|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
What’s Your Business Exit Plan?
A business exit plan is your long-term strategy for extracting maximum value from the company you built before transferring ownership to someone else. Knowing how and when you plan to exit your business allows you to manage and build your business in a way that will maximize the opportunity when it arises. For example, if your plan is to sell your business in the next ten years, you will need to grow your profits quickly while keeping your debt low. If you plan to keep the business in the family, you’ll need to develop your successor and prepare your family for the transition. If you think you will need investment capital, you will definitely need a clearly defined exit strategy.
There are a number of options for exiting your business; however, the best option is the one that fulfills your vision and maximizes the reward for your effort.
Sell. Selling is one of the more common strategies, and it does offer a few different options. You could cash out completely and leave the company. You could also seek an equity position in the buying company so you continue to participate in future profits. To sell your company for maximum value requires a long lead time - several years - to make it attractive for the right buyer.
Be acquired. Instead of selling your company to another business owner, you may want to have it acquired by a larger company. It could be a competitor that wants to buy your market share, or a company that wants to expand its business lines. If you can choose the right acquirer, you will receive far more value from your business than if you simply sold it outright.
Go public. If your company generates enough revenue and promises increasing earnings, you could look at taking it public through an initial public offering (IPO). Preparing to take your company public can take several years and a few hundred thousand dollars in regulatory and accounting procedures. Once you go public, you have access to your ownership interest in the form of shares of stock.
Employee buyout. If you built a solid company around loyal employees, you can offer them ownership through an employee buyout. The most common way to accomplish that is through an employee stock ownership plan (ESOP). An ESOP provides strong motivation for employees to be more productive and take ownership in what they do.
Keep it in the family. If you have children or other family members interested in the business, you need to develop a succession plan as early as possible. It will take time to develop a successor and you may need to make a plan for children who are not going to be active in the business. Most family businesses don’t make it past the first generation due to a lack of planning and preparing the family for the transition.
Run it dry. This is actually the most common exit strategy, especially for smaller businesses and sole proprietorships. Within a few years of your planned exit, you can begin to extract more value from your business by increasing your salary or paying yourself bonuses. You will need to make sure you are on track to paying off any debt so, when you close your doors you can simply sell any remaining assets.
Liquidate. This is the most straightforward option, used primarily when there are no other options or when there is no business exit plan. Sell any assets at market value and pay off any remaining debt. It usually results in the least amount of value from the business.
It’s never too early to plan your exit. At the very least it will force you to crystallize your vision for your business and how you want to leave it. If your goal is to maximize the value of your business for you and your family, it can take years to fully execute an exit strategy that might include getting the right people in place, creating a succession plan, growing your market share, maximizing profits and lining up another venture to pursue. Your business exit plan increases the likelihood your future will happen as you want it to happen.
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