Starting this month, Martial Arts Professional introduces “The Four Keys to your Future.” In an unprecedented, yearlong series of feature articles, you will learn how to benefit from the new era of the martial arts industry that is upon us.During each quarter of the year, Martial Arts Professional will focus on one of the four key concepts that will guide you toward a future of amazing growth in enrollments, retention, renewals and student quality.This month, the series begins with the first of the Four Keys: developing an exit strategy for your career and/or business. Quite simply, you must know where you’re going, if you expect to reach the finish line.

Think of each Key as your means to open another door to your future. It’s a progression of steps—from developing an end goal for your career/business—to building value in your business—to implementing systemization and economies-of-scale methods, to transform the average martial arts school into a highly desirable, marketable asset that will dramatically boost your personal wealth when you sell it.

For many years, and now as the publisher of Martial Arts Professional, Stephen Oliver has brought a sharper clarity to what the future of the martial arts industry will be, and what current instructors and school owners and those who will open schools must do to be a part of that future. His Mile High Karate franchise system is already bringing that future to an ever-growing group of school owners who want the best a martial arts business has to offer.

He has repeatedly stated that, first and foremost, you are faced with a fundamental decision: to hold fast to the school model of the past or join those who are already benefiting from the new model, and create a thriving martial arts business for yourself.

Although there will always be room for volunteer and part-time instructors, cultural and economic forces are coming to a head. Industry leaders and more and more school owners are finally realizing that a martial arts school is an outstanding business opportunity—one that has been largely unnoticed for decades. This has led to the development of a serious business model that is increasingly becoming the norm.

The pioneers of the new era are those school owners who have already made the transition from part-time and/or low-performing schools to high-grossing businesses. The much higher student quality they’ve achieved (as well as skyrocketing revenues) proves that the “selling out” concept is also old history. Many traditionalists have been able to develop synergistic business models that accommodate both the traditions of their arts and the highest goals of business.

As the martial arts industry transitions to this new era, there are no real impediments to move from where you are today to where you want to be—except, frankly, those in your head.

Building equity in your business, the second of “The Four Keys to your Future,” will be the theme of the next major article in this series, scheduled for the May 2009 issue of Martial Arts Professional.

The First Key to Your Future: Developing Your Exit Strategy

Begin with the End in Mind

Of all the concepts that have been communicated to a universe of entrepreneurs, business owners and franchisees in a flood of books, CDs, DVDs and seminars, none may be more important than the advice of Dr. Stephen Covey in his best-selling book, The Seven Habits of Highly Effective People—Begin with the end in mind.

Beginning with the end in mind is the fundamental first step—to everything! This concept is so universal that it applies to all of life, not just owning and operating a business, and benefiting from its productivity and value. Years of effort can be wasted or misdirected if this concept is not applied to reaching your final goal. In fact, Dr. Gene Landrum, author, educator and developer of the Chuck E. Cheese system, explains, in his interview with Lee Milteer, NAPMA Success Coach, on page 38, how he uses this concept when he writes a book—he writes the last sentence first.

It only makes sense to know where you’re going, before you start. Of course, many of you reading this article have already “started”; you are currently operating a school or program, and you may or may not have an end in mind. In fact, frankly, Martial Arts Professional and the Mile High Karate franchise system have noticed that many of today’s instructors and school owners certainly know why they teach their students to achieve excellent outcomes; but those same instructors and school owners haven’t thoroughly planned excellent outcomes for themselves. In a business context, beginning with the end in mind, means developing an exit strategy for your career and/or business. If you haven’t seriously developed an exit strategy, then, fortunately, it’s never too late to take action: consider today the first day of your journey and finally and formally decide what end, or goals, you are working to achieve in your career, business and life.

That is your fundamental first step if you expect to reap the massive rewards of a highly successful martial arts business; and this article will focus your thinking on this concept and motivate you to take action on your future.

Talk to Yourself

As a school/small business owner, it wouldn’t be unusual for you to have never seriously considered how you would want to end your career and/or close or sell your school. Traditionally, martial arts instructors and school owners have often found themselves operating a school because their instructors presented them with the opportunity. It wasn’t necessarily a serious, carefully planned life or business decision, but a “natural” progression from martial arts student to Black Belt to assistant instructor to instructor to chief instructor to new school owner.

Nothing strange about young adults (including young adult martial arts instructors) being focused on today, instead of tomorrow; however, it dawns on them, eventually—and, unfortunately, later than sooner, in too many cases—that developing an exit strategy is a core, life task.

