Business owners typically live for the thrill and ride of owning their own business. Nothing lasts forever and that’s why we need an appropriate Exit Strategy. This way you can actually get the money back out but also to maximise the return.
The difference between selling your business for little more than fixtures, fittings and stock or for a multiple of 3 or more is very little when you plan your business exit strategy 3 to 5 years out or even from your original business plan.
One of the key elements to exit a business is to make yourself redundant. This could have been one of the reasons why you started a business in the first place but life is full of clichés.
So how do we make ourselves redundant?
Let’s look at five exit strategies that will achieve just that.
1) Bleed the Business Dry
It might sound strange but it is actually a strategy to bleed the company dry on an ongoing basis. Legally of course and not into the red but a well-planned out process. You can do this by increasing your salary, rewarding yourself via bonuses or issuing a special class of shares that you can earn significant dividends. Although we frown upon these practices in public companies, in private companies, this actually isn’t such a bad idea.
Rather than reinvesting money in growing your business, you keep things small, take out a comfortable chunk, and simply live on the income. If you think you’re in business for the lifestyle, minimise your dependence on other investors and structure the business to allow you to draw out cash as needed.
The downside is potential tax implications from income instead of capital gains or other more tax attractive methods that would dilute the tax burden.
2) Liquidate the Business
How many times have you seen an advert or business going into liquidation. This appears to be a fire sale but more times than not it is actually a well-planned out exit process. One often-overlooked exit strategy is simply to call it quits, close the business doors, and call it a day.
If you liquidate, any proceeds from the assets must be first used to repay creditors and loans before yourself and depending how you are categorised. The remaining funds are divided among the shareholders so make sure your ownership structure is clear.
Its usually quick and easy but you generally lose the value in intangible assets like the value of your customer base and brand.
3) Friendly Sale of the Business
If you are overly attached to what you’ve built, it can be difficult to hand over the reins and pass ownership to another person who will preserve your legacy. If you can seek out a friendly sale then you will feel more comfortable about transferring ownership whilst improving the return you will receive over liquidation.
In searching for a friendly buyer, it may come from inside or outside the business. To open up further opportunities you may finance the sale and let the buyer pay it off over time.
The purest friendly buyout occurs when the business is passed down to the family. If you decide to go this route, you’ve got a lot of planning to do before getting out including financial structuring.
4) Competitive Sale of the Business
Find another business or party that is interested in buying your business.
Through this process you can maximise the return by negotiation. This can be done by yourself or through a broker which will maintain independence whilst providing you with a valuation pre-sale. In an acquisition, the sky’s the limit on your perceived value. The person making the acquisition will pay what the perceived value is which may include synergies with their existing business.
If you choose the right buyer, the purchase can far exceed your expectations. Look for strategic fit where the buyer could; expand into a new market, offer a new product or service to their existing customers or capture synergies in their supply chain.
If you’re thinking of selling your business as your exit strategy, make yourself attractive to potential buyers but don’t completely ignore the other exit options.
5) Take the Business Public
There are certain listing rules in Australia around raising an initial public offering (IPO) so it must be planned out and meet the minimum requirements. With the advent of technology and the improvement in the available options to raise funds, the gloss of an IPO has diminished over the last few years. Compliance has also become a major cost that eats into company profits.
If you’re currently funded by professional investors with a track record of taking companies public, you might prefer this option. To get a business to an IPO means you have probably had several rounds of funding and will be in a diluted position by the time you go to market.
You can spend significant funds preparing for the road show, where you may need to grovel to convince investors your business is worth the funds you are trying to raise. Unless you sell out before the IPO you may be tied down to hold the shares for a certain period of time before you can dump your stock on the open market.
Ultimately the preferred exit strategy of a business will always be unique to your situation. Having an exit strategy is paramount to this choice. As part of this process you need to understand what sort of people you are trying to attract into the business and that an exit strategy is only one piece of the planning process.
If your business needs guidance on business exit strategies, contact the Cashflow Tech Systemz team at firstname.lastname@example.org