You know that the day will come for you to exit the business. What will you do when that time comes?
Do you have a proper business exit strategy? The right exit strategy can help you realize the value you’ve built. The wrong or no exit strategy will destroy all the efforts you have put in.
Are these your concerns too ?
- Why should I plan for exit strategy ?
- What can I do to my business when I retire ?
- Who can I pass on my business ?
- What options do my business have ?
- What is the value if I want to sell off my business ?
The foundation for any company that wants to “build to last” is to have a business model that actually support the objective. Jim Collins
Reasons for Business Exit
Different people will perceive risk differently. When a business owner grow older, he tend to prefer less risky situation.
Some practical reasons why business owners exit a business :
- Competitive pressures i.e. decrease profits or increase competition
- Change in health situation i.e. disability or illness of business owner
- Cash flow financial difficulties
- Desire for liquidity and asset diversification from shareholders
- Release the real value i.e. cashing in business goodwill and success
- Readiness of heirs to take over the business
- Retirement of the business owner
Sadly, a good exit strategy is uncommon: One in four business owners aged over 60 are planning to close their businesses at retirement. Imagine the unrealized business values go into waste !
Exit Strategy - KEEP
Strategy – Cash Cow
If your business is in a stable, secure marketplace and has a steady revenue stream ; you can employ a professional that you trust to run it for you, and retain ownership for the business.
Since the focus of the company is not on growth, your business keep things small and simple. As business owner, you can afford to pay yourself a huge salary, reward yourself with a fat bonus.
- Able to retain ownership of the business and able to pull out money when you need it.
- Without careful long-term planning, the business cash reserves could be drained faster than expected. Also, too high salary attract higher tax as well.
Exit Strategy - GROW
Strategy : Merger & Acquisition (M&A)
This means merging your business with another, usually a larger company. This is a win-win situation as the companies have complementary skills, and can save resources by combining.
For bigger companies, it’s a more efficient and quicker way to grow their revenue than creating new products. In a strategic acquisition, the acquiring company buy over your business to expand into a new market, or offer a new product to their existing customers.
- If your business has strategic value to an acquirer, they may pay far more than you’re worth to anyone else. The acquiring company purchases your business, either with cash or stock or with some combination of stock and cash. This boost immediate liquidity.
- The acquiring company may or may not retain you and your management team. This means you are likely to lose operating control. Merger and Acquisition at times fails because of culture and system clash in the merged company.
Strategy – Going Public with Initial Public Offering (IPOs)
The expression “going public” describes the process of offering for sale a portion of your company in the public markets using securities like preferred stock or bonds. If your business are on expansion phase and funding required to meet business growth has exceeded its debt capacity, your company can consider going public as a option.
In an IPO, you and management team typically remain in place for a period of years. Your investors and managers may be able to sell some stock, and your company continues to operate much as it has in the past. However, your company will be subject to additional regulations from Securities Commission and under the sharp scrutiny of analysts and institutional investors.
- In good times, your business valuation is inflated 8 times on IPO. Your stock will be worth in the tens or even hundreds of millions.
- Investment bankers take high commission and the transaction costs on an IPO is huge. Professional investors will dilute your company shares holdings to a tiny fraction of your company.
Exit Strategy - PASS
Strategy : Family or heirs succession
A privately-held business usually represents a lifetime of work and efforts of the owner and founder.
Upon retirement, the owner would like family members or other heirs to enjoy the fruits of his/her labour. This strategy is very fundamentally common in Asian businesses.
- Can continue the legacy of the founder and expand it.
- Key employees and family members alike may have concerns about family transfer arrangements, who controls the business. Family members not involved in business may become jealous etc.
Exit Strategy - SELL
Strategy : Sale to friendly third party
The simplest way to transfer ownership is through a sale to an outside party. Interested third parties might include customers, suppliers, larger company in related industry. There are two types of third party buyers:
- Financial buyers – seek high return on investments. They will need to see strong financial statements and assets. Prefer current management stay on for awhile.
- Strategic buyers – may be a your customers, suppliers from a larger business in a related industry.The ideal buying company is that has more skills and interest on the operational side of the business, and can scale it.
- Less due diligence required as both parties know each other. Your buyer will most likely preserve what’s important to you about the business
- Business value may not be fully realized as you are selling to a friendly party and hence leaving much money on the table. Some buyers may not have the credit available to obtain financing and may rely on the owner for a private installment sale.
Strategy : Management Buy Out
You can also sell your business to current employees or managers. These are the people that have been with your business through the good times and the hard times and has been groomed by the owner. Some of the employees are key to the business or closely involved in day-today operations as well. .They may be interested to continue the business on their own. Sell the company to the next generation of managers it is known as a management buyout.
- If management buys the business, they have a commitment to making it work. This exit strategy provides immediate liquidity to the owner and shareholders, and allows the company to continue as a private enterprise with a seamless transition.
- The potential buyers may not have sufficient finances or personal net worth to buy the business. Hence, this type of transaction is usually financed through some combination of debt and/or private equity investment. At times, the owner has to finance the sale and lets the buyer pay it off over time.
Exit Strategy - CLOSE
Strategy – Liquidation
If you have decided to get out of business and unable to merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy. If you liquidate the business, any proceeds from the assets must be used to repay creditors. The remainder shall be divided among the shareholders. If your business is a limited liability company, you can stop doing the business, but keep the company alive.
- It’s natural process as everything comes to an end. There is no lengthy negotiations and detailed succession planning discussion required.
- It should be treated as the last resort as all the hard efforts over the years are wasted. Thing like client lists, business goodwill, business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value.