Know Your Exit
Modern business conversations focus heavily on Start-Ups, thanks in large part to the success and rapid growth of many young companies. For each new successful IPO that comes to market there are a multitude of ventures that simply fall short. Often the main reason for this failure is a lack of exit strategy. All new businesses start with a big hairy audacious goal (BHAG), then funnel that into a vision, then a mission, and ultimately a business strategy against which they will execute. Few, however, contemplate how to exit and truly generate ROI for investors.
In the following series we will examine multiple methods to extract value from your business. When advising small business owners, I ask that they develop three loose scenarios to cover what I consider three end points for continued success of their business. From these scenarios, we can work on defining potential exit strategies and selling price targets. The three initial targets are: do nothing, grow and transition, and all out sale at a desired price. Each present unique advantages and disadvantages and produce different exit strategies over the life cycle of the business. In theory, this is a constantly moving target based on where you and your business are in the growth cycle.
The do nothing strategy works for owners who are sole proprietors or want to keep a small number of employees. In businesses where the founder is essentially the business, this model would make sense. Following it would result in growth that increased equity, which would get distributed as the owner moves to fund their retirement. This would essentially result in liquidation as the distributions occur to allow for long term, post career planning.
The grow and transition strategy is a little less disruptive and suitable for sole proprietors and any other entity form of small business. Executing this strategy requires transition planning, buy sell agreements, and thoughtful distribution planning. Where do nothing will result in an end of your business, grow and transition allows your business to continue while you step away. In doing so, the pay will shift from a salary to primarily owner distributions. It will also allow any employees to continue operating the business as normal.
The last of these three generic categories is selling your business, whether to another private company or to the public through an initial public offering (IPO). Similar to growing and transitioning your business, selling your business means it gets to live on potentially in perpetuity. There are a myriad of potential issues with either selling privately or taking a company public, but both produce high ROIs for initial investors and you, the founder. In a sale scenario you might no longer have a position, or might lose ultimate control once the deal closes. In going public, you will have a Board of Directors to answer to and market targets to hit. However, given the opportunity to cash in as an owner, and continue with business as mostly normal, may make many of these issues seem trivial.
Regardless of the option, it is imperative to consider your exit strategy at or near start up because it provides a long-term target to execute against. From this initial loose target, you can develop more sophisticated plans to fit your business needs. Contact us today at 724-550-6970 or info@theskeenfirm.com to discuss this integral part of your business.
*Disclaimer: The advice provided is for informational purposes and is not intended as legal advice. It should not be relied on, nor construed as creating an attorney-client relationship.