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Preparing business owners for their ideal exit

 
 

STEP ONE

Get Clear on Why You’re Exiting

Why do you want to exit your business? In most cases there are a combination of factors that are either “pushing” you away from your business or “pulling” you to something else. Push factors are legitimate reasons to want to exit your business, while pull factors are things you want to do after you leave your business.

Typical Push Factors

  • Reaching retirement age

  • Feeling your business has reached its peak

  • Worrying you have too much of your wealth invested in one asset

  • Getting bored

  • Experiencing a health issue

  • Needing a break to reduce stress

Typical Pull Factors

  • Spending more time with family and friends

  • Itching to travel the world

  • Deciding to get fit and healthy

  • Wanting to set up a charitable foundation

  • Having the desire to start a new business

The happiest departures happen when there are just as many compelling pull factors as there are push factors.

STEP TWO

Align Your Exit Type with the Reason You’re Leaving

 

SELL OUTRIGHT

This is the closest exit to the stereotypical sale where you sell 100% of your business to a third-party buyer and walk away.

Best fit: You want completely out of your business and you have an attractive company to sell that is not dependent on you to run it.

 

RE-CAPITALIZATION

Under this scenario, you sell a portion of your equity, which allows you to take some of your "chips off the table" while you continue to maintain a portion of your equity in your company.

In a "minority re-cap," you sell less than 50% of your business, and in a "majority re-cap," you sell more than 50%. In both cases, the buyer is usually a private equity group, and very often you will be expected to stay on and continue running your business after the re-capitalization.

Best fit: You want to diversify your wealth and are still passionate about growing your business for years into the future.

 

LIQUIDATION

This is a "fire sale" where there is assumed to be little "goodwill" in your business and you simply sell its hard assets. Goodwill is defined by accountants as the difference between the market value of your business and the value of its hard assets.

Best fit: Your company is distressed and unprofitable, or you have an irresistible opportunity pulling you towards something better.

 

COO/CEO

Another option for exiting the day-to-day operations of your business is to hire a President & Chief Operating Officer (COO) to take over running your business day to day. With a COO in place, you continue to be responsible for major strategic decisions and would likely continue to work in your business and draw a salary.

Under this scenario, you would maintain most of your equity in the company but may choose to provide some sort of long-term incentive (e.g. shares or options) to your COO.

Best fit: You want to minimize the inevitable headaches of running your business, but you want to continue to handle strategic projects and don't mind retaining the majority interest in your business.

 

CHAIRPERSON

Like the COO/CEO exit type above, as a Chairperson, you would relinquish the day-to-day operations to another leader who you appoint as Chief Executive Officer (CEO).

In this scenario, it is unlikely that you would draw a salary or have any day-to-day responsibilities in your company, but you would likely retain all (or most) of your equity in the business and, as a shareholder, may continue to be able to draw dividends from time to time.

Best fit: You want to relinquish all day-to-day responsibilities in your company, don't need to draw a regular salary, and don't mind retaining your equity position.

 

TRANSFER TO FAMILY

In this scenario, you could undertake a family transition where a family member(s) gradually take over running your business. Usually executed over many years, in most cases your shares would be purchased using the cash flow from your business.

Best fit: You own a profitable business, one or more family members are keen and qualified to run it, and you are prepared to manage through a lengthy transition period.

 

MANAGEMENT BUY-OUT

Your manager or managers could choose to buy you out. Given their knowledge of your business, managers can often access bank financing or private equity to raise the money to acquire your business.

Best fit: Your senior management team is willing to take on the debt required to buy your business, and the company is stable and has the predictable profits required to qualify for bank debt.

STEP THREE

Figure Out Your Number

The ultimate judge of your company's value is the market itself. No matter how much you want for your company – or what you think you need – if the market says the business is not worth that, then you're out of luck. In addition to getting a business valuation to understand what your company might be worth to a third party, there is another calculation you should make, which is to understand what your business is worth to you.

When the market valuation and your personal valuation coincide, it may be time to consider an exit.

To answer the question "What is your business worth to you?" it helps to be clear on your motivation for selling. What follows are a few examples, including retiring, being risk averse, and boredom.

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Retirement

If your goal in exiting your business is to retire, you’ll want to ensure you will have enough investable assets to create the income stream you need to fund your retirement.

Risk Aversion

If your goal is to diversify your portfolio, calculating your number works a little differently. Start by analyzing what percentage of your net worth you’re comfortable holding in your company’s stock.

Boredom

Some owners decide to exit because they are bored with their business and want to move on to another project that is exciting them. In this scenario, you may want to sell your business quickly and would be willing to take a discount.

STEP FOUR

Decide What Role You Want to Play in Your Company in the Future

  • THE LENDER

    When selling a smaller business, it’s common that the buyer would ask you to finance a portion of the sale. This means instead of accepting cash for a portion of your proceeds, you would take part of your money in payments the acquirer makes to you in the future. You may be offered interest (called a “coupon”) on the amount you lend the owner. This loan is often guaranteed by your business, so in the event the new owner defaults on your loan, your recourse would be to get your business back.

  • EARN-OUT

    Another role you may be asked to play is that of a senior leader within your acquirer’s company. In this position, you will be tasked with achieving a set of goals in the future in return for additional consideration for your business. This is called an “earn out,” and acquirers use this tactic when they are buying a company that is dependent on its owner or they need to bridge the gap between what they are willing to pay for a business and what an owner wants. Earn outs are especially common in service businesses, and their term typically ranges between 1 and 7 years (the average is 3 years). Your earn out goals will likely be tied to hitting a revenue or profit target in the future, the retention of a specific customer, or any other objective you agree to with your buyer.

  • CONSULTANT

    Another common role you may be asked to play is that of consultant to the acquirer of your business. This is usually a short-term arrangement where you agree to help the new owner in return for a pre-arranged consulting fee. The consultant option is often used when an acquirer would like to quickly integrate your business and only sees a short-term need for your help.

  • SHAREHOLDER

    Another role you could be asked to play is that of shareholder. In a re-capitalization of your business, you sell some of your shares but are usually asked to continue to hold a significant portion of equity in your business after the investor injects money into it. Re-capitalizations are typically offered by private equity groups who want to invest in your business, make it more valuable over time, and then sell their position in your company at a much higher valuation at some point in the future. Private equity companies do not usually have operational leaders on staff, so you may be needed to continue operating your business as both CEO and significant shareholder.

STEP FIVE

Pick Your Spot on the Exit Matrix

Your final step to a happy and lucrative business exit is to pick your spot on the Exit Matrix, which corresponds with two factors:

1. How important is it that you maximize the cash proceeds of a sale?

2. How long are you willing to stay on post sale?

At one extreme, you may have built up enough investable assets outside of your business to be financially secure, and you are willing to continue to be a shareholder in your company for the long run. If this is you, then hiring a CEO and relinquishing your day-to-day responsibilities may be your best exit option.

At the other end of the spectrum, you may have another business you want to start immediately and therefore want to maximize your cash proceeds and minimize your time in your company post sale. In this scenario, you would look to sell your business outright to a strategic buyer.

No one point on the Exit Matrix is better or worse than the other. The key to a happy and lucrative exit is to get clear on your priorities before you start the exit process.