Developing an Exit Strategy and why it’s important
Often, when people start a business, they think 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? That is true, but there are several reasons to consider an exit strategy when starting a business.
- Outside Investors and You Want a Return on Your Investment: You put money in your business to start with, and if you raise venture capital, those investors want their money back at some point. Their investment is not like a normal loan; you both receive payment only after you sell. Waiting five years or more 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.
Merger and Acquisitions
A Merger or Acquisition happens when you are purchased by a similar company with parallel functions in your industry. Sometimes, they even have some overlap with your company but want your technology, customer base, unique services, a unique product for your industry you were able to invent, or a combination of the above.
This is a win-win situation. You get a clean exit from your company, your investors get a return on their investment, and the purchasing entity can expand its operations or add new products or services. It is one of the most common exit and business purchase methods.
Initial Public Offering (IPO)
This happens rarely but is when you offer public stock in your company at its market valuation. Individuals, other companies, or employees can purchase the stock; 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 stays 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 and the business itself. For a faster exit in this case, a CEO and other management should be appointed ahead of time, giving the founder the 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. This person is often 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 your 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 to ensure completing all the steps correctly for a successful sale.
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 occasionally become necessary. If a business starts well but then starts losing money, the best option may be to liquidate its 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.
Questions about Developing an Exit Strategy?
Do you have questions about developing 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.
