How Does A Sole Proprietor Plan An Exit Strategy?

Many people are sole proprietors or solo professionals. They work by themselves and they are the business.

This makes it difficult to think about an exit strategy.

After all, if they retire, the business ends, right?

Wrong!

If you carefully select your customers and you strategically think about other businesses that will benefit from having those people as customers in the future, you can, indeed, plan and exit strategy and realize some equity from your business when you are ready to retire.

That’s the topic of this episode today. It comes from a question submitted to us by Steve Bass, the owner of Alliance Corporate Services.

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Here is the transcript to this episode of Four Minute Fixation:

How Does A Sole Proprietor Plan An Exit Strategy?

Where’s the exit? Follow me.

Hi once again everyone. It’s time for me to reach into my big old mailbag and today I whip out a question from Steve Bass. Steve is the owner of Alliance Corporate Services and he asks how does a one-person business plan an exit strategy? This is really an excellent question so I thank you Steve for asking that to me. I have a number of clients who are solo and small practice attorneys, who are independent professionals who work by themselves and they do very well. I also have business owners who are in business and the business pretty much runs by itself. They’re the only persons involved in it.

The very first thing you should do when you go into business is to plan an exit strategy because your business will built focused on how you get out and how you acquire value. You’re building equity in your business over time so what I will tell you is even if you’re a Solopreneur or one-person business, you should always own assets. If you can own the office building that you work out of, instead of renting office space for 15, 20, 30 years, you’ll have an asset to sell when you’re ready to exit. You’ll be able to realize the appreciation of that asset. Any time you can buy tangible appreciating assets, you need to take the opportunity to do that.

Setting that aside for a moment, how do you sell professional practice for a business where there’s only one person who’s the [principal 00:01:37] involved in that? I’ll give you this advice. The first thing you should think about when you’re thinking about an exit strategy is who the target audience is in order to buy you or buy your business. What you’re selling is you’re selling your client database and you’re selling the good will you have with those clients. To the extent that you have repeat or recurring income, that’s going to go a long way.

When you build your business, if you’re a solo practitioner, you’re a solopreneur, you’re an independent professional, the first thing you should do is decide who’s going to find you valuable. If you’re an attorney and you’re in a corporate transactional practice, you’re going to want to network with litigators quite a bit because litigators always have a need for your services and if they are just a sole litigation shop, they may want to acquire you at some point and hopefully your client database.

The second thing you should think about is who are the people who you can do business with multiple times? This may mean you acquire a line of products or deliver a type of service that you don’t currently deliver now. You’re going to have to push yourself outside of your comfort zone. What you need to do is you need repeat, predictable business or recurring, predictable business so that you can say to someone, “Here are my books. Here’s what you’re going to find over the next five years in terms of income.” The name of the game is for you to be able to sell predictable income over time to the person who’s acquiring your business. Because let’s face it, if you sell your business, you’re not going to want to be in it past the time period where you turn it over to someone else. Repeat, recurring predictable income is the key to selling.

The third thing you want to think about is maybe you can bring in an apprentice or a partner and groom them to eventually take over the business and buy you out. This is a workout we find works very well in the legal profession. What you do is you bring in a junior partner and you let him or her vest ownership over a period of say, three to five years in your firm, so by the time they’ve been with you for five years, they own ten percent or five percent. You tell them that they will have a right of first refusal to purchase your firm at one and a half times the earnings of the firm in the year you decide to exit. One year, you have a particularly good year, your firm does a million and a half dollars, you say to your partner, “I will now sell you this firm for a million and a half dollars and I will exit in a year’s time. You have one year to raise the million and a half dollars and pay me and buy me out.” If that person can’t do it, then you have the option to sell it to somebody else at a later date.

Those are all different types of ways to plan an exit strategy but what I will tell you is that your exit strategy is personal. It needs to be crafted specifically to you and to how you want to leave the business and when you want to leave the business. If you have a need for an exit strategy, you can always feel free to reach out to me and I’ll be happy to discuss it with you. Keep sending me these great questions and thank you, Steve Bass, for this one. I’m Dave Lorenzo and I’m fixated on helping you make a great living and live a great life.

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