Exit Strategies at a Glance
Often, entrepreneurs are so caught up in the idea of starting and growing a business that they overlook one of the most important aspects of being a business owner: the exit strategy. “Exit strategy” simply refers to the idea of selling or otherwise transferring your interest in the business to someone else, thereby “exiting” you from the company.
Having an exit strategy plan in place from the beginning is important because it allows you to grow and operate the business with that specific end-goal in mind. Some strategies require particular corporate structuring (e.g., you can’t IPO an S-Corp). Others may not require a particular structure but may need significant conversation and planning to ensure a smooth transition (e.g., passing on a family business to the second generation).
There are a variety of ways a successful exit can be achieved, but the appropriate method depends on what your end-goals are. The following are some brief examples of different strategies.
While certainly not the most news-worthy, liquidation is one of the quickest and easiest exit strategies for a business owner. Liquidation is the selling of assets, followed by the closing of the business. The process for liquidating is most often set out in the company’s operating agreement. During liquidation, the company will be required to pay off its debts prior to distributing any proceeds to shareholders. This may sometimes mean that there is nothing left at the end to distribute to owners of the company.
Liquidation will likely not provide the biggest return on investment and it may sever relationships with employees, partners, clients, customers or anyone else that has been involved with the business.
Many entrepreneurs want to keep their business in the family. This requires making plans for transitioning the company to a child or relative at some point in the future. While this may seem like an attractive option given the ability to groom successors over a period of time, only approximately 30% of family owned businesses make it into the second generation, and only 13% make it into the third generation.
One of the main considerations if contemplating this option is to think about whether the family member who will inherit the business is actually interested (and capable) of running the business, or would he or she benefit more from simply inheriting the cash that is produced when selling the business to another interested, albeit nonfamilial, party.
Merger or Acquisition
Probably the most iconic image of an “exit strategy” is a merger or acquisition. A merger is the combining of two previously separate companies into one, often retaining at least some of the employees and other goodwill items, like customer relationships and branding. An acquisition, on the other hand, is the outright buying and subsuming of a target company. An acquisition often results in the acquirer “trimming the fat,” which means that it takes control of all of the valuable assets, while cutting many of the expenses, such as employees, office space, and other overhead costs. As the owner of a target company, these are all things to keep in mind when preparing to sell your company.
Which exit strategy option is best?
As mentioned above, the best exit strategy will depend on a variety of factors, including your company’s individual corporate and financial situation, as well as your goals as the owner and seller. Each exit strategy requires different preparation steps.
If you are currently looking to exit from your business, or would like counseling on how to best prepare for a future sale of the business, contact us.