When is the last time you thought about your exit strategy? Instead many new venture creators become so caught up in the day-to-day grind or managing the overall direction of the business that they forget one of the most important pieces of success: exiting. As a new venture owner, planning out the eventual business’ succession to new owners or other liquidity events is the last thing on their mind, especially as a healthy, young entrepreneur. Unfortunately, in life there are surprises, priority changes, economy changes, in addition to a plethora of other potential blind sides. Setting up a potential exit strategy in the beginning not only provides some guidance as the firm grows but also eases the exit when the time comes. Not to say that the original exit strategy is the only option once the time comes, but having a flexible plan affords an owner freedom later. The exit strategy for the future depends on the entrepreneur’s personal goals as well as the type of business and the economy. Several potential liquidity events include: sale, merger, IPO, liquidation of assets, and bleeding the business.
Sale
Sale or acquisition is the most common option and involves finding another business or person that wants to buy.
Pros
-Choose the buyer
-Able to negotiate price
-Strategic value can multiply selling price
Cons
-Non-compete agreements can complicate life for future planned ventures
-Bad fit with buyer can lead to future failure
-Potential for bad appraisals
Merger
Two companies come together, establish each other’s value and then combine. Typically, shareholders receive shares in the new, larger company.
Pros
-Can allow owner to stay involved in business
-Business can go further than original owner imagined
-Shareholders can improve value with new, merged firm
Cons
-Since money is in shares many times, cash might be tied up
-Beware of bad fit with merger target
-Potential liabilities the new business might inherit
IPO
The flashiest option is selling the firm through the stock market.
Pros
-Biggest payout potential
-Attracts attention
Cons
-Only available to a small number of firms
-May have to reorganize firm, example: S-corps
-Detailed financial accounting
-Time consuming
-Expensive
Liquidation of Assets
Selling off the assets is an option. Sometimes enough is enough and closing the doors is the best option.
Pros
-Simple
Cons
-Usually the least monetary return
-Does not take advantage of the business’s intangibles
Bleeding the Business
Take a large salary, receive huge bonuses, and buy a company jet. While this option is frowned upon in public companies, as a private firm, bleeding a business is not a bad option and transforms it into a ‘lifestyle company’.
Pros
-Huge salaries are fun
-Personal amenities
-Take out money as needed
Cons
-Possible negative tax implications
-Could pull out money too early or fast and ruin the business for the long term
Summary
Overall, picking the correct exit strategy early on can leave you free to explore other options in the future as well as building a valuable business that can run day-to-day without constant effort on the part of the owner.
