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Does Your Business Have an Exit Strategy?

Successful business owners plan in advance how they will exit their business. If owners do not have definitive exit strategies, they should predict a value at which to sell if the opportunity presents itself.

One day, in my consulting firm, that opportunity came to me from left field and I passed it up because I never thought about what my business was worth or what I was going to do when I sold it. Here are examples of business exit strategies:

Sell

Two common methods are to sell to an outside buyer or sell a portion of the business to working or silent partners. Selling to an outside buyer may be difficult if the buyer does not have the funding to buy the business. The seller can consider selling with terms that include a down payment and monthly payments for the remaining balance. But beware! I used this process to sell a retail business and experienced tremendous difficulties because I hired the wrong law firm to represent me in the transaction. Liens were filed incorrectly, resulting in my losing thousands of dollars. I never recouped the money due to me.

Employee Stock Option Program

Also known as an ESOP, in this type of exit strategy, the owner can sell his shares or a portion of his shares to the employees of the business. This transaction works best if your business has a minimum of 25 paid full-time employees. It is a great option for those business owners who are concerned about company legacy and employee welfare. To represent your interests in this type of exit, please hire an investment banking firm specializing in small and middle market ESOP transactions.

Merger

Owners may consider merging their business into a larger company. In the past, I launched a technology company. I connected with the president of a competing firm to discuss joint strategic alliance opportunities. He offered to buy out my business, merge it with his firm, and offered me a position leading one of his regional offices. Having experienced extreme difficulties in selling my former business, I spent extensive due diligence before accepting his merger offer. After two months of researching his staff, and clients and discussing the opportunity with my clients and staff, I finally accepted his offer. However, there were still several mistakes I made. His offer of stock ownership was not real stock. Phantom stock programs provide employees with benefits without giving them real stock. Sometimes this is referred to as shadow stock. These stocks are to be valued as real company stock. But my new boss valued his real stocks as he felt it was worth, not based on any industry valuation methods. I realized my phantom stock could be worthless.

Initial Public Offering

Another exit strategy is to initiate an IPO, where your company goes public. In the late 1990s, many tech companies jumped into an IPO because of growing tech stock valuations. Moving your company into an IPO takes extensive experience and guidance. Speak to expert legal and investment teams that can lead you through this process. In March 2000 the dot-com bubble burst and many small tech publicly traded companies lost 78% of their value.

Liquidate

Shutting your business doors may be the only option remaining for many business owners trying to exit their companies. Businesses in shrinking industries such as retail may have no other option when buyers are non-existent. This occurred during the latest pandemic. Online shopping grew tremendously, big-box stores were closing and many small boutiques sold off assets and closed their doors. This is one option many business owners do not want to face. Avoiding this situation is a good reason for knowing the value of your business and having an exit plan.

Bankruptcy

If your business suffers from a catastrophic event, there may be no other option than to exit by filing bankruptcy. In most instances, business loans and company debt are backed by personal guarantees of the owners. Thereby forcing the owners to file personal bankruptcy. In 2008 during the mortgage collapse, more than 170,000 businesses were forced to close. Have a backup plan for potential financial collapses. During these types of events, businesses with cash reserves or access to increased debt may survive.

Key Lessons Learned:

• Business owners should create an exit strategy as soon as possible.
• Know at any point in your business the valuation of your company.
• Research and select the best legal and investment banking representation-those with experience in similar-sized companies.
• Know at what point in the business when liquidation should be considered as an exit before acquiring too much dept that leaves bankruptcy as the only option.

Written by Darlene M. Ziebell

Darlene brings extensive knowledge in business consulting and entrepreneurship. She bases her methods on a unique blend of effective enterprise strategies and the battle scars she acquired in four businesses, including startups, ESOP, acquisitions, partnerships, bankruptcies, and lawsuits. Her management consulting firm grew sales by over $40M advising more than 20% of the Fortune 1000.  In addition, she mentors business owners, guiding them on successful growth strategies through her customized business methodologies.  Nothing beats her experience.

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