Exit Plan Options
Business owners are typically motivated by a desire to establish and operate their firms. Exiting is often furthest from their mind. However, a successful exit requires advance planning and a customized exit strategy to ensure a smooth transfer of ownership and to enable the business seller to recoup investment dollars.
Five of the most common methods of exit used by business owners follow here.
(1) Lifestyle Company Exit – Rather than reinvest revenue in the company, some business owners prefer to drain the enterprise of all profits on a daily basis. The owner of a Lifestyle Company may take a huge salary, reward himself with large bonuses and/or issue a special class of shares that only he owns which gives him ten times the dividends paid to other shareholders. While these tactics are universally condemned in the public sector, they are less so in the private sector.
Rather than reinvesting funds in the growing business, the owner of a Lifestyle Company uses the revenue produced by the company for personal living expenses. Withdrawing too much money from the business can be detrimental to the growth of the business which requires revenue to expand. This practice can also be detrimental to operations. In addition, when the owner takes an excessive amount of money out of the business it may not sit well with investors in the company.
Owners of a Lifestyle Company should reduce reliance on external investors and strengthen the firm so that funds for operating expenses will be available in the business
(2) The Liquidation Exit – This method is simply to call it quits. Entrepreneurs don’t typically build a business with the idea of liquidating it in the end, however it happens. When a business is liquidated, all assets are used to pay creditors. The remaining value – if there is any – is divided among the shareholders if there are shareholders.
(3) Friendly Buyer Exit
If the business owner is emotionally attached to the company, transferring ownership to someone they know can be a comfortable option. Potential Buyers may be family members, customers, employees, colleagues. Often in this type of exit, the owner finances part of the sale and the Buyer pays the owner back over time. Transferring ownership to someone who shares the owner’s zeal and values the company legacy is significantly easier than going through a dissolution process. Transferring ownership to a family member may be the purest “Friendly Buyout,” but it can also be fraught with complications relative to family dynamics.
(4) Acquisition Exit
A business acquisition is the most common exit strategy. In a business acquisition, the owner transfers ownership of the company to a Buyer for a negotiated price. After the sale, the former owner (seller) may invest proceeds from the sale, gift amounts to others, make philanthropic donations, purchase another business, or any number of things. To select the right Buyer, consider a strategic fit. Does the potential Buyer what to expand into the market the owner’s company already serve, or offer a new product to their existing client base, or add on critical capabilities that the owner’s company offers? There can be a drawback to an acquisition. If the owner’s firm and the Buyer’s firm are incompatible, the new company they form together can self-destruct.
(5) The IPO Exit
Despite the fact that there are millions of companies in the U.S., only about 7,000 are public. The IPO is relatively rare and difficult. Many of the largest public enterprises began as spin-offs from private companies rather than as the result of entrepreneurial initiative. As with other exit strategies, there are plusses and minuses to IPOs.
If the investors have a history of taking companies public, an IPO may be a viable choice. Preparation for an IPO requires a large investment of time and money as the owner convinces investors of the value of the stock. Unlike an acquisition where the owner and Buyer endeavor to achieve a good fit, with the IPO, Wall Street needs to see the attractiveness of the company. If the company has capable investors, the owner may succeed with an IPO. But trusting in an IPO is a leap of faith for a bootstrapped business owner.