Over the years I’ve seen so many Small Businesses sell out for much less than…
Beginning at the End: Advice for a Successful Exit Strategy
You’re well on the way to achieving your dream business – congratulations!
All that hard work is finally paying off, and you’ll soon reap the rewards. The next step is to plan your exit strategy. But why would you be thinking about an exit strategy when things are going so well?
There are a couple of excellent reasons:
- Your investors want to see a return on their investment.
Any outside investors will want to see all the possible outcomes of the investment. If you can present your exit strategy right at the start of any pitch, investors are more likely to be interested if you can confidently show them their money will be safe.
- To put it bluntly, you might get bored.
For a creative entrepreneur like yourself, sometimes it’s the thrill of building a startup that keeps you interested. Once it’s up and running, the excitement gives way to routine, and a quick exit is needed to begin work on the next big project.
So, what does an exit strategy look like and how do you get one?
We investigate the possibilities:
Friends and family.
It might seem like the simple solution with the least amount of hassle, handing over the business or selling it to a family member or friend. But is it a good long-term plan?
- It could make the transition between owners much smoother if it’s a friend or family member.
- You can keep a hand in the business; you wouldn’t have to make a complete break from your creation.
- Can you ensure that there will be no infighting with a family succession plan? Doing business with family members can be emotional.
- Family members may not have the same level of skill and passion that you brought to the business.
Merger and acquisition.
This method could be the most profitable option depending on how successful your business is and the aims of the merger. Perhaps they want to eliminate you as competition or expand quickly. Whatever the reason, this is a worthwhile option to consider.
- Depending on the reasons (as outlined above), the acquirer might want a quick sale, and therefore you can maximise your profits.
- Your business could go up to the next level of growth, especially advantageous if you plan on keeping some of your assets in the company.
- Your hard work in building up the business could get bogged down with the other priorities of the merger.
- In a worst-case scenario, the acquirer might want to reduce the competition, and they will fold the business after buying. Existing employees could lose their jobs.
Sell on the open market.
You put it all out there for the taking and hope that you get the desired price. This method is a process similar to selling your house and as a consequence depends heavily on the current market.
- A well-run, profitable business will be attractive to buyers, especially if you can also provide an extensive list of loyal clients to go with it.
- Business goodwill counts towards the value of the business, maximising your profits.
- To a large extent, you’re at the mercy of the market. If it’s not a good time to sell, there’s very little you can do about it.
- It’s potentially a very long process; some statistics suggest that only around 20% of businesses on the market sell. You could be in for the long haul.
The Initial Public Offering (IPO).
This strategy is where you ‘float’ shares in the company on the market, seeking capital from public investors. It means the company can seek capital from a large pool of investors for future growth or even to pay off debts.
- You’ll have cheap, quick access to capital.
- You’ll get greater exposure and prestige for the company.
- It will mean extra costs in legal, accounting and marketing.
- There is a risk of not being able to raise the required funds.
Liquidation over time.
Although it sounds very final, liquidation over an extended period could be a sound financial option for you. It means that, as the owner, you can extract profits from the company rather than reinvest them in the business or waiting for a lump sum from a sale.
- You will be getting a regular income rather than waiting an indefinite period for a sale.
- You will not be able to grow the company and will, therefore, reduce its value.
- Any other shareholders will want to be similarly compensated, meaning less money for you.
Rather than thinking about an exit strategy as ‘the end’ of your business, it’s more useful to think about it as planning for all eventualities. If investors are assured of the outcome of the business and, most importantly, that their money is safe, they’ll be far more likely to invest right at the start of the venture.
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