When you start a new business, or as you develop strategies and plans to grow your existing business, you need to think about your business exit strategy. Are you trying to establish a lifestyle business that generates income without plans to sell it in the future, or are you building equity in a business that you may want to transform into cash? Depending on your goals, the type of business you choose and the way you grow it should be aligned with your end-game objectives.
If, one day, you plan to exit your business and transform your equity into cash through a sale, merger or IPO, you need to prepare for that every step along the way. You'll need to build value and equity in your company by creating unique products, services, relationships and distribution channels, building an intellectual property portfolio and expanding your customer base. To help, here is an overview of some business exit strategies for you to contemplate and potentially pursue.
The most common exit strategy for any business owner is to sell the business to someone else or to some other company. It entails a transaction that can be conducted between two private parties without all the government regulations and oversight that occurs with an IPO. A sale typically results in the seller of the company receiving cash in exchange for the company. The tricky part of any sale is valuing the company. Since most small businesses are privately held, the ultimate transaction price in a sale is sometimes more art than science. Make sure you get more than one appraisal of the business so that you have confidence that the price is right.
A merger is when two companies get together, establish a value on each company, and then combine the two to form one bigger company. In most mergers, the company shareholders receive stock in the bigger company which is presumably worth more than the stock held in each independent company. Therefore, be aware that in mergers, you may not actually receive cash for some time.
You can also sell your company via the stock market in an initial public offering or IPO. The good news is that you stand the chance to get the biggest dollar payout of any exit strategy. The bad news is that it is very expensive to obtain an IPO, and you can easily spend half-a-million dollars on attorney and accountant fees. In addition, there are a lot of restrictions to achieve liquidity through an IPO, so if your business is outside of the tech sector and has less than $50 million in revenues, we strongly advise you to consider a different strategy. Most important, you cannot control when the IPO markets are strong or weak so it is much harder to plan for an IPO for specific dates.
Another way you can achieve liquidity is to get bought-out by someone who comes in and takes over your business. You'll usually see this happen with small- to mid-size businesses that provide professional services such as insurance companies, CPA firms, law practices, and even distribution and manufacturing organizations.
A typical "buyer" would be a team or individual who is in the same line of work and who will take over your business on the basis of buying out your existing ownership. Remember, a deal like this is often tied to performance of the business at the time of the buyout and after you leave. Usually, you'll get a better deal if the acquiring company can pay upfront rather than doing a "leverage buyout" where they leverage the future cash of the business to pay off their debt to you.
Liquidation of assets
If you don't have any debts, you can also achieve liquidity by shutting down your business and selling the assets that you have. Of course, you'll need to find buyers who feel that your assets have value, and you'll have to negotiate a fair price for those assets that are not clearly identified in terms of a price point. With this kind of exit strategy, you are usually getting the smallest amount of money because you're just selling the raw assets and aligning your buyers with a price they're willing to pay.
If you want to sell your business for retirement funds in the future, take the time now to create an appropriate business exit strategy. Carefully structure your plan to see what liquidity is going to be for you. And down the road, you'll find that you've built a business that has value to others without you having to be there every day to run it.