Exit Strategies
INTRODUCTION
One thing is to know how to build a business worth a fortune; another thing is to know how to close it. Make sure you have an exit strategy, a way to get your (or investors’) money back. All investors, business angels and JV partners are particularly fussy about the exit strategy: “will I get my money back?”
Entrepreneurs who are launching and developing their businesses often don’t think that decisions made on day one can have huge implications down the road. Different exit strategies offer business owners different levels of liquidity. Ideally, an entrepreneur will develop an exit strategy in the business plan, before actually going into business, because the choice of exit plan can influence business development choices.
In last recent years several New Zealand yacht yards closed their doors for good. Did they plan for it? Did they have an exit strategy? Did stakeholders have what they were hoping for when started a company? What happen to people working in the business? Has the corporate knowledge been retained and utilised? How it was utilised. Was it a coordinated move or “leave it to shredder” approach?
Entrepreneurs should start to think about a future exit strategy because preparing for an exit takes some time. In fact it is a part of developing a company. The most successful exit requires considerable planning. The sooner you start, the more rewarding your eventual exit is likely to be. So, what options do you have?
Let’s consider the following, most common exit strategies:
COMMONLY USED EXIT STRATEGIES
1. Liquidation & Close or Feed it to the shredder
Even lifestyle entrepreneurs can decide that enough is enough. In the worst case, the company will be broken into pieces and fed to the liquidators or simply bleed on a daily basis. This path is dictated by poor financial performance, lack of a viable market for either the company or its products or the impatience of the investors to continue funding a dry hole.
Pros
Who doesn't like seven figures of take-home pay?
There's no need to think hard about getting out: Just pull out the money when you need it.
It's easy and it's natural. Everything comes to an end.
There's no negotiations involved.
There's no worrying about transfer of control.
Cons
The way you pull the money out may have negative tax implications. For example, a high salary is taxed as ordinary income, while an acquisition could bring money in the form of capital gains.
Get real; it's a waste! At most, you get the market value of your company's assets.
Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value.
Other shareholders may be less than thrilled at how much you're leaving on the table.
2. Owner Buyout
The simple buyout happen when the business is sold to the family or employees. In many cases, the founder or the employees will have an intense desire to keep their jobs. Often in this kind of sale, the seller finances the sale and lets the buyer pay it off over time. Or, the employees group will find a way to finance the amount necessary to buy out the interest of the others, thus taking control of the company away from potentially hostile forces. Owner buyout can occur when a well-performing company is generating positive cash flow and profits.
Pros
You know them. They know you. There's less due diligence required.
Your buyer will most likely preserve what's important to you about the business.
If management buys the business, they have a commitment to making it work.
Cons
Negotiation could be effected by emotions.
Selling to family can tear the company apart with jealousies and promotions that put emotion way ahead of business needs.
3. Merger & Acquisition (M&A)
Acquisition is one of the most common exit strategies. If you find another business that wants to buy yours – sell it! This means merging with a similar, larger company. This is a win-win situation when bordering companies have complementary skills, and can save resources by combining.
Now this is important: from inception, you build sales and brand value to get the attention of potential suitors. You may have predetermined a level of profit at which you begin to market the company. You may have done such a good job of building a brand that a competitor or conglomerate will see your company as a good fit to its long-term strategy.
This option often results in some consolidation in the ranks.
Pros
If you have strategic value to an acquirer or If you get multiple acquirers involved in a bidding war, they may pay far more than you're worth to anyone else.
Cons
If you plan from the beginning to sell your company to predetermined type of buyers, that may prevent you from becoming attractive to other acquirers.
Acquisitions are messy and often difficult when cultures and systems clash in the merged company.
Acquisitions usually come with some strings attached (e.g. non-compete agreement) which could make your life difficult.
4. Go Public or Initial Public Offer (IPO)
This is the most complex exit strategy regulated by Securities Commission of New Zealand. The regulations will keep your lawyers happy for years to come. If you plan to use this option, you must start the planning process almost from inception due to the stringent recordkeeping necessary.
Pros
You may land your face on Newsweek’s cover
Your stock will be worth millions of dollars.
Your VCs will to insure their shares will retain value even when the lockout period expires
Cons
You need financial and accounting rigor from day one far above what many entrepreneurs generally put in place.
Before you can be taken public some form of S Corporation (meaning reorganization) will be require to avoid double taxation.
You'll spend your time selling the company, not running it.
Investment bankers take hefty (about 6%) percentage off the top, and the transaction costs on an IPO can run in the millions.
When your lockout restrictions expire (usually lasting 90 to 180 days after the company goes public) your stock will be worth as much as an old chicken coop (I’m exaggerating).
It is not intention of this post to deliberate on how shipyards in NZ closed down. But, for all involved it could be a good time to ponder how that process went.
