Whether you are a seasoned entrepreneur or you are just thinking about the possibility of starting or purchasing your own business, it is vital that you understand the concept of an “exit strategy.”
In terms of business, an exit strategy is your plan for leaving the company you own. Ideally you will be exiting because you have achieved all your goals and are ready to move on, preferably with a nice profit. You may also need to exit the business at some point due to negative complications or issues. Either way, you need to have a plan in place for moving on if you want to get the most out of your investment and your time spent owning and operating the company.
In order to orchestrate a successful business exit strategy, you need to start strategizing very early. In fact, it is best for you to develop an exit strategy from the very inception of your business. The manner in which you proceed to build your business may be significantly impacted by future exit goals.
In today’s blog we have detailed six potential exit strategies you could plan to utilize as a means of leaving your company behind. Keep in mind that every business is unique and you should always consult with a knowledgeable corporate/M&A attorney regarding what types of exit strategies could be viable for your specific circumstances and how to go about preparing for and executing the strategy you choose.
A winding down exit strategy involves your company permanently shutting down and selling off all of its assets. Your company will cease to exist following its liquidation, which allows you to exit and hopefully make money off the sale of those assets, but it also means your employees will be out of a job. More often than not this is the strategy used when there aren’t other great options available to the owner (e.g., failing to adequately plan prior to the point of exit, financial troubles, etc.) and yields the lowest value to the owners (and possibly even negative value).
Related Party Buyout
There are a number of ways you can seek to sell your business to other buyers. One such way is to execute some sort of buyout with some related parties. A buyout could come in many forms, such as having business partners purchase your share of the company, or selling the company to an existing employee. In all cases, a buyout will involve an interested party purchasing your stake in the ownership of the company, allowing you to exit on terms to which parties agree. Depending on the circumstances of the parties, a successful related party buyout might take several years of advance planning, particularly when the business is valuable and/or the purchasing parties lack financial means to pay sufficient value.
Just like selling your home, you could choose to sell your business on the open market. Once you’ve made the decision to exit your business without shutting it down entirely, you can shop it to potential buyers. Ideally, this will give you a significant amount of control in that you can freely choose to accept or reject offers and terms. This means you can exit your business under your own terms and potentially try to ensure that the new owner maintains the legacy you built. For this sort of acquisition, the business owner must develop the proper processes and procedures in order for the business to continue (and thrive) without his/her participation. Business brokers may be useful to a seller in these situations to help them find interested buyers.
You could also look to exit your business through a strategic acquisition where another company (possibly a competitor, supplier, customer, etc.) will look to acquire your company and either operate it separately or absorb it into its own operations. Some strategic M&As may require the owner to stay on and help with the transition, but everything is negotiable. These transactions tend to yield the greatest value to a business owner (i.e., largest “multiples”), partly because the buyer can often realize certain efficiencies upon acquiring the business that other buyers may not be able to realize. Investment bankers are often useful to sellers in these situations by assisting them with finding good buyers.
Initial Public Offering (IPO)
Many startup companies dream of achieving an Initial Public Offering and taking their company public for a hefty sum of money. This is really only a viable exit strategy for large companies, and it can be extremely difficult to achieve. Additionally, there may be complications in your ability to withdraw your interest in the company following the IPO. However, there are some circumstances where an IPO could serve as an extremely profitable exit strategy. Keep in mind, however, that publicly-traded companies are subject to significant regulations and scrutiny. The cost of registering and maintaining registration (e.g., securities filings with SEC, Sarbanes-Oxley compliance, accounting fees, etc.) is significant. That’s why, in my humble opinion, I think a strategic acquisition is sometimes a better result for the owners of the target company.
Finally, you may elect to pass your business on to a loved one. This is not always as easy as it sounds, but many business owners prefer to have their legacy live on through their loved ones owning and operating their company. Family succession takes a significant amount of planning, but it does allow you to fully groom your replacement and likely gives you much more control over the future direction of your company.
If you are planning on buying or starting a business, or if you already own a business, the sooner your start planning your exit strategy the more smoothly it will go. Contact the Doida Law Group today to learn how we can help.