For many entrepreneurs, starting a business isn’t just a means to earning a living. It’s also a passion project to be nurtured and developed throughout the years, sometimes with a finite end. As a result, founders often neglect to consider their exit strategies when they’re getting started.
An exit strategy enables the owner/investor to extract his or her money from a business venture. While it’s great to go into a business opportunity with high expectations, failing to create an exit strategy may leave you at a serious disadvantage. Not only do exit strategies help ensure you see a return on investment, but they also reassure nervous financiers that their money is in good hands. In the long run, making your business more appealing to potential buyers will benefit your company whether or not you decide to sell.
Before you select the ideal exit strategy for your company, it’s important to understand the benefits and drawbacks of each option. Here are some of the most popular exit strategies employed by modern small business owners:
Acquisition refers to a process by which one business pays a certain sum of money to purchase another. Depending on the specifics of the deal, the new company may appoint its own management team to run parts—or all—of the acquired company, or ask that the current employees remain on board to handle daily operations.
Of course, attracting potential buyers for your business is easier said than done. The goal is to convince the acquirer that your business is worth at least the price you’re willing to live with. The most important thing to do, therefore, is to make sure your business has assets that would be valuable to other companies. These assets could be in the form of employees, intellectual property, physical assets, brand equity or a combination of two or more.
Although finding an acquiring company can be challenging, this exit strategy can also be incredibly lucrative for owners and investors. For example, when Apple acquired Beats Music and Beats Electronics for $3 billion in 2014, the owners of Beats made out with an impressive sum.
Although all entrepreneurs want their businesses to be a success story, some companies will inevitably prove less profitable.
As a result, owners may have to consider liquidation, or the process by which a company shuts down and sells off assets. Many failing businesses opt to liquidate rather than seek out additional financing that could lead to further debt. This was the case for book selling giant Borders, which filed for bankruptcy protection in February 2011 before liquidating some of its assets to rival Barnes & Noble and closing its doors for good.
Liquidation is not a good exit strategy for every business. For investors to extract a significant quantity of cash, the business must possess a large amount of assets and property. You should keep in mind that any cash obtained through the liquidation process must be used to pay off creditors before the owners can take their shares.
Family and Employee Sales
Can’t bear to see a stranger take over the company that is your pride and joy? Business owners looking to cash out may want to consider selling to a trusted family member or current employee. Not only does this person acquire an established business, but the owner can also rest assured knowing that employee jobs may be protected and the company’s legacy maintained.
Of course, owners hoping to reclaim their investments through family or employee sales should plan ahead. In fact, some companies offer shares to workers as part of their compensation packages. If you choose to sell to a family member or current employee, be sure that the price you offer reflects fair market value, or else you could be assessed a gift tax.
Many business owners dream of one day going public with their companies. IPO stands for “initial public offering,” and refers to the first sale of a company’s stock to the general public. Although going public can be challenging, companies stand to make tremendous financial gains.
GoDaddy, the web hosting service known for its Super Bowl ads, experienced a significant jump in sales during its market debut. In fact, shares rose an impressive 30% from their IPO price.
As exit strategies go, IPOs are one of the most difficult, and only a few thousand companies achieve this milestone each year. Furthermore, depending on the way the IPO is structured, investors may not initially be able to withdraw all their capital. Lock-up agreements, which prevent insiders from selling stock for a given period of time after the IPO is complete, are a key component of many IPOs.
Additionally, companies that opt to go public may find themselves dealing with increased public and IRS scrutiny. For this reason, a number of successful companies, like IKEA, have opted to remain privately held.
If you are interested in learning more about how to run your business with an exit strategy in mind, read how to plan an exit strategy.