As small business owners and investors, I am sure that with the excitement of getting the business up and running, the last thing on your mind is an exit strategy. In fact it could be argued that the whole notion of an exit, while just taking the bull by the horns, seems utterly counterproductive. Who in their right mind would be contemplating an exit, when they have just started?
Needless to say, there are many reasons why you should plan and know your exit even before you start. Before I dwell into the various exit strategies, it is important for you to know, why an exit strategy is one of the most important factors that you should plan for, as you set up a business.
Why plan an exit?
Sometimes businesses mature and stall in their growth. The ones who sustain, grow and thrive beyond the macro-economic growth are the ones that make it into the big league.
Therefore, it is imperative that you have a plan and a view, as to how you are going to get repaid for the risk, investment, and time that you have put into the business.
There are also many other reasons, beyond the need to get a windfall, that make it inevitable to have an exit strategy.
Sometimes business relationships don’t end on a positive note. Therefore, as a small business owner or investor you need a plan and a view as to why, when and how you will exit.
Needless to say, there are many reasons why you should plan and know your exit even before you start. Before I dwell into the various exit strategies, it is important for you to know, why an exit strategy is one of the most important factors that you should plan for, as you set up a business. Why plan an exit? Sometimes businesses mature and stall in their growth. The ones who sustain, grow and thrive beyond the macro-economic growth are the ones that make it into the big league.
Therefore, it is imperative that you have a plan and a view, as to how you are going to get repaid for the risk, investment, and time that you have put into the business. There are also many other reasons, beyond the need to get a windfall, that make it inevitable to have an exit strategy. Dispute Sometimes business relationships don’t end on a positive note. Therefore, as a small business owner or investor you need a plan and a view as to why, when and how you will exit.
Other than income tax (in most countries), death is the only other certainty. You need a firm idea about how dependent the business is on your existence, how your family will survive and how your remaining partners will be able to conduct the business.
What will happen if you are unable to work because of a mishap or illness? You need to have a plan regarding who will take care of your family, investment and you.
It is important to know when and how you want to retire, and how are you going to recoup your investment and time that you put into the business.
It would help to have an exit strategy in place if you want to diversify or want to avail of a new business opportunity.
How would you exit from your business if you find out that some of your key stakeholders were deceitful or defaulting on dues to you?
What are your plans if your business stagnates? An exit strategy will help you save your investment and time if you want to quit. The following set of points should be taken into consideration:
First things first
Now that you know why you need an exit strategy, you need to be aware of a few essentials, which you must take care of, as you plan to start and exit a business. However, this set of actions will help you plan:
1. Have rigorous, fool proof financial accounting methods, policies and procedures in place, from day one.
2. Have a shareholders’ agreement, which clearly spells out your rights as a founding partner.
3. Create a tiered (preferred) class of shares that will enable you to pay out higher dividends and share of profits and will ensure that you have higher voting rights.
4. Get power of attorney documents signed by all partners giving you the right to run your business (legally), without undue interference or limitations by other partners.
5. If you have a limited company with a board of directors, get blank board resolution documents signed by all board members.
6. Get an appointment letter attested to, and signed by all partners clearly stipulating your role as the CEO of the company, your salary and tenure.
To most readers, the suggestions above might seem absurd, preposterous and over cautious. Believe me, when an opportunity arises for an exit, you will really appreciate that you went through the arduous task of getting the accounting and legal work done.
So what are the exit strategies?
Initial Public Offering (IPO)
IPOs are a rarity and of the millions of small businesses in the world, only a few ever make it to an IPO. Unless you have the backing of a well known and solid venture funds, that has a track record of getting small companies public, this is not a recommended option for most start ups or small businesses.
The process of getting prepared for an IPO is expensive and cumbersome. It involves lawyers, auditors, investment bankers and consultants.
During an IPO process you are under the spot light and subject to various regulatory compliances and audits that you probably never knew existed. You start off the process, by being the ultimate salesman, convincing investors that your business is worth much more than it is.
