Is it your dream to build a company and change the world? Or, perhaps,
you just want to own a business that gives you the freedom to live on
your own terms. Either way, you have big ambitions for your company.
So, why bother thinking about an exit? Surely, the ups and downs of
building your business are so thrilling in and of themselves that leaving that business, or selling it, is the last thing on your mind. Hold that thought.
If you’re really serious about growing your business the right way,
an exit is definitely something you should plan for. After all, would
you go through life without planning a will? Of course not. Writing your
will doesn’t mean you’re looking forward to dying; it just means you’re
responsibly planning ahead.
There are many reasons why you should
prepare an exit strategy, but for entrepreneurs like myself, it’s
pretty simple: I love the thrill of starting a new business, but I’m not
as keen about the management side of things.
1. Merger & acquisition (M&A)
"Mergers
and acquisition" usually refers to a larger company purchasing a
smaller company, or “merging” together. In the tech industry,
a well-known M&A example is Google’s acquisition of YouTube. Have
you ever noticed how YouTube videos regularly show up in Google
searches? This is a perfect example of two companies merging to create a
more integrated whole.
When is M&A the ideal exit strategy? The main benefit of a merger-and-acquisition exit strategy is that your company is likely to be highly valued because:
- A buyer has an immediate need for your product or service.
- Multiple buyers may bid against one other, increasing the value of your business.
- When you sell to a competitor, you are more likely to negotiate a higher price than if you sell to a third party.
A
common reason for outside companies to seek to acquire a company is
the edge that act gives them over competitors. That edge helps them gain a foothold in a market, or strategically eliminates competition.
A
well-known example of strategic alignment for acquisition was Steve
Jobs’ development of technology at NeXT. That development set up NeXT as
an ideal acquisition by Apple.
In Jobs’ own words, "[T]he technology we developed at NeXT is at the heart of Apple’s current renaissance."
2. Initial public offering (IPO)
As
the term suggests, an initial public offering lets you sell part of
your company as stock to be traded on a public stock exchange, meaning
that anyone and everyone can buy a piece of your company.
When a
company goes public, it usually gives up ownership of the company, in
return for more cash to grow and expand. The main benefits of going
public include:
- Your team stays in place, and your company continues to operate much as it had before the IPO.
- For smaller businesses in growth mode, going public IPO can help the founder regain some of the original investment.
- There is often a “lock” period after an IPO. According to the SEC, “lockup agreements prohibit company insiders . . . from selling their shares for a set period of time.”
- Publicly traded companies face extra scrutiny from the IRS and SEC. Because of the high regulatory costs involved, many small businesses opt to stay private.
- Due to added pressure from shareholders, publicly traded companies often over-emphasize profits in the short-term.
Should you choose an IPO business exit plan? If
you’re considering an IPO, seek the wisdom of entrepreneurs who’ve had
one and can guide you through the process. Despite the successful IPOs
by Facebook and other tech giants, IPOs don’t always work out. Before
choosing an IPO exit, ask yourself if you really want to hand over
control of your businesses to public shareholders and Wall Street
analysts.
3. Sell to a friendly buyer.
If the idea of M&As or IPOs sounds daunting, consider this. You can sell the business to anyone you please.
In
many cases, business owners opt to sell to a “friendly buyer” such as a
co-founder, key employee or family member. The main benefit of selling
to a friendly buyer is just that -- you’re selling your business to
someone you know and trust.
As mentioned, you can expect three common types of friendly buyers and reasons for selling to each:
- Family members. Selling to a family member allows you to keep the business in the family and thus look out for your own interest.
- Key employees. This is a viable exit strategy when an employee has been key to your company’s success, and knows the ins and outs of the business.
- Partners/co-founders. When selling to a partner, you know he or she is committed to the long-term success of the business.
The
big downside of friendly-buyer exits is that they tend to be less
objective. In other words, the business owner may not seek the highest
sell-price out of consideration for the buyer.
Conclusion
To
many entrepreneurs and business owners, “exit plan” has a negative
connotation. On the contrary, having an exit strategy in place is a
simple matter of being prepared. Having done that, you get can back to
the fun stuff: running your business.
Having an exit plan is about
looking to the future and being proactive, not reactive, when things go
south. Don’t wait until your business is in poor health to start
thinking of an exit strategy. Rather, plan ahead to ensure your smooth
transition out of the business.
With your plan in place, you can confidently grow your company in a way that aligns with your exit strategy.
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