When you first begin a new business, you develop strategies and plan ways to grow your business, but did you realize how important having an exit strategy is? Almost every business owner will want or need to sell their business at some point, for any number of reasons. You’ve started your business or want to start a business because you want to plan for your future right? Don’t forget there may be a business sale in that future and having a business exit strategy is never a waste of time or effort. Depending on your goals, the type of business you choose and the way you grow it should be aligned with your end-game objectives.
Every step along the way, you should plan for a time when you may need or want to exit your business and liquidate your equity through a sale, merger or IPO. You’ll want to build value and equity in your business by selling innovative products and services, developing relationships and distribution channels and expanding your customer base. To assist you, below are of some types of business exit strategies for you to consider and potentially utilize.
Selling your business is the most common exit strategy for any business owner. Business owners often know they will sell their business when it is time to retire but they forget to think about having to sell quickly. An illness or death is just two of the reasons an owner might have to sell quickly and soon than expected. Keeping accurate and complete business records along the way helps to ensure a smooth and quick sell no matter when the time comes to sell your business. When it is time to sell your business, the trickiest part of any sale is valuing the company. Since many small businesses are privately owned, determining the final sale price in a sale is typically more of an art form than science. Make sure you get a few appraisals of the business so that you can average them to find the right asking price.
A merger is two companies getting together, establishing the value of each company and merging the two to form one larger company. In most mergers, the company shareholders receive stock in the bigger company which is usually worth more than the stock in each independent company. If you decide to merge your company with another upon retirement, you will no longer have to work the business and receive a share of profits by retaining stock in the new company. Just be aware that in mergers, you may not actually receive money from your stocks until a later date.
Selling your business in the stock market through an initial public offering is called an IPO. With an IPO, business sellers often get the biggest payout of any other exit strategy. Adversely, it is very expensive to obtain an IPO, business owners easily spend a half million dollars on attorney and accountant fees alone. In addition, there are a lot of restrictions to liquidity via an IPO, so if your business is not in the technology sector or has less than $50 million in revenues, you should strongly consider a different exit strategy. It is also important to remember that the strength and weakness in IPO markets are difficult to predict, therefore much harder to plan ahead for.
Similar to a private sale is a buyout where a team or individual, in the same line of work, buys you out and takes over your business. This is typical with small to medium sized businesses that provide professional services in industries like insurance, accounting firms, law firm distribution and manufacturing companies.
A buyout is often tied to performance of the business at the time of the buyout as well as after you exit. Generally, you’ll get a far better deal if the buyout person or company can pay you upfront rather than agreeing to a “leverage buyout” where they use the future revenues of the business over time to pay off their debt to you.
If your business is debt-free, you can liquidate your assets by closing your business and selling off the assets. The challenge in this is finding buyers who feel that your assets have value, and you’ll have to negotiate to get a fair price. With this type of business exit strategy, you will likely receive the least amount of money for your exit. Asset liquidation is often used by business owners who need to sell quickly for personal reasons.
If you are thinking of buying a business or currently own a business, part of having an exit strategy is working with a professional business broker. You never know when life will throw you a curve ball and having a broker at your fingertips, who already knows you and your business, will make it all much easier to deal with.