Getting Out: How To Develop An Exit Plan Before You Sell Your Business
There is an old adage that states, "the best offense is a good defense." This theory applies perfectly to implementing an offense aka selling a business. Before you can dream of selling your company for top-dollar, you must have an established, well-thought-out exit plan or strategy. Choosing the appropriate exit plan will require a considerable amount of planning and is not something that should be entered into on a whim. The good news is that the sooner you start, the more rewarding your exit will be and the more likely it is that you will be able to successfully sell your company.
Choosing An Exit Strategy Starts By Understanding Your Options
There are three main exit strategies to choose from: an IPO, strategic acquisition, or management buyout. You can also explore a dual approach that creates a combination of the aforementioned strategies. It is important to remember that each strategy will be customized to fit your unique set of needs. Working with a trusted financial advisor throughout the planning process can enhance your understanding of the sale process and improve the success of your exit strategy.
Below are the common characteristics of the three most common exit strategies.
- IPO – In an IPO exit strategy you will sell a portion of your company in the public market(s). This selling period usually occurs over a set period of years. During this time, your company will be subject to additional financial regulations and requirements, including the Sarbanes-Oxley requirements.
- Strategic Acquisition – A strategic acquisition occurs when another company purchases your business. The purchase can occur through cash, stock, or a combination of the two. In this vein, you will lose operating control of your company; however, you will have the benefit of liquidity. As part of a strategic acquisition, a company might choose to enter into the Mergers and Acquisitions sector, in which another company will purchase all of your company.
- Management Buyout – A management buyout occurs when the next generation of current managers buys your company. This type of transaction is typically settled through private equity investment, assets, or a debt scenario. Generally speaking, a management buyout provide a smoother transition for employees, managers, and you (the previous owner).
Choosing the right exit plan will depend on your objectives. In fact, before you even begin to consider an exit strategy you will need to think carefully about the following list of objectives. Keep in mind that the below items are meant to serve as a starting guide; your company and your financial needs will determine additional business objectives.
- Your future role in the business.
- Your liquidity needs.
- Your company's future potential.
- The impact of Sarbanes-Oxley.
- The current and future market conditions.
Once you have considered the above objectives, you will be ready to meet with your VR Intermediary to consider which exit strategy is right for your business. Remember, the sooner you begin the process, the more likely it is that you will have a smooth exit that is beneficial to both you, your managers, and your employees.