No one lives forever, and eventually you decide it's time to retire. To make this life-changing plan a reality, you need a viable exit strategy. Many business owners are under the impression that when they're ready to sell, there will be plenty of cash-rich buyers knocking on the door. Yet crossing your fingers and praying for a white knight rarely works; you need to be proactive in considering alternatives, like the three listed below. If not, you may find yourself working literally for the rest of your life.
Let a Foreign Partner Buy You Out
According to S&P Capital IQ, a division of Standard & Poor’s, foreign companies are buying U.S. ones at a frenzied pace. During the first five months of this year, foreign companies spent more than $85 billion in mergers and acquisitions, and are expected to spend more than $200 billion this year on U.S. companies. This is the second year in a row that buying is at such a high level, and it's four times higher than 2009. While the large, multibillion-dollar acquisitions get all the headlines, the bulk of the deals are with smaller companies.
The goal as a potential seller is to begin establishing partnerships with foreign companies now. Your business can serve as a local distributor, for example, or a sales and marketing operation for a foreign manufacturer. If this relationship is managed properly and you show results, an acquisition is a natural next step.
Many Chinese companies are interested in expanding their reach in the U.S. through direct sales, and a partnership with a local company is the best first step. Other foreign companies are considering using the U.S. as a manufacturing center for high value-added goods. Increasing labor costs in China, coupled with transport costs, have made China somewhat less competitive relative to the U.S., which has high unemployment and stagnant wages.
The key for this plan to work is to seek out foreign buyers by targeting them as strategic partners first. If you have absolutely no idea where to begin, reach out to nearby consulates. They usually have a business attaché, who can start connecting you with the right people.
Sell Your Company to Your Employees
A sale to employees can be a win-win situation if it’s executed correctly. Typically this works by setting up an independent trust (a separate legal entity) that buys the owners’ shares. The valuation of the shares is usually set by an independent third party. The trust exists for the benefit of employees. So how does the trust pay the owner for the shares? The payment usually takes the form of an IOU, which is paid off over time with dividend income paid to the trust by the company. The trust could also borrow money based on the value of its equity in the company to pay the owner.
The key mistake that some business owners make when considering this option is waiting until the last minute. You should plan on at least five years for you as the owner to be fully paid.
Auction Your Business
If you have exhausted all options and are faced with potentially liquidating your business, consider an auction instead. Auctions usually pique the interest of many buyers that believe they can get a bargain. It doesn’t always work out that way, though, which is to your advantage. The most critical success factor lies in hiring the right company to administer the auction. It should be an institution that is seasoned in auctioning businesses (and not just assets) within your industry. They should have a list of potential bidders ready and should provide a track record of success for auctions.
Read more articles on small-business financial management.