Are you a business leader who’s running your own company?
And have you planned your exit from your business?
Odds are that you haven’t. A BDO/COMPAS poll found that fewer than half of business owners have an exit strategy in place. Yet your company may be your most important asset. And even if you have no intention of exiting for many years, having a strategy can help you determine the appropriate direction for the business.
Moreover, an exit strategy can provide guidance regarding how to build the value of the company – and how to protect that value in the long term. It can also reassure your management team and family members regarding your company’s future, and help to ensure a smooth transition when the time comes. And, of course, a well planned strategy will provide for the financial security of you and your family for your retirement or in the event that you can no longer work in the business because of illness, injury, death or other unforeseen circumstances.
An exit strategy should therefore be part of every business leader’s strategic planning to ensure you achieve your goals. Perhaps those include maximizing your financial returns and moving on to another challenge. Maybe you want to preserve the legacy you have built over a lifetime. Perhaps you’d like to eventually reduce the amount of time you spend working, but continue to be involved in the business. Possibly you want to see your business continue to grow beyond your tenure. Each goal requires a different strategy.
Basically, there are four general options to exit a business: pass it along, sell/merge it, close it or do nothing and wait for something to happen. Not many of you would close your company as your first choice. And the last choice is the riskiest and costliest. Without an exit plan, an unprepared family member may have to assume responsibility for operating the enterprise. Or a business partner or family member may be forced to wind down the operation or sell it as quickly as possible for much less than its true value. The business could even go bankrupt.
You would not likely choose any of these scenarios for your company. And yet the fact that the BDO/COMPAS poll indicates fewer than half of business owners have an exit strategy in place means too many seem to be taking the high-risk “do nothing” approach.
There are many significantly more rewarding options, such as the following.
- If you have adult children who currently or may work in your company, your first choice may be family succession – passing the business on to one or more of them. If so, you need to determine whether this is feasible. Are any of your children are interested in succeeding you? And would they be capable of running the business when you are no longer there?
Should you determine that family succession may be a valid option, you will need to develop and execute a plan that defines the role of your successor(s) and establishes a training and transition process and timetable.
- If family succession proves to be an unlikely option, selling your company to the right buyer can open up new opportunities for a business and support its growth. Would a management buyout, for example, be a possibility? If you have an ambitious, capable management team that is interested in carrying on the business in the future, an MBO may provide an efficient transfer of responsibilities as well as reassurance to customers, suppliers and lenders.
Transfer of ownership can be phased gradually over several months to several years to accommodate your preferences for continuing involvement in the business and to facilitate a smooth transition and financing. Payments can be structured as one-time on closing or periodic contributions over time.
- Sales to strategic buyers are also common. These purchasers are typically from the same or a similar industry as the seller. They may be competitors, suppliers or customers that want attributes they can readily leverage, such as a new market or channel of distribution, a brand or a trademark. The sale process is often faster and less complex with these buyers since they know the industry and may have already undertaken some due diligence.
- There are also financial buyers, which are typically private equity firms looking for established businesses with growth potential. Each has its own investment philosophy, strategy and criteria for assessing investment opportunities, and transactions can be structured to provide sellers with an equity interest or a continuing role in the operation of the enterprise.
- If you have a growing business and wish to retain some ownership, a leveraged recapitalization may be another solution. A debt or equity lender supplies growth capital while you benefit from the future growth of the business by retaining a stake in it. Candidates for this type of transaction are enterprises with strong earnings and growth potential.
- For owners who want to continue working in the company and benefit from its future growth, equity earn outs are another way to structure a sale. The seller seeks a partner to work in, and eventually purchase, the business. The partner makes an initial investment in the company and then subsequent payments based on specified financial targets and earn-out period.
But before you can execute any of these succession or sales processes, you’ll need a documented strategy to ensure your exit meets your expectations. Here are the steps to get started.
- First, determine your goals. The strategy you choose needs to be in sync with both your personal and business goals. Is it important to you that your enterprise continue into the future? Do you visualize ambitious growth beyond your tenure? Do you want to pass the company along as your legacy to family members? What personal financial returns do you expect? Do you want to retain ownership? Do you want some involvement in the business long into the future? And what would be your ideal time frame for a transition?
- Determine who will help you achieve these goals. Does a successful outcome involve partners or family members or certain members of your management team? If so, you’ll need to discuss your ideas with them and also consider what agreements may be needed or need amending.
- Discuss your plans with your financial/tax and legal advisors. Any strategy will have implications for your finances, taxes and legal situation.
- Document your exit strategy. If you decide that you want to pass along the business, you’ll need to set out the structure of the post-transition management team, establish target deadlines for the transfer of responsibilities and outline a successor training program.
- If your goal is to sell the business, you need to set out the timeline and steps to prepare the company for sale. These might include, for example, securing a valuation, strengthening financials, cleaning up inventory, updating equipment, and preparing a marketing strategy.
- Communicate the strategy to all of those involved and then schedule discussions on a regular basis to make sure it stays on track. Encourage questions, talk about progress and obstacles. Keep moving toward your goals.
When’s the best time to develop an exit strategy? When you start your business. But if that hasn’t happened yet, there’s no time like the present. When you plan your exit, you lay out your goals. And that brings you closer to achieving them.