Exit Strategies for Entrepreneurs

exit strategy
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You worked hard to start a business and it’s been very successful.  You know that one day you want to retire, but, that’s as far in advance as you’ve thought.  In addition to saving for your retirement, you should be thinking about an exit strategy long before you retire.  We’re going to discuss five exit strategies along with the positives and negatives of each one.  Think about which option would work best for your retirement goals and the goals you have for your business when you exit.  This will help you be better prepared for your future. 

There are some business owners who choose to pay themselves a hefty salary and bonuses as an exit strategy.  Some business owners will pay themselves a huge salary, reward themselves with a large bonus regardless of how the company is actually performing.  In addition, they issue a special class of stock that only they own and that pays ten times the dividends.  In public companies, this is frowned upon, but, in private companies it’s fairly common.  This is called a “lifestyle company.”

With a “lifestyle company” you don’t reinvest money to grow the business.  You take out comfortable chunks and live on the income.  However, if you’re in a business that needs investment to grow, you can’t take out too much money or you’ll run the company into red.  Moreover, if you have investors, you can upset them if you take out too much.  In order to have a “lifestyle company,” you need to minimize investor dependence and structure the business in a way that allows you to take draws as you need. 

The positives about this type of exit strategy are: 

That you’ll have a large take-home pay;

You’ll be able to live a lavish lifestyle;

You don’t need to think too hard about getting out, because you just withdraw money when you need it.  

The negatives are: 

There may be negative tax implications;

If you don’t plan for the long-term you could end up taking out money that you’ll need later.

Another exit strategy is to liquidate.  Although, most entrepreneurs don’t start a business to close it down later, it still happens.  If you decide to liquidate, you will need to repay creditors and the remainder will get divided between shareholders. 

The positives are:

It’s easy;

You don’t need to negotiate; 

You don’t have to worry about transferring control.

The negatives are:

You don’t make a profit;

Valuable information such as client lists, your company’s reputation, and business relationships are destroyed and you won’t get an opportunity to recover their value;

Your shareholders won’t like not profiting from their investment.

You can sell your business to a friendly buyer.  If you let your friends, family, employees and customers know that you’re thinking about liquidating and shutting down if you can’t sell your business, one of them may be interested in buying it from you.  If you decide to sell to family members, you’ll need to do a lot of planning before getting out.  The problem with second generation families is that a lot of them run the business into the ground. 

The positives are:

Your buyer will preserve what’s important to you about the business;

If a manager buys it, there’s more of a commitment to make it work.

The negatives are: 

You can get too attached to a nice buyer, and under-sell your business;

Selling to your family can tear them apart and they typically put emotion before business needs.

An Acquisition.  You can sell your business to another business who is interested in acquiring yours and avoid the second-generation ruin.  If you decide you want your company to be acquired by another company, make your company attractive.   The positives are:

If buying your company would be a strategic value to the acquirer, you can sell your business for a higher dollar amount;

If you get multiple interests, acquirers could start a bidding war for your company. 

The negatives are: 

Organizing your company to target a specific acquirer could prevent other buyers from being attracted;

Acquisitions can be difficult if cultures and systems clash when the company merges.

An IPO.  If you’re company is funded by professional investors, you protected your equity, and you have experience with taking companies public, this could be an option.  The positives are:        

You’ll get press recognition;

Your stock could be worth hundreds or thousands of dollars;

The negatives are: 

You need financial and accounting expertise that is above the average entrepreneur’s knowledge;

Some forms of corporations will require that you reorganize your company before you can take it public.

Source: http://www.entrepreneur.com

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