Exit Strategy – The Art of Moving On
In Canada and in many urbanized places in the world, an exit strategy is the rather loose definition people usually give to plans by heads of companies to move out from their businesses. After heading it for years, nurturing its growth from the difficult years all the way to its most productive times, many company heads are reluctant and still more are unprepared for the time to let go of the business and to retire.
On the practical side, there are already signs that business owners are getting older than the overall number of heads of their businesses. In the last statistics regarding ownership of businesses and their physical ages, business owners aged 50 years old and over are almost 60% of the total number of owners of medium-sized and small businesses (SME).
The number is significant in that it is 16% higher in comparison with the 2004 statistics on business owners 50 years old and over, according to Statistics Canada.
There are now an exceptional number of enterprises and other small businesses owned by baby boomers. With it, there is also an increase in the number of businesses sold or dissolved. Experts expect that this number is going to rise dramatically over, say the next 10 years, when the baby boomers keep on retiring and exiting the workforce.
Most have speculated that these boomers would want their investment (or money) back after the end of their period of ownership and steering their companies to what they are now. They are expected to want a percentage of their investment. For those who sell their businesses, profit is the main motive.
As always, private business can be hard to sell. When a business owner leaves his sole proprietorship, the elements are simply dissolved and disbanded with its assets the only transferable aspect to the new owners.
Private corporations simply sell or transfer their shares to the new owners. However, the values of the shares are difficult to appraise when they are not traded in public on a stock exchange.
Business owners who are progressive, look at exit strategies as more than its money-making angle.
Progressive business owners sometimes have other goals to go with their exit strategies. They usually include the age-old desire of establishing a legacy, or to simply ensure the business is still in the family’s control and ownership.
Leaving the business
By practice, it does not seem easy for business heads, top business movers in their times, to take on the idea that they will need to leave their businesses eventually. They might have thought about it from time to time, but the concept is pushed further and further through the years.
It might have been that the focus was always on the business and not the seemingly far-fetched idea of leaving it after and for good. For the smart businessman, it should not be sufficient to only found a business, be successful in it, and nurture it until it becomes a sizable fortune. Those with an exit strategy come out the winner.
Planning your exit strategy ideas
For the business owner, deciding on a specific exit strategy is not a walk in the park. The best is still the one that had been carefully planned, and should be done far ahead the date you want it.
The most ideal time to choose and decide your exit strategy is when you are writing a business plan. The timing is good because your exit strategy will also affect your business development and growth, taking into consideration that some strategies can sometimes consume years before it can succeed.
What follows are some concepts (with their corresponding pros and cons) which you can use as template for your own particular case. The obvious reason is that these ideas can be applicable in different circumstances. Some are solid enough to fit your needs perfectly.
In short, this is simply closing up shop and selling every asset of the company. This easy route covers all your worries on control and ownership transfers. The negotiations are minimal there are no technical details to drag things around.
To make money, you have to have valuable assets to sell – expensive equipments, land and other company properties with value. The assets can turn in some hefty income, unless you have creditors to pay first with the proceeds of the sale. What are left is divided among shareholders, if your company has any.
For small enterprises, those that are mostly dependent on the work of the owners, liquidation might be the last option especially if there is nothing to sell.
Entrepreneurs, especially the successful business owners, almost always dreamt of keeping their businesses in the family. Like some legacies of old, the business will reside with the next family member down onto the latest of the line to “keep the family’s name”.
With the idea of succession, the business owner has the chance of grooming his own successor. The other big advantage is reduction or outright exclusion of 3rd party involvement.
On the other end of the stick, the disadvantages of keeping emotions and other family issues out the way takes a thorough work. There could be conflicts within the family which has the potential of trickling down to work and into everything else.
It can be difficult, not just for the owner but also for the other family members. Owners can start the work by evaluating potential candidates using the fairest criteria, and maybe the approving consensus with the other members.
3. Management/employees buy-out
Your present employees and managers might have strong interests in your business that can end up with an ideal purchase. You know your business is in good hands, and you have your money’s worth. Your managers or your employees know your business well enough not to let go of a profitable venture and want it to thrive with them running it.
The Employee share Ownership Plan (ESOP) is one set-up method for this exit strategy. This is a plan of stock equity for employees that allow them to acquire ownership in the company they work in.
Another way is getting the team of managers or the employees group to pool their resources to get hold of the company. This is one alternative to owners who have no candidates for their succession envisioned to continue the corporate culture of the business.
As an advantage, there is limited due diligence necessary since the owner knows all the people involved. This is a de-facto reward for the management in return of their long-term company support. In turn, the owner knows that his legacy and the independence of the company are well-protected.
It might turn out disadvantageous in the sense that management usually has restricted access to the company’s capital. This fact could alter some of the terms and affects the selling price. If there is some failure in the attempt to buy, there are chances that it could affect morale.
4. Open market selling
Some owners of small business favor this type of exit strategy. The selling idea is simple with not many obstacles in the way as in the other types. Like any other selling, there will be negotiations and some other minor issues unlike all the others with huge issues.
At some point of a small-business but successful entrepreneur’s time (most usually when everything and the owner is ready for retirement), he simply hangs up a “For Sale” sign for his business with his desired price, and let the natural processes work out.
If this is the kind of exit strategy you have in mind, you need to spend extra grooming for your business to attract potential buyers.
5. Selling to a 3rd Party
Among the business owners’ several options are private equity (the financial investor gets the sale and is issued shares) and the sale to another business (another working company gets the sales and is issued shares).
Like any marketing method, positioning your company as an attractive acquisition is always profitable. Many businesses buy into other businesses for their own reasons – maybe as a quick road to further expansion buying out the competition (which could be your company).
The trick is targeting your potential acquirer way ahead (but still in time for your exit strategy). The message is simply that your small business is well worth the price you want.
6. Initial Public Offering (IPO)
An IPO (Initial Public Offering) is the sale and shares issuance of a company that is private in a stock exchange that is public. For many reasons, an IPO is not actually suitable for many small businesses. However, it is viable as an exit strategy.
With your business and your company becoming public, the returns can be highly profitable. However, your IPO may be structured in a way where you cannot withdraw any of your capital. By that time, the new stockholders may demand to have all the raised money in the IPO be fully used to expand the business.
Any of these strategies are potentially good to fulfill your exit strategy plans. However, as cautioned from the start, the strategies nearest your most ideal has to be modified, perhaps, or altered to suit the end-results that you want.
The decision still rests with you. If your goal is getting the most money, open market selling or selling to another business company (including your competitors) could be the perfect solution. If the money is secondary and family legacy rules everything inside you, maybe succession is best.
The most important consideration is to work on your exit strategy right away, or an 11th hour decision can be disastrous.
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