If you haven’t already done so, then you must have that serious discussion with yourself (in fact, continuous discussions) about your future, which includes not just your career, but also BIG life issues, such as choosing to raise a family, lifestyle, retirement, long-term financial goals, etc.

You will find it rather difficult to lead any kind of “successful” life, without developing a plan to end your career and enjoy your later years.

Why You Need an Exit Strategy

If you currently operate a martial arts school or plan to do so, and have not developed an exit strategy, then you should move that task to the top of your to-do list today. You may have decided to run a school “to create a job for yourself,” by continuing to operate according to the “traditional” martial arts school model, and you’re free to make that decision. If you rely on your school for all or part of your personal income, however, then you should be aware that the industry is moving forward.

Martial Arts Professional and Stephen Oliver have seen the future of the industry, and operating a school somewhere in the middle (the traditional model)—between the hobbyists and the high-grossing entrepreneur school owners—will become increasingly difficult.

If you find yourself in that middle position today, then developing an exit strategy is even more critical, as the traditional school model becomes less commercially viable and unable to generate even the basic revenues you require. The other option, of course, is to join the high-grossing entrepreneur school owners, which will increase the value of your business when you decide to exit your career.

You may be a member of another large group of today’s school owners, who really do want a business, not just a school. You are trying to be an entrepreneur, but your results have been mediocre. An exit strategy is just as critical for you because you are trying to build something of value; and developing an exit strategy may just be the “boot to the rump” you need to direct and focus your efforts on specific future goals that will improve your school’s inconsistent performance.

Developing an exit strategy is a good idea simply because life is full of surprises. There are numerous lifestyle changes that can literally occur overnight, possibly forcing you to sell your school. These include the death of a family member, spouse, business partner, etc; a divorce; health concerns; and a need for cash to address other financial challenges.

Another life surprise, specific to martial arts instructors, is training and/or teaching injuries, or the development of debilitating physical ailments, such as arthritis, chronic back pain, etc. As much as you enjoy teaching your students and owning a business, you shouldn’t be surprised if you wake one morning and decide you want to pursue an entirely different interest, career or business opportunity. It happens! That transition will be much easier if you have already planned your exit.

Finally, you can’t avoid the reality that many small businesses fail, and not necessarily as the fault of the owners. It’s a reality you must consider when developing your exit strategy.

It doesn’t take much of an Internet search to discover that all the studies and research about small business failure rates prove that there is no consensus. To give the researchers their due, however, most small businesses are privately held and reliable data about their success and failure rates are incomplete and statistically unreliable.

The best theory that many business experts accept is the “rule of thirds.” This rule states one-third of small businesses turn a profit, another third break even, and the last third never make a profit. A U.S. Small Business Association study revealed that only two-thirds of all small business startups survive the first two years, but less than half are still in business at the four-year mark. Whatever the correct failure rate, developing an exit strategy is even more necessary when you are faced with these odds. Ultimately, an exit strategy is a bit like a security blanket. It doesn’t guarantee that you can sell your business totally on your terms, especially if one of those life surprises drops from the sky, but whenever you have a plan in place to deal with future events, it’s more likely the outcome will be beneficial to you.

Your Wake-Up Call

This first article in Martial Arts Professional’s yearlong series is meant to be a wake-up call, to compel you to take action about your future; but we don’t just want to awaken you, we want to give you some tools and point you in the right direction.Think of “developing an exit strategy”
as “setting a goal,” similar to the goal-setting concept you teach your students, but you don’t stop there; you also teach your students how to reach their goals. That is the purpose of the other three “Keys to your Future”: To show you how to build equity in your business, implement total systematization and apply economies-of-scale, so you can also reach your goal.

Where do you start?

First, you can schedule that important discussion with yourself if you have no clear plans about your future; and, even if you do have “an end in mind,” then this is a great time to review the exit strategy you’ve developed.

Don’t hesitate to expand your discussion with yourself to others in your life: parents, spouse and other family members; your attorney and accountant;
or local businesspeople that you may have come to know through your community activities, or as a member of a business group. Understanding and implementing these Four Keys is why being a member of a mastermind group, such as NAPMA’s Inner Circle or Peak Performers, is so important because these are just the kind of big, life-defining concepts that are best discussed among a group of school owners facing the same challenge.