Although IPOs are glamorous and famous, they should not be your first option. However, if you have a unique technology protected by patents and are funded by well know venture funds, you are truly one of the few who have the potential to make an IPO.
Getting another entity to acquire your business is one of the most common way to exit from a business. The principle is simple – find another business that is ready, willing and able to buy your business. Sell it and keep the money, and occasionally get paid more for remaining in the business and helping the new owners run the business, that you have started.
Most successful small businesses are acquired by much larger public companies. What this means in essence, is that you are in a better position than the buyers are. This is so because the people negotiating and making the acquisition decisions have not invested their own money. They are gambling with other people’s money. Therefore, you have the upper hand in negotiating price versus the buying side.
My recommendation for small businesses taking this path for their exit is to know in advance their potential acquirers. This way, you could craft and design your propositions in a manner complimentary to a potential acquiring company.
The trick is not to limit the exit to one or two suitors. Have an array of suitors and evolve your propositions over a period of time. This way, you have the potential of starting a bidding war among multiple suitors or at the least creating a strategic value to a single acquirer, who may pay you more than what anyone else is willing to pay you.
Selling to family, friends or employees
If you truly believe in your business and are emotionally connected to it, then selling it to a reliable and known buyer. such as a friend, relative or a trusted employee might be a better option.
Small businesses that take this path are not doing this for an outrageous monetary exit, but rather to ensure that the quality, integrity and continuity of the business is assured. Very often, entrepreneurs who take this path are not motivated by personal glory or money, but rather are seeking buyers who will preserve what is important to the founder.
Bleed to death
There are some business owners who bleed their company dry. Such people pay themselves a chunk of salary and a bonus, irrespective of their company’s performance.
Some of them give themselves five to ten times the dividends that the other shareholders receive. Although these activities are illegal in public companies, they are perfectly legal in private companies.
In these “cash is king” companies, the owners do not reinvest in their business nor do they consider growing their business. Rather than reinvesting money in growing their business, these companies, keep investments minimal and withdraw huge amounts of cash and live off the income of these businesses.
Keep in mind that in most businesses, cash that is taken out for personal use is no longer available to the business for reinvesting. If your business plan deems that you must invest to grow, then of course, this is not a viable option.
There are other ways that a “cash is king” exit could work. You could get your family to loan you a large sum of money and pay high interest for the loans. This way the cash is kept in the family.
A final note on exit
No matter what your exit strategy is, it is important to note that the valuation of your company is primarily driven by two factors. The paramount of which is the cash flow derived from the revenue that you generate. The other most important factor is growth. Therefore, time and pace your exit when your cash flow is maximised and when growth is poised to peak.
In fact, when you think about it, this is a truism that is applicable in your professional career or business. Always exit on a high note. Look around you. Great business leaders remain great because they exited at the peak of their company and personal growth.
As the famous Aesop fables teaches us “Affairs are easier of entrance than of exit; and it is but common prudence to see our way out before we venture in.”
John Lincoln has over 20 years telecommunications experience in the USA, Japan, Europe, India, Dubai, Malaysia, Latin America and various other countries. He has extensive senior expertise in international telecommunications sales, marketing, business development and customer service delivery. John also has executive experience with general management, marketing, P&L, product development and revenue management responsibilities in both consumer and enterprise segments for both the fixed and mobile sectors. In addition John has an impressive operational and management portfolio of established proven expertise in incremental business value creation and management of large multi-cultural teams in Vodafone Global in the UK, Japan Telecom in Tokyo, AirTouch and Pacific Bell (now AT&T) in San Francisco and Tokyo, Airtel in Delhi and other telecom and technology companies. Additionally he has extensive large scale business development, M&A and operational project experience across the USA, Europe, Asia and Latin America. John has an MBA and MS in Telecommunications from the Golden Gate University in San Francisco, California, USA. You can find John’s personal blog at johnlincoln.blog. com. He can be contacted via: john.lincoln@ gmail.com, Twitter: @lincolnjc.