Developing an Exit Strategy
Often when people start a business, they are immediately thinking about an exit strategy and what it will be like to sell. Why would you want to do that? You are doing something you love to do and it will be a lot of fun, right? True, but there are several reasons to think about an exit strategy when you start a business.
- Outside Investors and You Want a Return on Your Investment: You put money in your business to start with, and if you raised venture capital, those investors want their money back at some point. Their investment is not like a normal loan, as they don’t get paid until you sell. Waiting five years is a long time to wait for a payoff.
- You Love Beginning over Daily Operations: Many entrepreneurs start a business for the thrill of taking an idea and making it into a money making operation. However, they are often bored when it comes time for daily operations and maintenance.
So how do you plan for an exit strategy? What are the ways you can sell your business and get your money and that of your investors back out of it? Here are the five most common and profitable methods.
Mergers and Acquisitions
A merger or acquisition happens when you are purchased by a similar company that has parallel functions in your industry. Sometimes they even have some overlap with your company but want your technology, customer base, unique services, a product you may have developed, or a combination of the above.
This is a win-win. You get a clean exit from your company, your investors get a return on their investment, and the purchasing entity gets to expand their operations or add new products or services. This is one of the most common types of exit and business purchase methods.
This happens rarely but is when you offer public stock in your company at its market valuation. This stock can be purchased by individuals, other companies, or by employees. You have a choice to stay on as a management member of the company and run things even though you no longer own the company, or exit and start something else.
Often a founder does stay on during a portion of this transition process even if they are looking for an exit, as stock purchasers are often looking at people behind the business as well as the business itself. For a faster exit in this case, a CEO and other management should be appointed ahead of time, giving the founder freedom to leave sooner.
Sell to an Individual
This is a simple one, and common. You simply sell your business to another individual who wants to run it. Most often, this person is more interested in day to day operations than the startup process.
Most of the time, you should vet the buyer for the proper skills and business acumen to run the business successfully. There are several ways you can structure a purchase deal, including seller financing, earn-outs based on business performance, or escrow payments based on you performing certain services before you get the final payment for the business.
There are several steps for preparing your business for sale and hiring a business broker and other professionals can ensure all the steps are completed correctly.
Stay a Minority Partner
Instead of selling your business outright, you can sell a portion of it and stay on as a minority partner. In this case, the new owner runs the business, and you simply collect a portion of the profits in exchange for occasional work and your expertise. You can even retain most or all of your business, and simply hire someone to manage it for you.
While this “cash cow” type of approach can work well, if things go wrong you can get sucked back into operations to keep the company profitable. However, for some business types, this can work well.
Liquidate and Close
The last method is probably the least desirable but can become necessary from time to time. If a business went well at first but has started to lose money, your best option may be to liquidate your assets and close.
If there is no viable buyer for the overall business at hand, sometimes this is the best way to recover your investment and free yourself up to move on to something else.
Do you have questions about your exit strategy, or are you ready to sell your business? Contact us here at Rogerson Business Services to learn how we can help you.