Planning an exit strategy

You should have an exit strategy in mind when you’re looking to attract investment as it can enhance the viability of your business. Investors want to know what kind of return on investment they’ll get, how long their money will be tied up and what your long term intentions are.

Leaving a business you built is never easy but it’s critical you begin planning an exit strategy during the early stages of your venture. You need to consider your employees’ futures and any commitments you have to financial partners.

Sell

Your most difficult decision when selling may be who to sell it to. Do you want the legacy of your business to continue through family, someone that shares your passion for business, a current member of your staff or the highest bidder?

The true value of your business is more than just bricks and mortar, it’s in its performance and potential as a going concern. How your return on investment (ROI) is determined will be vital to achieving a satisfactory sale.

If you want to take your business to market with an independently justified set of figures, hire more than one independent valuator to help vindicate your price position. You’ll know that you’re going to market with a fair dollar figure in mind if you set the price based on independent valuation.

Having a valuation on hand also helps if you plan on using a business broker. Brokers can often set the price too high, which discourages buyers, or too low for a quick sale.

Buyers may have conditions that can include an extended transfer period where they want to learn every part of the day-to-day running of your business.

Selling to family probably requires more due diligence. You need to ensure there won’t be any jealous family members and that you can maintain space between you and your former business.

Advantages of selling:

  • You can sell to a buyer who’ll preserve the important qualities of your business
  • You may be able to sell to family, friends or employees
  • You’ll hopefully realize the total worth of your business.

Disadvantages of selling:

  • Selling to family could create conflict
  • It could take some time to sell.

If you’re confident of your business’s ROI value, want someone you know to take over, don’t need a quick solution and want to receive your business’s true value, selling may be your best option.

Acquisition

Acquisition is when you find another business that wants to buy yours and you sell it to them. It’s one of the most widespread exit strategies.

In an acquisition the value of your business is really the perceived value of the acquirer, rather than that defined by market valuations. If you can make your business attractive to acquisition candidates without cutting off other options, you may find a buyer who’s prepared to pay more than the true worth of your business.

You’ll need accurate knowledge of the market while making sure your business looks like a strong strategic asset, to find the right company to acquire your business.

A large company may view your business as one that fills a gap in their market. They may want to strengthen their own product position through acquisition.

Advantages of acquisition:

  • An acquirer may pay more than your business is worth if they perceive added value in it
  • A bidding war is possible if you can attract a few interested buyers.

Disadvantages of acquisition:

  • By targeting a specific acquirer you might become less attractive to other buyers
  • Your business may not fit well post-acquisition, leading to the combined company self-destructing.

If you have a significant market share, can identify a likely target acquirer and are willing to make your business more attractive to a strategic buyer, your best option may be to sell by acquisition.

Liquidation

When you have limited time to exit your business, the fastest solution is to close it down and sell its assets. Liquidating isn’t usually in the plans of most business people but it does happen. You’ll have cash in hand quicker than if you sold your business as a going concern.

There are some significant drawbacks for business owners who make an emotive decision rather than a planned action to end their business.

The majority of your business’s value is in its operations rather than its assets. Selling the parts of your business separately will return less than the venture as a whole.

For most business people liquidation is a last resort because the true value of a business isn’t realized.

Advantages of liquidating:

  • You’ll exit quickly
  • There’s no negotiating involved
  • You won’t have to worry about transferring your business to someone else.

Disadvantages of liquidating:

  • You won’t receive a true return on your investment
  • Your employees and loyal customers will be left out in the cold
  • Any investors you have will feel short-changed
  • You’ll be the last in line, after creditors and investors, to see any money from asset sales.

If you provide a vital service to your local community, the quick closure of your business won’t be well received. Conversely, if you don’t have much debt, own most of your business, have only a few staff members and are short on time, liquidation may be your best option.

Public float

An Initial Public Offering (IPO) is the process of floating your business on the stock exchange. Plenty of investment and due diligence are required over a long planning period to have a successful IPO.

You may consider reinvesting in the lead up to your IPO to make your business highly competitive, so to impress stock analysts. You can also boost the perceived value of your business through marketing prior to the offer.

Businesses that offer public floats usually contract investment banks to underwrite them. The initial share price can dictate demand so your investment bank will find a price not too high or too low.

Advantages of IPOs:

  • You can get the highest return through an IPO
  • Your business should get some media exposure in the lead up to the public offering.

Disadvantages of IPOs:

  • Success stories are rare
  • You’ll need meticulous accounting records from the creation of your business
  • Underwriting, accounting and legal costs are involved.

If you have considerable funds to prepare for an IPO, maintain extremely high accounting standards and potential to grow into a larger business, your best option may be a public float.

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