How to Start a Business: Part 6 – The exit strategy

How to Start a Business: Part 6 – The exit strategy

By Carlee McCullough | Published Yesterday | Business & Economics | Unrated
On our way to wealthy

Carlee
McCullough

As you start a new business or develop strategies for an existing business, give significant attention to your business exit strategy. An exit strategy is a tool used to enhance the opportunity to get your money out of the business upon your departure. If angel investors or venture capitalists have invested, the exit strategy is almost mandatory.

According to Stephen Covey – author of “The Seven Habits of Successful Living” – an entrepreneur should “Begin with the end in mind.” After years of building value in your business, it is only natural that you would want to capitalize and maximize the value upon your exit.

To help in planning, below is an overview of various business exit strategies.

Selling the company

The most commonly used exit strategy is selling the business. Typically the seller receives cash in exchange for transferring their ownership in the company. The wisest approach under this strategy is to maximize the company’s value in order to walk away with more cash in hand.

Issues that may arise when selling the business are determining the value and finding a suitable buyer. However, buyers can be found in obvious places such as selling to employees, customers, friends, or family members.

Acquisition

A close relative of selling the business is acquisition, which entails a larger firm taking over the business. Some businesses have this approach as their initial strategy and all business transactions are directed at this goal. The key to success in this approach is to make your company appear appealing to potential acquirers while maximizing the estimated value.

Some significant companies have capitalized on this strategy in a highly lucrative manner. After purchasing 49 percent of Essence, Time purchased the remaining shares of Essence for approximately $170 million. Bob Johnson of BET sold to Viacom in 2003 for $2.4 billion. Def Jam Records creator Russell Simmons sold his share in the label to Universal Music Group for $100 million. Jay-Z sold his apparel company Rocawear for $204 million. Soft Sheen was acquired by L’Oreal USA for a speculated sum of $160 million.

Merger

A merger, unlike selling the business, is when two companies combine to form one big company. After the value is established for each company, typically the larger company will issue stock to the shareholders of the smaller company.

So in essence, you may not receive cash in hand for this transaction, but the assumption is that the two businesses together create more value as one company. The downside of a merger is the loss of control for the smaller company and frequently the downsizing of employees with the president/CEO staying on in an advisory role.

Initial Public Offering

The IPO, which is the sale of equity in your company through an investment banking firm, is the option that potentially provides the biggest payout. The shares are subsequently traded in the stock market such as the NASDAQ or OTC. This is also the most intricate, complicated and expensive of the exit strategies. This option is the hardest to predict because you do not control whether the markets are weak or strong.

Also, the strength of the market and Wall Street’s opinion affects the value of your firm and thus the value of the shares. Out of the millions of companies in the United States, only about 7,000 are public indicating the difficulty in going public. So unless you are a new technology oriented firm with a unique product or service this road is going to be extremely challenging.

Liquidation

Liquidation is when you close the doors of the business and sell everything, including inventory, equipment and client lists, hopefully at market value. Frequently depending on the time allotted, assets are sold far below market rate resulting in fewer dollars recouped.

If the assets hold a value, selling them and using the revenue to pay off any remaining debt is a wise move. Any remaining revenue will be take home money for the business owners. This exit strategy provides the least return and is probably the most emotionally driven because the goodwill, reputation and relationships that took years to build have little to no value in this transaction.

As author Stephen Covey says, “Begin with the end in mind.”

Next week: “How to Sustain a Business”

(Send questions to Carlee McCullough, Esq., Contract Compliance Officer, City of Memphis-Office of Contract Compliance, 125 N. Main St., Suite 546, Memphis, TN 38103 or e-mail: wealthy@tri-statedefender.com.)