Some business owners start a business with the intention of staying small, and working the business forever, and maybe even eventually passing it on to their offspring. Others go into business with the intention of building a valuable asset that can eventually be sold to the highest bidder.
Regardless of original intentions, all business owners should develop an exit strategy. The specifics of the strategy will certainly depend on the objectives of the parties involved, but not having one at all is not a smart idea.
So, what should business owners consider when planning an exit strategy?
Plan Ahead. Way Ahead.
The further in advance a business owner begins to plan out their exit strategy, the more successful it is likely to be. Many of the steps necessary to make a profitable exit are the same ones necessary to run a successful business, so some business owners may have already completed a few of the necessary steps, without even realizing it.
These steps include things like ironing the bugs out of the business strategy, creating an independent board of directors, maximizing growth, arranging for an independent audit, and making sure reporting systems are up to date.
These are all requirements of the Sarbanes-Oxley Act, a law enacted in 2002 that governs public offerings, which may or may not be part of a business’s exit strategy. However, even if an IPO does not figure into the equation, meeting these requirements will undoubtedly make a business more attractive to strategic acquirers.
Business owners can also improve their chances of making a successful exit by building value and equity in the company. Building an intellectual property portfolio, creating unique products and services, and forging strong relationships and solid distribution channels are all actions that business owners can take to dramatically increase the value of their companies.
Potential Exit Strategies
There exist several different ways of exiting a company, and each has their advantages and potential drawbacks. Here are a few examples:
Selling the business is the most common way of making an exit. Purchasers may be other individuals, or other companies. Selling a business is ideal for owners who simply want to make a clean exit, and be done with the business. A sale sidesteps the legal requirements of an IPO, as it is a private transaction. However, valuing a company can be difficult, and multiple appraisals are recommended before deciding on an offering price.
An IPO, or Initial Public Offering, is when a business owner sells their company through the stock market. Going public is popular among high-revenue tech firms, but is unlikely to be a good strategy for small-business owners. An IPO has the potential to be quite lucrative, but is quite costly to do and difficult to plan, as it is impossible to predict the volatility of the stock market.
A buyout is when another individual, group, or firm takes over the business. It has the advantage of quickly providing liquidity to the owner of the company, and allows the business to continue to operate without going public. However, buyouts often hinge on the performance of the business after the owners leave, and receiving the full selling price is dependent on the future profits of the business. A buyout offers a smooth transition, but is not without its risks.