Probably nothing is more helpful when major decisions are required than the opportunity to learn from like-minded school owners/entrepreneurs
that are working toward the same future as you; so an obvious action you can take “to develop an exit strategy” is to join one of NAPMA’s mastermind groups. Learn more at NAPMA.com/InnerCircle.

Second, you can read and study “The Four Keys to your Future,” as they are published in Martial Arts Professional throughout 2009, as well as seek additional information on these concepts from independent sources.

Third, you can take everything you’ve learned and commit it to paper in the form of a plan; after all, developing an exit strategy is much like writing a business plan. Instead of a formal business plan (which is just a bit too corporate for most entrepreneurs), consider creating “an informal action-oriented plan with specific strategic goals, tactics and timetables, instead of a 30-page document that collects dust on the shelf. In other words, step away from ‘corporate stripes’ and learn to behave like a true small businessperson.”That advice comes from the president of a successful franchise system that created just such an “action-oriented plan” for its franchisees. It’s a simple three-step plan that you can easily use to develop your exit strategy and start to take action on it.

Adapting this franchise system’s strategic plan as your own is also a great example of “not reinventing the wheel,” a concept you’ve often read in the pages of Martial Arts Professional. This strategic plan is a “wheel” that has already proven to be rolling in the right direction. That is an underlying principle of entrepreneurship: learn what others have done to plan and accomplish the same or similar goals, and then follow one of the paths they’ve blazed. Don’t waste your time “reinventing the wheel,” just climb on board and spend more of your valuable time making your business valuable and your future bright.

The three steps of the action-oriented plan are:

• Mission, vision and values
• Goals
• Control Book

Think about each of these elements as you shape your plan, or exit strategy.

Mission, Vision and Values

Write a mission statement that clearly states your mission in fewer than 15 words. Determine the ultimate destination of your business and record it as your vision. Choose words that describe the values by which you will govern yourself as you strive to achieve your goals.

Goals

For goals to be meaningful, they must be clear and concise. Make your goals specific to each area of your business and set a date for when they will be accomplished. For most martial arts schools, those areas are marketing or prospecting, sales, curriculum, staff and training, finance and operations. Of course, each has various sub-categories.

For example, your community involvement, and the publicity it generates,
is part of your marketing program. Write your long-term goals for each area, and then set the mini-steps you’ll accomplish during the next year on a calendar.

Control Book

The Control Book is where you organize all your thoughts and information.

It includes your mission, vision and values and your goals, but it does not stop there. It also includes key information used in the management
and accomplishment of your goals, and organizes them by the same functional areas of the business (marketing, sales, curriculum, etc.). For example, the finance section should include current financial statements and the staff section should include a current organization chart. For most businesses, one three-ring binder can hold almost all of this information.

The president of the franchise system reports that the results of its strategic plan for its franchisees have been impressive.

• Franchisees are developing a vision for what they want to accomplish on their own terms. Once they have clarified their vision, mission and values they tend to be happier with the direction of their businesses.
• They are taking ownership of clearly defined goals. They know what they need to accomplish to stay on course. Just as importantly, they see more clearly and avoid obstacles that might prohibit them from accomplishing their plans.
• They are making better decisions because all things are considered in the light of the plan and the ultimate goal.
• There have been a number of positive comments on the quality and clarity of the overall plan from lenders. A confident, well-informed lender is an important ally for a small business owner.
• The plan has served as a vehicle for the franchise member to communicate his direction to employees. As a direct result, the employees who have participated in this process tend to feel more empowered and informed. This, in turn, has resulted in those employees working better together to achieve the goals of the franchisee.
• Once people begin to see the possibilities of what they can accomplish, and gain confidence in their ability to achieve those possibilities, they start to expand their visions. They set bigger goals, make bigger commitments of time and energy and pursue them more aggressively.
• Ultimately, the strategic planning process has resulted in a stronger approach “to run the business by the numbers,” for the specific purpose of achieving the goals of the franchisee. This directly and positively affects the value of the business. In the strategic planning process, both value and satisfaction count. Franchisees who have established a strategic plan have significantly increased the value of their businesses, and because it was their plans and their accomplishments, they are also more satisfied.

The primary result of this franchise system’s strategic plan (see italic text above) proves that developing an exit strategy is a critical first step toward accomplishing your goals. Those results also reinforce the value of a franchise as the one system that can maximize student excellence, stable growth and financial security.

