YOU NEED A CAREFULLY DEVELOPED EXIT STRATEGY
There are several reasons why exit strategies are not top of the mind issues in small business management. First, there is always the press of day to day events which require immediate attention. Second, there may be the feeling that when the owner/founder wants to retire the business can be sold to a friendly buyer, perhaps even a family member without a lot of effort or planning. Third, if the business is very successful it may happen that buyers will eagerly pay a high price for ownership in a lucrative enterprise. Fourth, if the business is not successful it could be closed down and the assets liquidated if it cannot be sold. Each of these potential options has its advantages and disadvantages, and the retiring owner/founder needs to develop an exit strategy early on in the life of the business in order to be successful in his/her after business life. Let’s see how that can be done.
A LONG TERM PLAN FOR EXIT MUST BE DEVELOPED AND MONITORED ON A REGULAR BASIS
An exit strategy typically has both a time frame and a value goal. An entrepreneur starting a business may fix a time limit of ten or fifteen years with a value goal of selling the business for $500,000. The timeline requires projecting the operations of the business forward in terms of revenue and expenses so as to yield the value goal specified within the time frame. Pro forma financial statements (financial data projected into the future) will show what needs to be accomplished during the period in order to meet the desired end result. Efforts need to be directed toward the long term goal with the same intensity that the daily work of the business is managed. It is never too early to begin this work.
THE POTENTIAL OF AN ‘INSIDE’ SALE OR TRANSFER IS USUALLY OVERSTATED AND UNREALISTIC
While there may be considerable allure to the thought of turning over the business to a family member or selling to a ‘friendly’ buyer this option is very risky and may not even be available when the owner/founder wants to retire. A deferred payment plan may not be possible for the new owner to handle and the retiree may be unable to collect monies due and/or be required to re take control of the business in order to protect his investment perhaps at a time when he is either unwilling or unable to do so. It is much better to think in terms of an arm’s length transfer of ownership rather than an ‘inside’ arrangement.
THE VERY SUCCESSFUL BUSINESS GREATLY WIDENS THE OPTIONS FOR A SUCCESSFUL EXIT
Building a very successful business makes it possible to think in terms of additional options, such as mergers and acquisitions. Selling the business to a publicly traded company may provide instant liquidity either in the form of a cash payment or stock that can be sold on the open market or held for future growth and/or dividend yield. A very successful business can be indicated by more than just the financial statements. It could also include intellectual property developed by the firm, specialized equipment, or a unique selling proposition that others cannot duplicate. It may also be in the employees that have developed special skills, but none of these outcomes will be realized without effort at building them over the time frame that has been set for exit. Therefore, if the owner can create a very successful business, every effort should be made to accomplish this in order to widen the options available at retirement.
THE LAST AND TYPICALLY WORST EXIT STRATEGY IS VIA LIQUIDATION OR CLOSURE
The worst combination of negative outcomes is an unsuccessful business operating at a loss with a heavy debt load and insufficient cash flow to operate and pay the debt. There would be very few interested buyers in such a situation unless parts of the business could be sold separately, such as the equipment and/or inventory. There is also the potential sale of the customer/product/sales list. This type of sale does not produce a return of investment anywhere near what the sale of a successful business could produce and should be avoided wherever possible.
The key to an effective exit strategy is to plan early and often in the life of the business indicating when you want to retire and what your financial goals are, and to work every day with these what and when goals in mind. A good exit does not happen automatically. It must be planned far ahead and be constantly managed. to get the results you want.