Should I Think About an Exit Strategy Before Buying a Business?
Are you thinking of buying or starting your own business? In that case it’s a good thing to think about exit strategy, even if you don’t intend to sell the business you need to have a think about this for various reasons.
Why Think About Exit Strategy if I Don’t Intend to Sell?
You may not buy or start a business with the intention to sell, but sooner or later you will have to hand it over to someone else, which in that case is the exit strategy. It is also important to be aware of your options because as much as you love the idea of running a business right now, you might not love it so much ten years down the line. Things change and opportunities sometimes present themselves in ways you never expected them to. It’s also better to know your options up front rather than rush into bad decisions later on if you for some reason are forced to sell your business.
The Lifestyle Move
"This isn’t technically an exit strategy, but it’s a way of making your company work for you."
Normally business owners re-invest most of the money straight into the company and pay themselves a very moderate salary. Some entrepreneurs have rethought this concept though - they don’t want to marry their business, they just want to flirt. So instead of working sixty hour weeks for twenty years, they create a business that pays them well, for a minimum amount of their time. That’s not to say they don’t invest time (especially in the beginning and during certain phases), or that they don’t reinvest some of the money, but their intention is not to create a worldwide conglomerate that they sell for a billion dollars. They just wanna make a good living right now and don’t gamble their time for a potentially great buy-out ten years down the line.
If you have other investors in the business though, you can’t take out huge sums of money and leave them with nothing. Nor can you take out so much that it hurts the business. And remember: you might not need the money right now to reinvest in the business, but you might do one day further down the line.
Usually this happens when there are problems with the business, but you can decide to close the doors any day. It means you will have to use any asset to pay back creditors, as well as divided he profits with other shareholders.
It is, of course, a simple way to get out of a business - you just close the doors. However, it won’t leave you popular with anyone who was involved with the business; from suppliers to clients and staff. Your reputation won’t exactly reach a new level of greatness. Also, you would make a lot more money if you sell it. But if you’ve had it, you’ve had it.
Sell to Friends and Management
Rather than putting your business up for sale to someone you don’t know, you might opt to sell it to a current client who is in awe of the business, or someone on the current management team who you trust can run the business properly. You may even hand it over to family.
This option comes with the advantage of leaving the business in capable hands. You might even still be around for the take-over, helping them manage the business, as you slowly exit.
The not so great part is that chances are you are helping them finance the buy-out - letting them pay it off slowly. Of course, this might not be a problem, it depends on how soon you want the money. And there is the exception to the rule - they may put up the money, or take a loan to be able to finance it in terms that are better for you.
If you structure a buy-out where you mix your emotions into the mix, you may sell for less than the company is worth, or end up with an unhappy buyer when they realize some hick-up they weren’t aware of when buying. Like you forgetting to renew a certain license or other and them being fined for it. Also, if there were more than one potential buyer there might be jealousy within the family (if someone in your family bought it) or within the company, if there were two bidders.
This means another business buys up your business. In theory it’s great - you find someone who needs what your business provides as part of their business and everyone walk away happy. The problem is that the new owners might not get along with your management team, which often leads to unhappiness and sometimes a new management team altogether. It has also happened that extremely successful businesses have gone down the hill as the buyers haven’t had the same vision for the company and run it to the ground. There are also many great stories of unsuccessful businesses being bought up and turned around.
A very good thing is that you have the chance to properly negotiate the price here - the value of the business in this instance is the value it has for the business buying it. If it would be highly valuable for them to buy your business, then it’s technically worth more than the “real” value of the business. It’s perceived value, in other words. And sometimes the person negotiating the deal is not the owner - i.e. they don’t write the paycheck, so they may not be as stringent.
Some entrepreneurs decide upon this exit strategy as soon as they set up the company and work towards becoming valuable to another company. The problem is that some set their goal on too few companies and end up not being bought. Always aim to make the business successful standing on its own two feet as well.
Going public sounds great - it’s a game for the big players. It also costs a fortune to get ready for and you have to charm all the Wall Street analysts and make them believe your company is worth ever so much. It’s hard. It’s very hard. And it costs a lot of money. Don’t do this unless you are a pro or have seriously considered it and been advised by several different people about what it is truly like to go public and what it will mean for your company specifically. Not all companies should go public. In fact, very, very few should.