Because the martial arts business lends itself so well to the franchise concept possibilities of what they can accomplish and gain confidence in their ability to achieve those possibilities, they start to expand their visions. They set bigger goals, make bigger commitments of time and energy and pursue them more aggressively. and Stephen Oliver have encouraged all current and future instructors and school owners to consider a Mile High Karate franchise opportunity as your best and most direct route to building equity in your business and benefiting from the exit strategy you develop. The Ultimate Key to your Future can be found at MileHighFranchise.com.

The Reality of Small Business Value

Somewhere between “developing an exit strategy for your career/business” and “building equity in your business,” is the task of determining the value of your school/business, and how that value is calculated.

It doesn’t make much sense to develop an exit strategy today that assumes you can retire on the proceeds from the sale of your school/business, if you don’t know how much it will be worth. You must know today, with as much certainty as possible, that your exit strategy is possible.

Ultimately, the external marketplace will set the value of your business, and it will be based mostly on the future potential of your business, and much less on its record at the time of sale.

Small businesses are notorious for being less valuable to a future buyer than their owners perceive them to be. That only makes sense, since the typical small business owner is so dedicated to his vision, and serving his customers. Most small business owners are personally fulfilled by the freedom of owning a business; but that fulfillment (or other “psychological attachments”) is not really calculable or transferable, when determining the value of your school.

No doubt, you have a “deep” connection with your school, thinking it to be highly valuable, considering its purpose is to change people’s lives. More power to you!
That’s what makes the martial arts industry so special.

Ultimately, the external marketplace will set the value of your business, and it will be based mostly on the future potential of your business, and much less on its record at the time of sale.

Nonetheless, when you are ready, or compelled, to exit your career or business, the cold, hard marketplace will probably have more bearing on the end-value of your business than your “feelings” about your school. Granted, you may find a younger entrepreneur or instructor who shares your vision, and is willing to pay more for your school because that is exactly what he or she wants, but that’s not likely.

Various sources for this article offered a range of business-value methods and advice; however, the “typical” method is to apply a numerical multiplier to the business’s current profits. In other words, if your balance sheet shows that your school generates $100,000 in annual profits, for example, then you can multiply that profit number by one, two, four or more times to determine a value that someone will pay.

Remember the time-tested truth, however, that the price of anything is, in the final analysis, determined by how much someone would pay for it, not the results of a formula.The first source suggested that you select one of a number of statements that best describes your business.

Two of those seem to apply to many, if not most, martial arts school businesses.

• “An established business with no significant competitive advantages, stiff competition, few hard assets, and heavy dependency upon management’s skills for success.” (Multiply current profits by a factor of two, three or four.)
• “A small, personal-service business where the new owner will be the only, or one of the only, professional- service providers.” (Multiply current profits by a factor of one.)

Another source, a member of the business-valuation industry, warned that multiples are a very dangerous way to value a business. She emphasized that those who might be interested in buying your business only care about its future economic benefits; and are likely to place less value on the “facts” on your current balance sheet.

She claims that the method used in her industry to place a value on the future benefits of owning your business is to set a discount rate for its specific situation. That discount is usually 20 to 30 percent. That discount rate is determined by going beyond financial statements and learning more about the stability of the business and how much the current owner has planned for the future. This could relate to how many contracts are in force and for how long, the business’s dependence on a few large clients or a narrow market of prospects, and how the business owner determined his projections of revenues, expenses and the need for more space, staff and equipment.

She is adamant that the multiplier method should be avoided because there are too many factors (as stated above) that aren’t quantifiable. A president of a business services company said that if your business can be described as a niche business that serves a specific market with specialized products or services, then it could be more valuable than what standard valuation methods might determine. This probably only applies to a small number of martial arts schools, however.

A franchise professional, who ran a major retail ice cream franchise, recommends that two-thirds of annual sales is a good rule-of-thumb, when determining the future resale value of a franchise business. Interestingly, he was answering the question of an entrepreneur who was doing his homework before deciding to invest in a franchise opportunity. This entrepreneur was certainly “beginning with the end in mind” and knew he needed an exit strategy before he opened his new business! That is the kind of mindset and foresight you must adopt to enjoy the maximum benefits of a martial arts business.

This variety of advice about how to calculate your business’s end-value only reinforces why you need an exit strategy—you simply must know what your school is worth today and at any point in the future, so you’re prepared to exit your career and close your school on the best terms for you.

What would you do if someone walked into your school tomorrow and offered to buy it, and asked you how much it was worth? If you haven’t determined its value and can’t provide the prospective buyer with a good answer, then a golden opportunity may walk out the door.