Which Way Do I Go? – Four Exit Strategies to Consider.
Contributed by Bill Doyle
As a business owner, two of the most difficult decisions you will make are when to exit and how. Here are some perspectives we’ve discussed with business owners:
Sell Soon. “I’d take the value of my company in cash and move on.”
Sellers who get their price know their company value, which will be higher if earnings are consistent and growing. If the dominant manager walks out the door at close holding the check, then the buyer is most likely a larger player in the industry, who will fold the company into its operations and not require the seller’s team. So bolster operations and conduct a disciplined exit process.
Partial Liquidity. “I’d like to take some money off the table.”
Getting the money usually requires borrowing via a leveraged recapitalization or selling a minority ownership stake. The tax code favors leveraged recaps, particularly ESOPs (Employee Stock Ownership Plans), but these require convincing the right lender and can dampen the company’s ultimate sale. Convincing a minority investor will require a process almost as onerous as selling the company, and will probably entail some form of agreement to sell the remainder of the company down the road. Either way, be ready to work with a sophisticated money player.
Create a Cash Cow. “Why exit if I can set up an ongoing source of income?”
For stable businesses with good potential long term cash flow, establish a solid management team, set up business procedures to maximize cash, and be willing to step back and let the machine work. Sounds great, but each of those three steps is more difficult than it looks.
Maximize Value. “Each of those has its appeal, and I have some patience if the value can be there.”
A “some cash now and much more later” strategy can combine elements of any of the above. Transfer of value, management transition and possible ownership change all represent major transformations of the company. What is the value? How can I bolster my management team? How can I build my core value? Should I make an acquisition at the time I bring in an investor, because multiples increase with scale: 1+1>2? Can I find in an investor who can help increase value?
To achieve your goals, set them clearly, then drive yourself and your company toward them.
Or, “If you don’t know where you’re going you’ll end up someplace else.” Yogi Berra