This article is part of our “Business Startup Guide” – a curated list of our articles that will get you up and running in no time!
Have you ever dreamed of building a company so successful that after only a few years you were able to sell it to a bigger company? Then, you could take your earnings and relax, travel, work on passion projects, or get right back into the swing of things with a completely new venture. What you’re dreaming of is the execution of a successful exit strategy.
Many people start businesses with the eventual goal of selling them. Others, decide at a certain point in business ownership or investment, that it’s time to move on. They’d like to pull their time and money out of a particular venture.
If you’d like to learn about the best types of exit strategies and how to use them successfully, read on.
What is an exit strategy?
An exit strategy is a method by which entrepreneurs and investors, especially those that have invested large sums of money in startup companies, transfer ownership of their business to a third party, or by which they recoup money invested in the business.
Common exit strategies include being acquired by another company, the sale of equity, or a management or employee buyout.
Who needs an exit strategy?
Even if you’re a small company, it’s a good idea to plan ahead and to actually have an idea of how you will transfer ownership of the business down the line, sell the business, or make a return on your investment.
Types of exit strategies
This list should give you an idea of common types of exit strategies. We will cover them in more depth below:
- Initial Public Offering (IPO)
- Management buyout
- Family succession
The acquisition is often known as a “merger and acquisition.” This is because, when a company decides to sell itself to another company, the buyer will often incorporate or merge the services of that company into their own product or service offerings.
This happened when Google bought YouTube, seamlessly integrating the video platform into their own search product. Now, when you google a topic, you will often notice that videos appear on your search result page.
On a smaller scale, it might happen when a coffee chain decides to buy a bakery business so that they can add a line of pastries and tarts to their menu. An acquisition or merger does not have to happen on a big scale.
The best thing about an acquisition is that if you get “strategic alignment” right, you stand to sell the company for more than it may actually be worth. And, if there are multiple companies interested in your product, you may be able to raise the price further or begin a bidding war!
Reasons an outside company might seek to acquire or merge with another company range from allowing them to break into a new market, to giving them a competitive edge, and removing you as a competitor from the current market.
If you know that being acquired is your exit strategy right from the start, this gives you room to make yourself appear attractive to the companies who may be interested in purchasing you. That said, remember that those particular companies may decide not to purchase you or may never have been interested in doing so. If you do go down the road of creating a very niche product only one specific company will be interested in, you also stand to lose big time if they don’t take the bait.
Initial Public Offering (IPO):
This exit strategy is not suited to most small businesses, primarily because it means convincing both investors and Wall Street analysts that stock in your business will be worth something to the general public.
For smaller companies that have already begun expanding—like restaurants that have franchised—an IPO may be a good way for the owner to recoup money spent, though it is worth noting that he or she may not be allowed to sell stock until the lock-up period has passed.
If you think this is the right strategy for you, or you want to at least have the option of going public later, the easiest way to get listed is to seek investors that have done it before with other companies. They will know the ins and outs and be able to better prepare you for the process.
Speaking of the process—it’s long and hard. If you do succeed in winning over the hearts and data-centric minds of Wall Street analysts, you’ve still got to conform to the standards set by the Sarbanes-Oxley Act, you will have underwriting fees you’ll need to pay, a potential “lock-up period” preventing you from selling your shares, and of course, the risk of seeing the stock market crash.
While an IPO may be a suitable route for a company like Twitter or Macy’s, consider whether or not you want to weather the headache of tailoring business decisions to the the market and to what analysts believe will do well.
If you’ve built a business whose legacy you want to see continued long after you’re gone, you may want to consider turning to your employees.
That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work.
There’s also the added bonus that you’ll have to do a lot less due diligence. Having management or employees buy your business is a good idea if legacy matters most to you. Of course, you could always consider passing the business on to family, but there’s always the risk there that they won’t understand the business, won’t have the determination to make it succeed and, if you’re splitting the business between family members, the possibility of family rivalry.
On that note, if your family has been brought up with an intimate knowledge and understanding of your business, they may well be the best people to pass things on to.
In fact, this is exactly what happened at Palo Alto Software. Founded by Tim Berry in 1988, shortly before the recession hit, his daughter Sabrina Parsons was made CEO, and her husband Noah the COO. The decision was strategic and allowed Tim to pursue other interests, including putting a focus on writing. Since then Sabrina and Noah have adapted the flagship business planning product, Business Plan Pro, into an online version, LivePlan.
Passing Palo Alto Software on to family was more fortuitous than carefully planned. Tim had always encouraged his children to follow their own path. In fact, none of them got degrees in business. It just so happened that Sabrina and Noah had entered the internet world early in their careers and gained the experience necessary to join and build out Palo Alto Software’s product offerings.
If you are considering passing your business on to your children or to other family members, there are a number of things worth thinking about and planning for, including ensuring that whoever is set to take over the business has the relevant skill set, is competent, and is committed to the future and success of the business. This will make it a lot easier to retire.
For small businesses, liquidation is a common exit strategy. It’s one of the fastest ways to close a business and may sometimes be the only option in cases where the operation of the business is dependent solely upon one individual, where family members are not interested in or capable of taking over, and where bankruptcy is close at hand.
It’s worth noting though that any profits made from selling assets first need to be used to pay creditors.
To make any money using liquidation as an exit strategy, you’re going to have to have valuable assets you can sell—like land, equipment, and so on.
If it’s not too much hassle and if your decision to liquidate is not related to finances, think instead about selling the business to the public. Are there any ways you can make it appealing?
If this isn’t an option and it’s better to close the doors before you lose money, liquidating your assets may be your best bet.
Planning for the future?
Have you mapped out your exit strategy? If not, do you have questions about how to do it and how to plan for the right strategy?
This article is part of our Business Funding Guide: fund your business today, with Bplans.