While the day-to-day decisions can make it easy to put off a thorough analysis of exit strategies, it pays to consider the future long before it becomes the present. There are a variety of exit strategies, but the majority fall into one of five general exit strategy categories. Understanding the advantages and disadvantages of each will help you map out a successful path for the future of your company.
Owners of private companies frequently develop an exit strategy that doesn’t really involve an exit at all since it consists of compensating themselves very handsomely while still at the helm. This most often takes the form of a huge salary, sizable bonuses irregardless of performance and a special share class that yields dividends far out-pacing anyone else’s.
Advantages: Planning your exit is not a complicated matter since you are simply pulling out money as you need it. Generous compensation is the major draw for this exist strategy.
Disadvantages: Money in your pocket is no longer available to operate and grow your business, so be sure you do not shortchange your company to the extent its continued success is hindered. It’s best to reduce dependence on other investors as much as possible and structure your business to allow you to draw out cash as desired. The way you pull money out can have negative tax implications.
This strategy is straightforward and simply involves closing the business. While it is doubtful any business owner looks forward to an exit strategy of liquidation, it happens frequently, particularly in retail. Keep in mind if you end up going this route, creditors will be paid with your proceeds first.
Advantages: It is simple. There are no buyer prospects, no negotiations and no ownership transfer.
Disadvantages: At most, you can expect to get the market value of your company’s assets. There is no value placed on soft assets like client lists. Other shareholders are likely to feel you are leaving too much money on the table. Employees are left without jobs and customers left in the dark.
Rather than liquidation, consider whether an employee, family member, customer or other party passionate about your company may be interested in a buyout. Oftentimes, you will be able to finance the sale and let the buyer pay it off over time.
Advantages: Less due diligence is necessary than with an outside buyer unfamiliar with the company. You are also more likely to see your legacy preserved.
Disadvantages: If passing the company down to one or more family members, consider what complications could arise if there are disagreement over who has authority or who has more shares. It can be common to leave too much money on the table when dealing with a familiar buyer. If any difficulties arise post-purchase, the buyer is more likely to expect you to come to the rescue.
As the most common of exit strategies, merger or acquisition involves finding a buyer for your business, negotiating terms and selling your company. Unlike public markets where your company is valued based on your industry, a private acquisition operates outside of such limitations when it comes to perceived value.
Advantages: If the buyer perceives enough strategic value, you could end up receiving more than your company would be worth elsewhere. If you are lucky enough to spark the interest of multiple buyers at once, you may have a bidding war on your hands and see your price soar higher.
Disadvantages: A bad fit can be disastrous to both companies. While it is important to make your company attractive to potential buyers, don’t take it so far that you begin customizing your product line to impress a specific buyer. If that buyer does not pan out, you could end up with a company difficult to sell to others.
This is the exit strategy that gets all the media attention, but only a fraction of the millions of companies operating in the U.S. ever go public. Many of those aren’t launched by entrepreneurs; they are spin-offs of larger conglomerates.
Advantages: While risks would seem to outweigh any benefits in many cases, this provides an opportunity to take a company public if that has always been your dream.
Disadvantages: You need to impress hundreds of Wall Street analysts, an extremely costly and time-consuming process that may not yield the results you anticipated. If your efforts fail, you’ve thrown away a large chunk of money. Even when an IPO succeeds, the company continues to be tied to the perception of analysts. Regulatory requirements may mean this is not an option for your company.