Wednesday, September 12, 2012
Posted by Tiffan Clark
Starting a business requires an incredible amount of strategy and planning. But one thing many entrepreneurs neglect to plan for is how they will exit their business. It’s understandable: When you are immersed in the excitement of building something that’s all yours, it’s hard to imagine giving it up.
Say your company is developing a life-altering, breakthrough technology and to grow it you need a large infusion of capital. In this case, you may be looking to venture capitalists or angel investors who, early on in the funding process, are going to want to know how they will get a return on their investment. This is where your exit strategy comes into play.
Or perhaps you are opening a business and imagine yourself at this company until you retire. When you retire, will you pass the business down to someone else in your family, sell it or close up shop?
Regardless of the type of business, having a viable exit strategy in place from the beginning can save you trouble, money and stress later. Here are some options for making an exit:
Typically with a buyout, the sale is executed within the company—meaning you have a planned successor, either a family member or someone in an upper-level management position, who will assume responsibility for the company. If your company is co-owned, you can also simply arrange to sell your shares of the company to your partner.
An acquisition entails selling outside the company, often to a larger entity. With an acquisition, there’s often plenty of room for negotiation, but make sure you look for a good fit. Think about which acquirer can help your company get into different markets, or how your product or service could bring something new to their existing customers. Companies are willing to pay more if they know there’s a real and lasting value in it for them.
Some business owners make the mistake of running their business with the notion that a certain company will immediately want to acquire it. Just like everything else in business, never make assumptions. It’s best to keep your options open and run your business without any expectations of who the perfect buyer would be in the future.
For many businesses, there comes a point when merging with a similar company can maximize revenue for both. Merging allows you to increase your market share and increase the value for your shareholders. It can also open up the opportunity for your business to enter a new market and develop new products while lowering operating costs.
This can also be a great stepping-stone to an exit, as you can slowly transition the management of your company. In some cases, merging can also allow you to retire and take on an advisory role, permitting you to gradually bow out, giving you time to ensure that your business and its employees are well cared for.
A highly desirable form of exit, the IPO has received a lot of attention over the years. If an IPO is your chosen route, it’s important to start planning for it right from the start. Taking a company to IPO can be expensive for the business, but it can also be hugely profitable.
Be aware though: Of the millions of companies in the U.S., only about 7,000 of them are public, and most of those were not started by entrepreneurs, but spun out from existing corporations. And while some IPOs quickly show success (LinkedIn), there are many that don’t (Facebook).
The aforementioned exit strategies are intentional and gradual moves that may be beneficial for both you and your company. Although these methods require long-term planning and a good deal of time, they usually pay off financially. Sometimes, though, an alternate approach may be pursued, either because a long-term growth strategy isn’t important, or out of necessity.
Run it dry
If you’re the sole owner and no one else has stock in the company, pay your debts off and then give yourself large salaries and bonuses until you’re ready to close up shop and retire. Sometimes this is more profitable than selling your business, and it provides you with the maximum financial benefit.
Liquidation simply involves selling off every piece of the company, big or small. Liquidating isn’t often the most profitable way to exit a business, but it is fast and simple. Any proceeds made from the liquidation are first used to pay off creditors, while the rest is divided among the shareholders. Most businesses don’t dream of the day they can liquidate their company; however, it can be a good contingency plan in an emergency or “everything must go” situation.
Planning your exit may seem overwhelming. It is actually a bit of a difficult topic to cover briefly because there are such a diversity of options and opinions on the issue. In the end, keep in mind that certain exit strategies work better for certain types of businesses. Which strategy you utilize is largely a matter of personal preference and practicality. If you’re not sure which option would work best for your business, consider discussing this with an experienced business mentor or legal services provider.