You may have a solid business plan that details everything you need to do to grow your business. But have you planned what you’ll do if things don’t work out, or if you just want out? It’s essential to have an exit plan because it can guide you in the unfortunate event that you may need to close up shop.
Scenarios when you’ll be happy you have an exit plan:
- Serious disagreement with your co-founder that affects the business’s operations
- If you want to retire and sell the business or pass it on to your children
- When a more prominent company wants to buy your business
- When your partner(s) wants to buy your share of the business
Without a detailed exit plan in place, you and your partners may end up in court just to reach an agreement. This article will guide you through the different exit strategies available, including alternative exit strategies you can try if the traditional routes aren’t ideal for your business.
The Usual Exit Strategies
- Initial Public Offering (IPO)
IPOs gained popularity among startups during the last couple of years, partly because of famous startups like Facebook who earned big after going public. An IPO allows you to sell a part of your company through shares in the stock market. In this setup, you and your team will still work for the company, but you can now sell some of the stocks or portion of the company that you still own in exchange for cash.
Business will continue as usual, except for the part where a portion of your stocks are traded publicly and that there may be pressure from investors to grow profits so they can get a good return on investment for buying your shares. You might think this exit strategy has no benefit, but it’s a proven way to free up capital to grow the business or pay off your initial investors, as in the case with many startups funded by VC money.
eDreams Odiego announced its IPO at € 10.25 per share, making the travel firm’s market value to € 1.1 billion last April of 2014. The company sold almost 5 million shares, while their shareholders sold a total of 31.8 million shares. The IPO allowed eDreams Odiego to raise a lot of capital, while their shareholders recouped their initial investment to the travel firm.
A big payoff looks good, but it comes with a significant risk and a lot of preparation. Businesses planning an IPO need to consult underwriters to get their company’s valuation, and pay about $100,000 in fees—all with no guarantee of a big payout during their IPO launch.
- Mergers and Acquisitions (M&A)
A merger is a process when two businesses combine to form one single entity, usually for the sake of sharing capital, talent, and other resources. An acquisition occurs when a large company buys a smaller business for a specific amount of money or stock shares.
Both types of deals are customized on a case by case basis, depending on the financial standing and needs of both businesses. For instance, the acquiring company may require you to keep running the business you’re selling for a few years, or they may assign a new management team immediately.
M&As are easier than IPOs and in some cases, you can immediately hand-off the management of daily operations to the acquiring company so you can retire. You’ll need a good team of negotiators if you want to achieve your goal in an M&A deal. The value of your assets, talent, intellectual property, products, and brand equity will also play a huge role in determining what you can get out of the deal.
Conduct a thorough background check on the company that will merge with or acquire your business to ensure they can pay you, and that they won’t just run your business to the ground when you’re gone.
Microsoft’s acquisition of LinkedIn for $26.2 billion is an excellent example of a profitable acquisition, but don’t let this example fool you into thinking acquisitions are reserved for the big leagues. Clorox bought Burt’s Bees, a small company based in North Carolina, for $900+ million back in 2007.
- Management Buy Out (MBO)
Your business partners or the company’s management team may buy out the business from you. In this method, they will pool their resources to acquire the business through some combination of business loans, assets, and private equity investment.
The best part of this exit strategy is that it provides an immediate payout to the owner while avoiding the lengthy transition process in M&As. You can also rest easy knowing that your business is in the hands of an established team that’s already well-versed in the company’s operations.
- Transfer to Family
Passing your business to your family is one of the simplest exit strategies around. You can either pass it on to them as an inheritance or transfer a portion of the business early to avoid a considerable gift tax. Talk to a licensed financial professional to review your options.
Your children will make good owners if they grew up watching you manage the business, and the company can continue with minimal disruption. With this option, you can continue to serve as a paid consultant, in case you haven’t saved enough for retirement, or you just want to continue working.
One famous example of this set-up is Nike. Phil Knight, Nike’s Co-Founder announced that his son will continue their family’s legacy after he left as the company’s Chairman in 2016.
Alternative Exit Strategies
Do any of the exit strategies above look like a good fit for your business? If not, the ideas below may be a better fit for your situation.
- Pay Yourself
Take out as much money as you can from the business every year, careful just to take enough, so the business doesn’t go under. This strategy only works when the following conditions are met:
- Your business isn’t a public company
- The business’s operation don’t require a lot of manpower, or supervision on your part
- You’re not accountable to a board or a set of shareholders with financial interests in your company.
Of course, getting the funds out of your business in this way doesn’t yield the best returns when compared to an acquisition or an IPO, but it requires little effort on your part. You also need to consult a financial advisor or accountant to see how this will impact your income tax. Another strategy you can try is investing the pay-out money in different P2P platforms with an option to defer taxes on your earnings, or funnel part of the money to a 401K account to minimize the taxes you have to pay immediately.
- Employee Buy Out (ESOP)
An Employee Share Ownership Plan (ESOP) gives your employees the option to buy shares of your company. Using ESOP as an exit strategy minimizes your role in running the business while gaining access to liquid funds through the exclusive sale of shares to employees.
Think of an ESOP like an IPO, but instead, the stocks will only be offered to the people you currently employ. This exclusivity protects your business from the pressures a publicly traded company experiences, such as pressure from investors to scale operations or grow profits. Your employees can preserve the current company culture and avoid investment companies from meddling with company operations.
Not the best approach, but it’s one of the few options available to poor performing businesses. This involves shutting down operations and selling all remaining assets, such as machinery and inventory to pay off any creditors and investors before you can take your share of the proceeds.
Many businesses shut down instead of securing additional funding to avoid debt. One such example is Borders Books, a bookstore that sold of its assets to Barnes and Noble before closing down.
Not Just About You
Remember that this decision not only impacts you but the people you employ and your business partners, too. Consider the options above if you want out of your business, but don’t take action until you consult your business partners and investors. Everyone in your team worked hard to make it to where you are today, so consider their needs as well.
About the Author:
Charley Mendoza is a freelance writer covering business, personal finance, careers, and personal development. She has written for HuffingtonPost, Tuts+, JLL Real Views, and more publications. Visit her website at FreelanceWriterCharley.com