What are the main exit strategies
Introduction
Most entrepreneurs’ wealth is contained within the business and/or the real estate that it utilizes. It frequently encompasses the result of their life’s work.
While it might feel counter intuitive one of the most important things a business owner can do is to have a well thought out exit strategy. Having an exit plan is good business practice along with being prepared for an exit.
Businesses under $5Million generally have more difficulty transferring or selling than above this level
What type of business are you?
Fundamentally there are two types of privately held business.
- Lifestyle – Focused on providing an income first.
- Value creator – Focused on building an asset that has value that subsequently generates income.
How you build and exit the business are different.
Biggest mistake Lifestyle business owners make is believing that their business has the same value as that of a value creator business.
Can you move from one or the other?
Yes, but it requires dedication and understanding how the journey and mindset changes.
What are the key exit strategies
Many people confuse exit strategy with the forms of implementation or options within the strategy. The key strategies are:
- Pass / Transfer to family
- Sell to external third parties
- Sell to people inside the business
- Planned and managed liquidation
Pass or Transferring to a family
Family Businesses
There is a widely stated as truth and contested statistic that that only 30% of businesses transfer successfully from the first generation to that of the second. The original study had a very narrow and focused respondent group. The only thing that can be concluded is not all first-generation business owners transfer to another generation or family member.
If you desire to transfer to another generation or to other family members, the journey to achieve this requires. Successfully enabling the transition from the current generation to the next has additional challenges to other exit options as the lines are blurred between family, ownership, and the business.
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Sell to external third parties
Sale to a third party can provide the most money of any transition for. The averages can be stacked against this as an exit option for the unprepared. Not every business sells. One of the key causes for this is the assumption that when you are ready to sell there will be buyers in the market. Unfortunately, there are buying seasons and these come and go. Some buyers operate out of season and are looking for businesses that are willing to sell at a low price. Being prepared for right buyers requires a shift in mindset to looking at your business from their perspective. You have built value creator business.
Many privately held businesses are wholly or significantly dependent on the outgoing owners, businesses can still be sellable but on terms that require extended payouts and performance.
Sell to people inside the business
Selling a business to employees, partners or key management members also requires a shift in mindset to one of value creation. Can the business truly survive without the current ownership? Like a transition to family members, it requires desire of the partners, management team and employees, the ability to run the business successfully and profitably along with the youth for them to enable their own succession as well as that of the current ownership.
Similar to being prepared to attract an external buyer being prepared, attracting and retaining the talent to be able successfully run the company when you have gone is critical.
Planned and managed liquidation
Many lifestyle businesses either plan to liquidate or have liquidation as the only option. An orderly liquidation is often seen where an unforeseen death, divorce, or distressed situation. This strategy can have advantages of an asset intense business where the sum of the total asset values exceeds the ability of the business to produce the income required. The proceeds of this strategy often results in being significantly different to any fair market value opinions.
Conclusion
Exit strategies remain an often-neglected yet essential part of future-proofing your business. While selling your business can be a goal for some, establishing a long-lasting familial enterprise can be a goal for others. Regardless of where you fall, planning is the most essential part of any exit strategy, as they all require at least some preparation. Setting up your business for familial succession and then finding out that no one in the second generation has the skills to inherit it would be a massive waste of time and energy, likewise preparing for an external sale and taking little to no value-increasing steps. For a successful exit strategy, prior planning prevents poor performance, and is essential to actual execution.
