It’s Never Too Late to Start Planning Your Exit Strategy
Hopefully, you’re thinking about an exit strategy because your business is fabulously profitable and it’s time to reap the rewards of your labor. It’s always nice to take the money and run.
On the other hand, if you’re business isn’t doing as well as you’d like, it may be beneficial and perhaps necessary to devise a getaway plan. A solid exit strategy can limit losses if you’re not profitable.
Your need for a way out could also have nothing to do with money. It may be due to conflicts with your partners (remember the famous split between Zuckerberg and Saverin). Or perhaps you’re heart just isn’t in it anymore, and you want something new.
Regardless of why you want to leave your company behind, now is a better time than ever to start planning your exit strategy. Because the wrong approach could have serious negative financial consequences.
Here are four strategies to start planning your exit strategy today
1. Sell to an employee or family member
If possible, selling to an employee or family member is a desirable option for many owners. It’s an especially practical option if you run a small, close-knit company that is profitable (being profitable makes buying the company more appealing to current workers). Long-time employees or family members who have been working at the company know how to run the operation, will have a commitment to making the business work, and will be motivated to continue taking care of other workers.
Corey Rosen, the founder of the National Center for Employee Ownership, says one of biggest challenges owners face when they want to move on is “finding a way to turn their equity in a business into cash.” But he attests that “selling to employees can provide an answer” because there are several options involved.
There are essentially three ways an employee (or employees) or family member can buy the company from you. Your options include:
- Lump-sum buyout: The employee buys the company with his or her assets or by taking out a personal loan, and your profits are taxed as capital gains. This is not a common option because of the risk and high cost involved.
- Installment sale: You essentially finance the purchase, and the buyer makes payments over time plus interest. This allows you to defer taxation to some degree. Money made from the sale is taxed as a capital gain, while the interest you make off that financing should be reported as ordinary income.
- Employee Stock Ownership Plan (ESOP): ESOPs are similar to company retirement plans, but provide a stake in the business. Employees get cashed out after leaving the company. It works as a buyout because you can have the company make tax-deductible contributions to an ESOP trust, which can be used to buy you out.
What you choose depends on your company’s situation. You want to think about who’s most deserving of owning the business. Of course, taxes play a role, which means you need to analyze which option leaves you with the most money.
2. Let your partners buy your shares
If you’re running a business with one or more partners, having them buy your shares may be ideal. Your partnership agreement should include a dissolution strategy, which is like a prenuptial agreement.
A dissolution plan may not seem necessary in the early stages of a company, but you need to have it in order to avoid a potentially messy situation if you choose to leave. If you don’t have such an agreement, then hopefully your partnership is good enough to ensure a fair and amicable split from the company.
Before you sell your shares to partners, you should also get a business valuation to ensure the price you’re paid is fair. During negotiations, hiring a good acquisitions attorney (even if there are no hard feelings) is advised to guarantee everything’s done according to the book and both sides win.
Note that you will most likely be paid in a lump sum or installments. Consider what’s more beneficial to you financially and personally. You may just want a chunk of cash and be on your way (but that could leave you with less money in the long run).
Also, you should think about what option is best for your partners, as disagreements could prevent a deal from happening.
3. Set yourself up for acquisition
The idea is simple: Find a company that wants to buy yours. This could be a competitor or a large corporation looking for new growth opportunities.
But before you start shopping your business around town, you may want to clean up the business a bit. When you start planning your exit strategy, ere’s what you can do to make yourself more attractive:
- Focus on the company’s operations: The vast majority of buyers won’t consider a company that’s not looking great on paper. Take time to identify where your business is leaking cash. This could include everything from updating old tech and improving budgeting methods to finding ways to boost revenue.
- Show how your company is a strategic fit: If you know of other companies that are interested, figure out how to show them that your company’s culture and market positioning can open new opportunities for growth.
- Know your value (or build it to what you want): Waze may not have expected to sell for $1.5 billion to Google, but a bidding war between the search engine giant, Apple, and Facebook brought the navigation app up to that price.
If you’re looking to get acquired, don’t settle for a fast exit. You could be leaving boatloads of money on the table. If you can, plan ahead and give yourself time to build the company to the value you desire.
4. Get the cash flowing to you now
Your business is an asset. If you want to bid it farewell, you most likely want to turn that asset into cash. There are actually other ways to do this than having a buyout. Here are two simple strategies you can try:
Pay yourself a much larger salary
If you’ve been paying yourself a low salary so the company can grow, maybe it’s time for a big raise. While this will show up as lower retained earnings, it won’t really affect how sellable your business is. It will affect your quality of life as well as help your exit strategy start today.
But there are some disadvantages to consider:
- Giving yourself a bigger salary could anger partners and employees. It’s important to communicate what you’re doing, seeing if they’re okay with it. Then you should be establishing a mutually agreed upon way to pay you more now.
- You may be limiting how much the business can grow, which, in turn, limits how much money you’ll get overall by the time you make the sale. A sale can be a long, drawn-out process.
Liquidate and shut the doors
Of course, if the business is failing, this may be the only option you have. But even if your company isn’t having a tragic collapse like Pan American World Airways, you can still close a profitable company. It happens all the time.
Sell all physical assets and non-physical assets, like real estate and IP. Pay off employees and debt. Then, grab all the money that’s left and ride off into the sunset. But before you do, consider the potential negative consequences, like:
- Getting below-market value for your company (when a buyer wants to sell without a discernable cause, buyers tend to be wary)
- Hurting your reputation, especially if you don’t help clients find other options. Take care of those relationships before closing the doors.
- If your company has shareholders, they may be mad that their investment won’t be given the chance to reach its full potential.
Doing your exit strategy the right way
The first step in making your exit painless and successful is to start considering which option is most advantageous. This should be for you and all concerned parties involved.
Communicating expectations is crucial to ensuring you and others are satisfied with the outcome of an exit. That’s how everybody wins.