An exit strategy should be planned the day you start your business. Every decision made along the growth of your business will either limit or create opportunities when you decide to exit. Some even say that the entrance strategy is actually more important than the exit strategy.
Why is the start important for a proper exit?
Every step taken to set up a company will have an impact when the company gets sold.
Setting up you company
We often see a rush to get started , and by doing so decisions are made very fast , after all getting started is what is important, right? But what is the impact of the decisions you make? Should you decide to be a sole proprietor, a partnership, and LTD, an LLC, a GMBH, incorporated or one of the many other possibilities?
Take the United States as an example . The table below shows you some go the impact of the decision of a company set up at the time of exit:
Which one is right for you? A legal counsel is a great person to ask. They will take the time to help you along the way.
Investments and Financing
Did you get financing to build the company? There are, as we know, many types of investments such as borrowing from friends and family, Traditional Loans, Fundraising, Investments and now Crowd Funding. What are the terms that were set ? How will they affect your ability to exit? As you get financing keep in mind what the impact will be and what you promised to do as you exit.
This is often overlooked when a business is set up and creates quite a few issues at the point of transaction. What are your investors, your Board of Directors' voting rights? Could they go against a sale? What are the rules of separation? Will you need to collect approvals in order to make the transaction legal? Do all of the shareholders have the same rights?
For example do you have an investor who also has distribution rights? Does the agreement include a "first right of refusal" ? The decision to sign and agree to give up some control while building your business may happen buried in a contract. Can they stop the transaction from going forward? This can affect your ability to exit and any issue can be viewed as a risk for a potential buyer and devaluate your business.
For those who are Shareholders or have Stock Options, are they Venture Capitalists, Angel Investors, Individuals, Employees? Those shareholders will have a say in any potential exit strategy. They have to be notified, they will have to sign paperwork giving you the right to move forward.
Where did you locate your business? Do you have offices in different parts of the world? How did you set up the businesses, do you have people who own parts of the business locally? how did you set up your offices, your accounting? Your contracts? This is something that you should only set up once and do so with a full understanding of what that these decisions will mean when you exit.
Know what you want
You built it successfully. Now you want sell it. What are your goals? Do you want to create a family legacy? diversify? create an estate ? see your “baby” thrive in the hands of someone else? retain interest in the business? change your lifestyle? benefit your community?
How about your financial needs? do you want to increase your financial liquidity, your net worth? Would you accept an earn out ? Is an IPO the option if you want to remain in the business? What about an ESOP? or is liquidation where you are at?
What do you want for employees? They have been there to help you succeed. Now what? Do you want them to keep their jobs? Did you work an a succession plan so that they can run the business without you? Can you help them be successful ?
Knowing the answer to these key questions will help you in sorting out potential acquirers , it will help narrow the proper transfer channels or simply said, determine the possible ways to transfer your business. For example : should you focus on a Strategic Buyer or Related Buyer Channel? Knowing your motives for selling will dictate the best transfer channel for you, It should align with your financial and personal goals.
Each channel rewards different Value Drivers.There are two type of value drivers, External and Internal.
External drivers cannot be controlled Internal Drivers Increase the Value of the company
These drivers will affect your Exit Channels in different ways. A Strategic buyer will be affected differently than PE Firm or a Related Buyer (someone you know) and therefore they each will value your business differently. So what is best for you?
Keep this formula in mind as you look at the points below. As much as you have needs so do buyers :
Value = Strategic Fit + Timing™
A Strategic Buyer :
•Understands the potential of the purchase differently
•May be willing to pay more
• As an owner you may loose control
•May not retain employees (Management team)
•May offer Cash/Stock combination
•May not further develop your technology in the long run
A Financial Buyer (PE Firm, Private Buyer): •Have a process fro acquisitions
•Know what they want
•Will do the investment with limited time for return
•Will try to bring the value down
•May include Earn outs
•May not retain employees (Management team)
Related Buyer :
•Might offer an easier transaction
•Known entity /friendlier
•Better likelihood of continued success
•Tax benefits (US ESOP)
•You as as a seller will be more in control
• It will most likely be a slow process
•Managers are not always entrepreneurs
•You may get a lower value
•The buyer/buyers may face lending challenges
•Potential for deferred risk separation
These are a few of the things to consider as you look at exiting your business. Selling is not a fast process, but it is a process. The earlier you start thinking of what you want, even as you start, and understand what it will take to sell, the easier it will be. Remember while all of this is happening you still have to run and grow your business. For a Mid Market Company, the average time for a transaction to be completed is 18 to 24 months.
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