Considering Your Exit Strategy- It’s Never Too Early to Start Planning Your Business Exit Strategy
When starting a business and creating a business development strategy, many entrepreneurs and business owners forget one of the most important considerations: the exit strategy. Especially at the beginning, it’s not easy to think about how your business will end. However, when your business is just starting out, it is often the best (and least complicated) time to discuss an exit strategy. At this point, your business is small (in number of employees and cash), there aren’t significant liabilities, and the business has only a few contracts with individuals outside the company. It will become increasingly difficult to discuss exit strategies as your company grows in size financially and in the number of employees, investors, and shareholders. Today we’ll lay out some of the basic exit strategies that every business owner should (at least) consider from day one. If you take away anything today, let it be this: it’s never too early to consider positioning yourself and your business for a successful (lucrative) exit.
Selling the business (to a private individual or an acquiring company)
This is the most common exit strategy for business owners, and many times it is the simplest. This option is extremely attractive to business owners who want to see their legacy carried on. Generally this transaction occurs between two private individuals (or entities) and can be done without sifting through the complex government regulations involved in an IPO. In a basic sale of the company, the seller will receive cash in exchange for ownership of the company. The most important part of the transaction, and almost always the most difficult, is valuing the company. Because most small businesses are privately held, valuation is never a simple task. If you’re considering selling your business, you’ll want to get multiple appraisals in order to decide on the right price for your business.
Another strategy is to sell your business off to another company through an acquisition. Under this approach, your goal is make your company as attractive as possible to potential acquirers in order to increase the price the acquirer is willing to pay. You may be able to take advantage of the strategic value of your company to a particular acquirer in order to negotiate a higher price. Also, if you’ve positioned your company right, you may have more than one acquisition candidate who will engage in a bidding war, which will drive up the acquisition price.
Keep in mind, however, that many acquisitions are accompanied by strict noncompete agreements and other restrictions on your ability to do business. In addition, these transactions often result in a chaotic clash of company cultures and systems between the target company and the acquiring company.
Liquidating the assets (or cashing out)
Perhaps your goal is to carry on your business until the day you decide to liquidate the company’s assets, and close up shop for good. Once you decide to liquidate your assets you’re faced with the complicated task of finding willing buyers and negotiating a price. Next, you’ll have to pay off all creditors and any remaining funds will be distributed by the shareholders. This kind of exit strategy generally leaves you, the business owner, with the smallest amount of money. One major reason for this is that your company assets will generally sell for market value. All the goodwill you’ve developed over the years, including client lists and reputation, is valueless in a liquidation.
Bleeding it dry
Under this approach, the company pays you a large salary with hefty bonuses regardless of actual company performance. While frowned upon in public companies, this strategy may not be a bad idea for certain privately-held companies. Often referred to as a “lifestyle company,” these companies do not reinvest their capital and instead keep their operations small, and elect to pay out exorbitant incomes and dividends to the owners.
This strategy won’t work for a business that relies on investment to grow, or for businesses that may need to seek additional capital from investors in the future. In addition, there may be negative tax implications to the business owner (and the business) depending on how the money is paid out.
In the rarest of situations will this strategy make sense for your business, but it is those situations that keep this strategy the most talked about business transition in America. It’s the flashiest, highest exposure exit strategy out there. It’s also the rarest, most complicated, and most expensive strategy. Keep in mind there are millions of U.S. businesses and only a handful (a large handful, around 7,000) of those businesses are public companies. In order for your company to successfully go public, you’ll want professional investors with a track record of taking companies public, millions of dollars to spend on the road show, and an experienced team of professionals comprised of lawyers and accountants to guide you. An IPO requires you to spend a significant amount of time on the road: pitching your company to investors across the U.S., and pleading to convince each investor that your stock is worth as much as possible. In addition, you’ll face numerous federal regulations, large underwriting fees, and the volatility of the stock market on the value of your otherwise healthy business. In sum, the IPO shouldn’t be your first choice of exit strategies. It’s an option worth consideration, but in most cases that’s about it, consideration.
Handing down the family business
The last strategy we’ll discuss is passing the family business down to the next generation. Under this strategy, it’s often difficult to make sound business decisions that are not emotionally driven or based on family politics. If you choose to go this route, you’ll want to develop a business plan that is based on sound business objectives. You’ll need to make clear that business is business, and stress the importance of separating business needs and emotional needs, something easier said than done.
The benefits of this approach include selling to a familiar face (which likely means less due diligence is required), and preserving your business legacy. However, due to the friendly nature of the transaction, you may end up selling your business for less than you would have to an unrelated buyer. Also, you should bear in mind that these transactions can strain family relationships.
Choosing the right strategy for your business
Picking which strategy is best for you and your business is never easy, but starting the planning early can make the decision much easier. Keep in mind that the strategies above offer only a glance at the types of exit strategies you can use for your business. With a little planning, you can develop a lucrative exit strategy for you and your business.