demean this strategy but it is a very different strategy from a business that is working towards an exit route.
Business’s with an “exit route” ( eg an objective or plan to sell or to float ) exist to build future value for the owners/directors/shareholders which is realised at the point of exit.

So, there will be a very clear financial and business plan for a period of about three to seven years.

The time taken to build a business to the exit point can vary considerably but I have found 7 years to be typical, even when the plan aims for 3-5 years.

It is entirely possible that a business may have  the appearance of a lifestyle business but still has enough of the attributes of an exit route business to be successful in such a situation. This would be an exceptional business though with exceptional management.

Clearly a business can and very often does change from a lifestyle business to a business with an exit route.
The question is “ when does that business change “??

Often people try to sell a lifestyle business without first changing it into an exit route business. Invariably this results in devaluation of the business and many surprises and disappointments for the owners. For example, in an exit route business you would have planned for succession and delegated responsibility down. If you, as an owner/director, want to leave the business after exit then you need to be able to show that the business can run without you. If you don’t then either the business will be devalued or you will be locked in for a  number of years after exit or both !!

Generally speaking, if you are going to exit for maximum value you are going to fine tune your asset value ( especially profits and recurring revenues ) but it will be hard to change your potential value greatly.

In a dynamic, growing business your overall company lifecycle ( I believe that every company has a lifecycle ) will be the result of a series of mini product and service lifecycles that you introduced over time. Some of them were probably more successful than others. Some might have fundamentally shifted the original strategy and direction of the company into the successful business that it is now. ( Google did not start getting really financially successful until Google Adwords were introduced. Twitter was a spin-off from the original podcasting offering ).

Generally speaking you are unlikely to be introducing radically different new products and services as you head for an exit. You are more likely to be consolidating and building on what you have already introduced. ( Although I would caution against abandoning all innovative thinking in regard to new products and services ).

If you are thinking of selling your business and at the moment it is a lifestyle business then you had better change it to an exit route business if you want maximum valuation. How long would it take to change and exit ?? A typical exit ( sale or float ) might take a year plus the time that you are locked in or cannot sell shares. – a further 1 – 3 years perhaps ? It would probably take at least a year to change the business. Let’s say about 4 or 5 years for an ordered, planned exit. If the average time to “ business maturity” is 7 years then if you did not start out as an exit route business you need to be looking to change to one 2-3 Years after starting and 5 years before you want to be completely free of that business !!

Now, of course things can and often are done in shorter amounts of time. Using professionals experienced in the sale process will help. To flag something that we will return to later – to get maximum valuation and minimum “ lock-in “ not only do you need professional help but you must create competition and put yourself in a strong negotiating position.

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