You Need an Exit Strategy
While planning your new business, and in later growth stages, you ought to consider an exit strategy. From the original business plan onward, your business should always be aligned with end-game objectives that include succession planning.
Equity to Cash
You need to prepare every step of the way, if you plan to exit the company one day by turning equity into cash via a merger, sale, or IPO.
In such case, you must build equity and value through unique services and products, distribution channels and relationships, expanding your customer base, and building intellectual property.
Some business exit strategies including mergers and acquisitions:
A merger occurs when two companies get together, establish a value on each, and combine to form a single larger company.
In most mergers, shareholders receive stock in this larger company that is presumed to have a higher value than stock held in each independent company.
In mergers, real cash may not be received for quite some time.
Selling a Business
Selling the business to another company or individual is the most common exit strategy.
transaction occurs between two private parties, without need for government oversight and regulation, as occurs during an IPO.
Typically, the seller receives cash in exchange for the company.
The difficulty lies in valuing the company.
Since most small businesses are privately owned, the ultimate price estimation is more art than science.
To increase the seller’s confidence during negotiation, it is worthwhile to obtain an appraisal beforehand.
A going public (IPO) allows you to sell your company via the securities market.
It is likely to give you a larger payout than another exit strategy.
However, obtaining an IPO is very expensive, causing you to spend large sums on accountant and attorney fees.
There are also many restrictions to achieving liquidity through an IPO, and you can not control when
IPO markets will be weak or strong, making it very hard to plan an IPO for a specific date.
Getting bought out by someone who takes over your business is another way to achieve liquidity.
This often happens with small or medium sized businesses that provide professional services, such as accounting firms, law practices, and insurance companies, along with manufacturing and distribution organizations.
A team or individual from the same industry or profession would be a typical buyer. They take over the business based on buying out your existing ownership. Such a deal is often linked to performance by the business during the time of buyout and after you leave.
It is preferable if the acquiring company pays you upfront, rather than a “leverage buyout,” where future cash for the business is leveraged to pay off their debt to you.
Liquidation of Assets
If you have no debts, you can close down the business so as to achieve liquidity.
This means finding buyers who bank on the value of your assets, for which you will need to negotiate a fair price.
This exit strategy gives you the smallest amount of money, since you are simply selling raw assets, and aligning the sale according to what buyers are willing to pay.
So, Do You Have an Exit Strategy?
Very few budding business owners give it a thought, since it seems counter-intuitive.
An exit strategy is very important.