Do You Have an Exit Strategy? Prepare Your Business for a Sale, Merger or IPO

By on July 25, 2018

When you start a new business or continue to develop strategies and plans to grow your existing business, you need to think about a business exit strategy. Depending on your goals, the type of business you choose and the way you grow it should be aligned with those end-game objectives. Some people begin a business with the dream of lasting for generations, however sometimes life gets in the way of those dreams. Others simply want to design essential products or services to sell off and walk away. Either way, you want to be prepared and get the most out of your business – whether you intended to sell or not – with a carefully planned exit strategy.

Reasons for Having an Exit Strategy

Are you trying to establish a business that generates income without plans to sell it in the future, or are you trying build equity in a business which can be transform into cash? Here are a few reasons why you may want to design an exit strategy — even if you have no immediate intention of selling your company:

  • A health or family crisis can take time away from your focus on business operation
  • An economic shift or recession may negatively impact your business finances, operations or workforce
  • You want options beyond selling to a competitor at a low value
  • You want to retire at some point and cash-in on the value of your company
  • Larger companies may offer to acquire or merge with your company to gain a larger market share and buying power
  • Technology trends shifted and your business is unable to transition to mobile devices or modern distribution platforms
  • Product trends change leaving you with lower revenues.
  • You’ve simply grown tired of the daily grind, managing a mid-sized company, and want a change

Typical Business Exit Strategies

If you plan to exit your business and transform your equity into cash through a sale, merger or IPO, you need to prepare along the way. You will need to build value and equity in your company by creating unique products, services, relationships and distribution channels, build an intellectual property portfolio and expand your customer base. To help, here is an overview of some business exit strategies:

Selling Your Business

The most common and simplest exit strategy for any business owner is to sell the business to another owner or 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 (see below). However, if you want to stay involved with the business for years to come, you may not want to consider a business sale.

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. Make sure you work with your financial advisor and get more than one appraisal of the business so that you can sell your business with confidence.

IPO

Most small business owners do not consider taking their company public to a stock exchange. The initial public offering or IPO might seem like a good way to grow your business to eventually cash in, however, just because you’re publicly held does not mean anyone will want to buy your stock. Plus, setting up an IPO can cost hundreds of thousands of dollars to facilitate and requires you to report detailed financials. The good news is that once you go public, you could earn a huge dollar payout of any exit strategy.

An IPO should be considered by small businesses backed by venture capital or offering innovative, cutting-edge products which people HAVE to buy. If your business is outside of the tech sector and has less than $30-50 million in revenues, you may want to consider a different exit strategy.

Mergers

A merger is a great way to plan an exit, because it can significantly increase your business’ value. For example, two $15 million businesses that join forces and lower overhead costs can expand into a $30 million business much more rapidly. At that point, the company shareholders receive stock in the bigger company which is presumably worth more than the stock held in each independent company, however, you may not actually receive cash for some time.

Acquisitions

Another way you can achieve liquidity is to get bought-out by someone who comes in and takes over your business. These takeovers often happen with small to midsize businesses – particularly among provide professional service providers such as insurance companies, CPA practice, distribution and manufacturing organizations, and law fims.

A typical “buyer” would be an acquisitions team or individual who is in the same line of business and who will take over on the basis of buying out your existing ownership but keeping operations going. How much you earn upon exiting the company is often tied to business performance at the time of the buyout. And whenever possible look for cash offers in which the acquiring company pays upfront rather leveraging the future cash of the business to pay off their debt to you in a “leverage buyout” .

Carefully Plan an Exit Strategy for Your Business

If you want to sell your business for retirement funds in the future, take the time now to create an appropriate business exit strategy. It takes more than placing a listing your business or assets online. You will want to consult your trusted financial advisor and hire a professional broker who understands business operations, valuations, regulations, and contract negotiations.

Don’t wait to plan your exit strategy until an offer comes in – you may not have a pulse on your best options and valuation.  Speak with some trusted experts to design an exit plan which supports your future life goals.

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About Harold Goldman

I am the founder of FinancialSafetyNet.org, and a Retirement Planning and Long-Term Care specialist. I am also the President of Emes Insurance Services, Inc., a Murrieta based insurance agency designed to help people with Retirement Planning and funding for College. I believe in educating my clients to become financially competent in an effort to develop plans for guaranteed income, protection against loss and tax-advantaged growth. To contact me Call (844)-376-2265

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