(Editor’s note: This article originally appeared on Bizjournals.com, whose parent company, American City Business Journals, is the largest publisher of metropolitan business newsweeklies in the United States, with 43 business publications across the country.)
For a business owner, an exit plan is a lot like the global positioning system in your car. The GPS tells you, and everyone else in the car, exactly where you’re going. In fact, with the GPS, any licensed driver can take your place behind the wheel, and you’ll still get to your destination.
While an exit plan for the owner of a business isn’t exactly a miracle of modern technology, it does offer the advantages of a GPS for key family members or other leaders of the business who wouldn’t know what to do if the owner decided to retire, or if he or she were to unexpectedly die or become incapacitated.
That’s why an exit plan should be a key part of any business plan. If you’re the owner of a business, you can’t assume that everything will continue without a hitch if one day you were unable to (or no longer wanted to) do all the things you currently do for your company.
Yes, that means you will have to face your own mortality, something none of us likes to do. But which is better – contemplating your death, incapacitation or retirement – or forcing your family to make decisions on the fly with no guidance from you and nothing close to a GPS to help them reach the right destination?
If you don’t have an exit strategy, it’s time you prepare one. Here are some items to consider:
- The ideal date to exit. How many more years do you plan to lead your company? Even if you find it difficult to predict, select a potential date, and you can refine it as your company evolves. Revisit your exit strategy at least annually and adjust for new developments.
- How long it will take to sell your business. Owners who plan to retire soon should be aware that it takes nine months to a year to sell a business. The closer you get to retirement, the more important a definitive date becomes. If you aren’t prepared to initiate your exit strategy in a timely fashion, you could miss out on a once-in-a-lifetime opportunity to sell when your company is most valuable.
- The type of exit strategy that’s right for you. The more elaborate the exit strategy, the longer it will take to finalize the deal. It could take several months or several years. An investment banker experienced in mergers and acquisitions can explain the options and the time you’ll need to complete different types of deals. Common exit strategies include:
- Passing the business down to family or heirs, either in whole or in part, depending on whether you want to a retain a stake in the company or not. Either option allows you to take some cash out of the business to help fund your retirement or invest in a new opportunity.
- A management buyout through which the management team buys the company.
- A corporate divestiture, through which you sell to a strategic buyer looking for a company that is a good fit for their existing operation, or you sell to a financial buyer such as a private equity firm that wants to enhance the value of the company and sell it later at a profit.
- The market’s demand for companies like yours. When there are fewer companies available for sale and plenty of buyers in the market (as there are today), sellers are in the driver’s seat and your company will command a higher price.
- The stage of your industry’s business cycle. While the economy plays a significant role in a business sale, your industry’s business cycle is also critical. Your business will be worth more to buyers when your industry is trending up, not down. If you are contemplating a sale, be sure to watch industry indicators closely and be prepared to act.
While these are some of the most common exit strategies available to middle-market business owners, you should seek help from an experienced M&A firm to weigh the breadth of your options.
When the housing bubble burst in 2007 and the economy tanked, investors backed away. Today, investor confidence has returned. Private equity and corporate investors, who have been sitting on as much as $3 trillion, are eager to put their investment capital to work.
Whether you’ve been in business for five years or fifty, an exit strategy should be a key part of your business plan. It will ensure that you and your family can maximize the value you have worked so hard to build.
About the Author
David J. Mahmood
Founder and Chairman
Phone: (214) 217-7750