If the answer is “no,” you are rolling the dice on your largest paycheck! Building company value through marketing, organizational development, R&D, and business development are vitally important; but if you do not begin with the exit in mind, you may be building towards the wrong end – a costly mistake.
A report by UBS Global Wealth Management found that nearly half of business owners who wanted to sell their businesses or otherwise exit in the next five years did not have an exit strategy.
If you are busy running your business and would like to understand your exit options, talk to a CFO. CFOShare works with our clients to create a solid exit strategy business plan that maximizes the company’s value and achieves their financial goals.
Why Should You Have an Exit Strategy for Your Business?
With a well-thought-out exit strategy, business owners can rest assured they are working toward a good outcome for themselves, their employees, their business partners, and their investors. An exit strategy business plan can provide you the best outcome, helping you achieve your personal goals without excessive effort or a suboptimal business structure. An exit strategy business plan will also bolster your risk planning by providing you a pre-planned path to step out of the business in case of economic downtown, unexpected health issues, or other unforeseen circumstances.
Consider an anonymous business owner: Frank, a startup founder for an internet of things (IoT) company. For years, Frank works hard to grow his business, negotiating deals with distributors like Best Buy and Amazon, hiring good marketing talent, and investing in R&D. Finally, at year 5 Frank approaches Google with a pitch to buy his business, only to find out that his gross margins are too low to be considered. Frank spends the next 2 years renegotiating his supply chain, changing manufacturers and working out quality defects, before he finally achieves the 50% margins Google wants. By then, Google has bought one of his competitors instead, and Frank does not have a buyer for his business.
Had Frank planned his exit strategy early on, he could have identified Google’s target requirements and invested in R&D or supply chain operations years in advance to avoid unnecessary struggle and delays. By articulating an exit strategy in your business plan, you can have the confidence that your business growth is building a path towards personal profit. There are other reasons to have a solid exit strategy. Business owners, with a clear plan for exiting their company, can:
- Protect what you worked hard to build
- Increase the company’s future worth
- Generate income for your retirement or an unexpected disability
- Create a legacy and steady income for your heirs
- Reduce or defer the tax liability for your spouse and family
- Accelerate future business growth
- Provide entrance into new markets
- Consider one or more succession plans for the company’s founder or CEO
What Are the Different Types of Exit Strategies for Your Business?
The best exit strategy for your organization will depend on several variables, including the size and type of business, the current health of the company, your personal circumstances and market conditions. You must consider what makes the most sense for you and your family, employees, business partners and investors. What may be a perfect small business exit strategy for a sole proprietor may not be good for a larger company with co-founders, multiple shareholders and investors. Always to build your exit strategy into your strategic business forecast to verify your exit is attainable.
Exit strategies, in order of what is generally (although not always) most financially valuable to least valuable, are:
- Initial Public Offering (IPO) – By taking your company public and selling shares, you tap into the largest financial pool in the world, which can be very profitable. However, because of Sarbanes-Oxley and other regulations, an IPO is not realistic for most small businesses.
- Sale or merger with strategic acquirer – Merging into a competitor, customer, vendor, or private equity roll-up creates a lot of value, which means the buyer is willing to pay a higher price. Strategic sales often begin with partnerships years in advance, so early planning and business development is the key to this exit.
- Sell company to an outside investor – The entire business, assets and reputation, is valued and sold at a specified price. For small companies this is often done through a business broker or investment banker for a commission. A business that is profitable with books in good order should sell relatively quickly, but more often than not companies are not prepared for sale when they first approach a broker. A broker will make finding a buyer easier, but they may turn you away if your financials are not in good shape.
- Management Buyout (MBO or LBO) – You may decide to sell the business to the management team or select employees. This is known as a Management Buyout (MBO) or Leveraged Buyout (LBO) if the company takes on debt to perform the buyout. An MBO can enhance motivation and loyalty and allow the company to maintain its culture. One caveat is that the success of this venture will depend on how well these former employees can acclimate to being company owners. It is not uncommon for inexperienced managers to run the company into the ground after the former owner departs.
- Employee Ownership through an ESOP or Workers Cooperative – You can sell the company to all its employees through an ESOP or workers cooperative. These are democratic ownership structures designed to create better employees by having them buy into a stake of the business. Banks will loan money to the ESOP or coop to buy your stake, then future profits will pay off the loan. These structures create entrepreneurs out of your employees, often motivating everyone to work harder.
- Bequeath Business to Family – This provides income for your heirs and becomes your legacy. Having a family member take over creates a smoother transition, and you are able to maintain an advisory role. However, this may create family tension, and members may not have the desire or the skill to take over the family business. Clients and investors may not approve of the new direction and management.
- Liquidation – Liquidation is closing the doors of your business and selling off the assets. A liquidation exit strategy can be handled quickly, as it only involves the sale of equipment, real estate, land and inventory. The downside is that a liquidation sale typically has a low return on the original investment. The company’s customer database and business relationships are lost. If money is owed to creditors, they must first be paid from sale proceeds. The advantage of a liquidation is it is very fast; therefore it is typically only used in distress or when there are no buyers. Keep in mind there may be better options than a fast liquidation in a financial distressed situation, such as a business turnaround or restructuring the company’s debt.
How Do You Begin Developing an Exit Strategy?
The first step to create your exit strategy is to review your company’s finances (and your personal finances) so you can get an accurate business valuation as well as a complete picture of your financial needs.
The next step is to ask yourself these key questions:
- What are your goals? Are you interested in maximizing your profit or is the company’s longevity also important?
- What is your time frame? The more flexible you are, the better a position you’re in for negotiating a sale.
- What are your intentions for the company? Are you OK with selling to a larger business, or do you want to preserve its culture and size?
- What are your long-range plans? You may just want to get out and break even, or you may wish to retire from the proceeds or start a new company.
Your answers to those questions will give you a better idea as to the best type of exit strategy for your situation.
CFOShare Helps Entrepreneurs Plan Their Exit Strategy
With our years of expertise, we can help you analyze your company’s financial situation to create an exit strategy that helps you maximize the value of your business and achieve your financial goals. Contact us today for a free consultation.