The BizFilings blog covering business tips and trends.
Exit, Stage Left
Published on Jan 23, 2013
Read our article, 'Exit, Stage Left' at 'Time to Start Up,' the small business blog by BizFilings.
By Adam Toren
Beware, dear readers; chess analogies forthcoming. Any advanced chess player sits at the board with his or her endgame in mind. She has considered the directions the match may go, and she has worked out the variations. Moreover, she plans to move the game down a particular track, toward an endgame she desires, and these final moves will reflect her initial plan and opening maneuvers. Of course, the best laid plans of chess masters often go awry. She remains flexible but focused, determined to shape the endgame to her desires, but open-minded enough not to become stubborn when things don’t pan out. Likewise, even when you’re just starting a business, you should have your exit strategy in the back of your head. There are a variety of exit plans, and they will influence the type of business you run, as well as demonstrate to potential investors you’re forward-thinking.
Nobody wants to think about it, but you’ve got to be prepared for worst-case scenarios. Remember, you can make all the plans you want, but life will often get in the way. Harsh events like disability or death are real, and you owe it to your family to be prepared. Get some quality legal advice, fill out the appropriate paperwork, and protect your assets and your business in case of dire straits. Make sure you’re properly insured and your contracts are air-tight.
Now that the negativity is out of the way, what kinds of options are available for your business exit strategy? Well, perhaps the most complicated is going public. An IPO, or initial public offering, involves selling portions of your company to the public market. Sounds exciting, right? It is, but it also requires a tremendous amount of resources and legal work. Also, it’s not really an exit. You and your management team will be expected to stick around and run things to ensure the investment of your shareholders pays off. You’ll also be subject to more regulations, taxes, not to mention public scrutiny. However, if your business is growing rapidly and has the potential to remain solvent decades down the line, going public may be the best option.
If your business is attractive and generally profitable, and you’re really ready to say goodbye, consider a strategic acquisition. Once again, the process is complicated, and you’ll need to get plenty of legal advice. But selling your business to another interested company can be extremely profitable and elegant if done correctly. Large companies always have a keen eye on upcoming small businesses that can help them realize further profits. Test the marketplace. Ideally, you want to generate some buzz and get several offers on the table. Get ready to draw upon your experience because this will be the most important sale of your life. You will usually be relinquishing control of your business, so only sell if you’re really prepared to step down.
If you’ve got a business partner or two, you can always offer to sell your shares. If you’ve partnered up, you most likely have found someone who shares your vision, ideals, and management style. You can hopefully rest assured that “your baby” will continue to grow and thrive. Additionally, if you’ve entered into a partnership, you should have written up possible buyout scenarios beforehand. You can also sell your business to the next generation of competent managers and stay on as a consultant. These kinds of transactions are usually pretty smooth since everyone has been working together and is on the same page. Okay, they are sometimes pretty smooth.
Keep it in the Family
It seems quaint and even ideal to pass your business down to your children or family members. However, it’s in many ways more complicated than selling your business to a stranger. If you wish to transfer your business as an inheritance, be prepared to spend plenty of time consulting lawyers and tax professionals. Additionally, be careful if you’ve got several family members who are interested in your business. Dividing your company between two or three children can cause it to tear apart at the seams. It’s a better option to sit down with interested parties at the beginning of your business. Who is genuinely interested in your business? Who shares your vision?
Dry it Out
You also have the option of increasing your personal salary and bonuses in the years prior to your liquidation plans. This can be effective if you’re running a small business of which you are the sole proprietor. Of course, if you have employees or partners, you must consider the ethical components of such a decision. You must also consider the higher taxes that accompany your increasing salary.
Adam Toren is an Award Winning Author, Serial Entrepreneur and Investor. He Co-Founded YoungEntrepreneur.com along with his brother Matthew. Adam is co-author of the newly released book: Small Business, Big Vision: “Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right” and also co-author of Kidpreneurs.