If your long-term goal is to move from labor to capital, then you need to build your business into an asset that you can personally “exit”, not a high paying job.
Assets can be sold or held once you have exited, but they do not require your day-to-day participation. Assets give you free time and capital to invest.
The “gravitational pull” of a service business is to stay small, never let the owner leave operations, and never be acquirable for more than 2-3X EBITDA (if at all).
You have to fight this gravity by:
1) Focusing on a niche and creating actual moats in the business
2) Building the organization and management to be independent from you
Moats and Niches
When you are the driving force of your company, it is easy to be in the “we do stuff for money!” business.
Your relationships and insights drive new opportunities, and your can-do attitude pushes the company to say “yes” to everything under the sun.
Take your time to understand the market and opportunity set, but to set the stage for an eventual exit, make a decision and say “we will be the best in the world at XYZ”. It took us six years to really focus in our first business, and everything was easier after that.
XYZ can be a simple as “providing the most delightful high-end residential lawn care services in North Manhattan Beach, CA”, but you have to plant a flag, say “we will OWN this space”, and relentlessly execute towards the mission.
This clarity will make your company simpler to operate, more profitable, and easier to exit.
You can focus on building a defensible moat, and it will also happen organically. No company in the world will care as much about your customers and be willing to completely align their business around this vision.
You can eventually replace yourself as CEO because the existential issues that require the founder will be resolved, and the focus will shift to operations and efficiency (which employees can often do better).
You have a tight, secure story. You are a solid, hardened entity, built around serving a customer better than anyone else, not the talent of the founder.
You will build something that a competitor would love to own, or a financial buyer would feel comfortable borrowing against to buy. Your business feels like a bond, not distressed equity, and you have the flexibility to sell or own from a distance.
Organization and Management
For every “job to be done”, you need to eventually replace yourself with someone who is better and less expensive (taking into account your equity compensation), until one day 5-10 years later, you’re out of work. Then you can exit.
You learn the job, you build the initial processes, then you hire and train someone else to do it. The people you hire should take those existing processes and rebuild them in a much better way. Each new person you hire should “bring up the average” of the company operations and talent pool.
Each time you take a job off your plate, find a new, harder job that better aligns with your strengths and is needed for long term growth. The challenge is to allow yourself to really delegate, even the hard stuff.
You have to keep pushing, hiring, growing until the company finds product/market/distribution channel fit and reaches a scale and stability that can support a new CEO.
Building an independent organization is a long, slow grind, but it is possible. It pays to be a bit lazy with a middling self opinion, so you’re less attached to completing tasks on your own and more open to promoting other talent. It took four years for my co-founder Tim to be able to exit, and nine for me.
Some of the challenges:
1) Every time you replace yourself in a job, their salary comes straight from the business profits, and it makes you more poor in the short term. When you are growing and hiring a lot early on, all money conspires to be taken out of your pockets. We made just enough to survive our first five years.
Embrace financial constraints, start young, live your Minimum Viable Life.
2) You have to attract, hire, and retain great people to take over important roles at your extremely irrelevant and mediocre paying small business.
Offer more than just a paycheck. Offer fun, offer comraderie, offer adventure, offer flexibility, offer opportunity, offer humor.
3) You always feel like you suck at your job. Once you have figured out a job, then someone else can be trained to do it. You move on to the next new thing that needs done, and now you suck at that. At least you can eventually “trade up” to areas of more strength and delegate the parts of your job that you hate.
Be humble, have a sense of humor, and enjoy that you’re growing. It gets better.
4) Eventually, you’ll find a job that you’re actually really good at, and there will be a negative tradeoff required to replace you. The business will be a little bit worse in order for you to exit that role.
This is the price you pay to exit. You have to just let this go. You can’t be a perfectionist and exit your business.
I talk about a lot of these concepts on Eric Jorgenson’s podcast if you’re interested: https://www.ejorgenson.com/podcast/waitbutwhy-co-founder-andrew-finn-on-how-to-acquire-a-free-company.
He also writes a ton about the concept of Leverage, which is a valuable framework to think about on your professional journey: https://www.ejorgenson.com/blog/category/Leverage.
2 thoughts on “Build Your Company to Exit”
Really well done. Loved how concise and clear the niche/moat + exit concepts are. Reminded me of Derek Sivers’ book, Anything You Want.