When you’re about to launch your great new startup or building a small business, you don’t spend a lot of time pondering how you’ll eventually leave it. Sure, you might imagine your terrific new app will be bought by millions. Or perhaps you think one day you’ll make enough money to retire. But without a strategy, those dreams are just that—dreams. You need an “exit plan.”
An exit plan is a long-term strategy for how you, or others, will extract value from the company you built and transfer ownership to others. “Whoa, Rhonda,” I imagine you saying. “I hardly know what I’ll be doing next month. Why should I figure out what I’ll do with my company five, ten, or twenty years from now?”
An exit plan helps shape what your priorities are in your company. If, for instance, your exit strategy is to be acquired in the next few years, you’ll need to build your company fast, re-investing most profits in growing your company. If you plan to run your company for many years before selling or passing it on to your children, you’ll grow more slowly and take more of your profits out as income.
If you have a business partner, you certainly want to discuss your exit strategy. One of the messiest business dissolutions I’ve seen happened because one founder dreamed of building a company worth millions of dollars to sell, while the other hoped to build a modest business she could run for the rest of her life. They never shared their exit goals, and, not surprisingly, they quickly clashed over every expenditure and strategic decision.
If you’re looking for an investor, you’re certainly going to have to spell out an exit: investors want to know how they’ll get their money back.
So how can you eventually—and happily—exit your business one day and convert the value of your company to cash?
- Sell. This is the traditional way to get value out of business. All types of companies can be sold, not just retail or manufacturing enterprises. Typically, professional businesses, such as doctors’ and dentists’ practices, are bought into by new partners. Even a one-person consulting business may be sold. But it’s not necessarily easy to find a buyer or to get a sufficient price.
- Be acquired. You may have something another, larger, company wants. Perhaps they want your customers or to reach a new market you serve and they don’t. Perhaps your company offers certain capabilities or technologies that add value to the larger company. You can often command a higher price for your company if you have assets that are valuable to another company.
- Merge. This is similar to being acquired, but the assets of the two merging companies form a new entity. You might merge with another company instead of being acquired because they don’t have sufficient funds to buy you out immediately. You would probably still own stock in the merged company, and others buy you out over time.
- Go public. When you issue shares in your company that are traded in a stock market, this is referred to as “going public” or issuing an IPO—Initial Public Offering. Once you go public, you probably won’t depart from management of the company, but you now have a way to get money for your ownership interest by selling some of your personal shares of stock. You generally have to grow a fairly large enterprise to go public.
- Have family members take over. When Levi Strauss started selling jeans, he almost certainly didn’t envision his company still being family-owned 150 years later. But even if you know you’d like this to happen, you need a plan. Your family members might not want to run, or be capable of running, the company.
- Employee buy-out. You can retain the jobs you’ve created by structuring a way for either key management or employees as a whole to buy the company. An ESOP—Employee Stock Ownership Plan—can help them finance the purchase and give you the cash you need.
Of course, there’s one other way to exit your company: close the business. You get the least financial reward, but you can get on with the rest of your life and finally go golfing.
Copyright, Rhonda Abrams, 2016
This article originally ran in USA Today on February 26, 2016