As a consultant, no one ever comes to me asking about exit strategy. It’s not something any of us really wants to talk about, is it? The assumption there is that we are going to fail, and that’s just not the spirit! But there’s more to exit strategy than failure.
I remember what it’s like at the beginning—the ambition, excitement, optimism. We didn’t want to think about life beyond. How can there be life beyond?! I am here to tell you that there is in fact life beyond. It’s all part of your unique journey, and there’s no shame in talking about an exit strategy.
Sure, 60% of restaurants will fail in their first year, and 80% by year five—a grim statistic I have at the forefront of my website. It never scares anyone off, but it does foster an honest conversation about feasibility. I like to begin a start-up engagement in the feasibility stage—let’s get super comfortable with some conservative financial forecasts and then we can start talking about a location, concept, and project plan to get open. Oh, and exit strategy.
My business partner and I used the Penn Legal Clinic to craft an operating agreement for our second location. When one of the law students asked us what would happen if one of us wanted out, I vividly remember looking at each other and both saying, “we won’t want to run the business without each other.” Ah, those were the days! Bright-eyed, bushy-tailed, and totally blind to the realities of life. Ultimately, when we decided to go our separate ways, that document was useless. Instead, we spent years in mediation and litigation. Never again! Budget for a good lawyer in the beginning, my friends. It will pay for itself in a flash.
The reality is, any number of things can happen that will change the course of your life and business, specifically the “Four D’s”: death, disability, divorce, disagreement. You should have a plan to work through all those things. You can set up a buy/sell agreement ahead of time. You can finance a buy/sell agreement ahead of time as well. In a start-up engagement, we'll talk exit strategy. My mission in my business is to help you skip the learning curve I had and beat those pesky odds.
One of the biggest questions is, will I be able to sell the business? Maybe. But it’s not easy. I rarely have clients who come to me telling me they are buying a restaurant. They mostly have their own concept and brand. If you close because you weren’t profitable, the only worth is in the equipment, valued at a fraction of what you bought it for. I always encourage my clients to buy the real estate if they can. This way, they can build equity outside of the restaurant business. I am working with a client now who is trying to sell his tavern. The brand is well-known in Chester County, it’s profitable, plus he owns the real estate and a sweet Chester County liquor license. But finding a buyer for a deal this size is not easy.
So, how do you determine it’s worth? You know the adage—it’s only worth what someone is willing to pay for it. You can spend a lot of time in spreadsheets and with valuation experts to get to a starting point, but that’s all it is. And that’s precisely how I ended up in mediation for years. I wasn’t willing to pay the price she and her spreadsheets insisted it was worth. It made no sense from a buyer’s perspective. I couldn’t finance it, and even if I could, the business couldn’t carry the debt. Ultimately, I made an offer that made sense to me, she counteroffered the same, and I accepted. I was tired of fighting, and I wanted out.
Beyond the nuts and bolts of ending a business partnership, there are a lot of other details to handle. How do you tell your employees? Your customers? Your vendors? You’ll want to maintain a good reputation on all fronts. These folks are now a big part of your network, and you’ll likely meet them again in your next chapter. Remember the Golden Rule. And ask for help when you need it.
Excellent read Angela!