For businesses, the time comes when closing, selling or otherwise transitioning ownership becomes a pressing consideration. That's why it helps for a business owner to have already planned an exit strategy.
“A lot of times much of their net worth is tied up in the enterprise that they've created," says William Barrett, CEO of the Mandelbaum Salsburg law firm in Roseland, New Jersey. “To not plan for what you're going to do with this asset and how you're going to maximize value is risky."
Business owners have many potential reasons to plan for a graceful endgame. They range from providing heirs with a legacy to giving investors insight into how they'll get a return on their investment. But unfortunately, many lack plans.
—Loreen Gilbert, president, WealthWise Financial Services
“We find most business owners don't have an exit strategy until they are ready to sell or must sell," says James Cassel, co-founder of Miami boutique investment banking firm Cassel Salpeter. “They might think about it, but they don't do much about it."
Exit Strategy Choices
There is more than one way to exit a business. Some founders may hold an initial public offering and later divest themselves of all shares. They may hand over the reins to an heir, merge with a competitor or be acquired by an individual or private equity firm.
Transition could even mean selling only part of the company.
“Exit may not mean total exit," says Lewis Jaffe, a clinical professor and entrepreneur in residence at the College of Business Administration at Loyola Marymount University in Los Angeles. “You may want to exit 10 percent of the company and still be an advisor."
Some businesses have only one viable endgame option—close the doors and dispose of whatever assets remain to the highest bidder.
“Lots of times in a personal service business, there's no brand value other than the individual," Cassel says. “Sometimes there just are no buyers."
Planning for Your Business Exit
To preserve options, it's wise to begin planning for an exit as soon as possible, ideally from day one.
“Having the end in mind from the beginning is key," says Loreen Gilbert, president of WealthWise Financial Services in Irvine, California. “If you know where you want to go, it helps you from the get-go."
The initial step in an endgame plan is to select the ultimate objective. The end goal will often indicate the desired approach. For instance, an exit strategy calling for selling the company to a son or daughter will involve selecting, educating and training the heir, and perhaps arranging for them to have the financial means to pay for the deal when the time comes.
After the owner decides on his or her personal aims, it's time to sit down with the company's legal and accounting team to discuss options for achieving the goals. An important beginning is estimating the value of the company now as well as on the date when the transition is anticipated, if it can be pinned down. Value can be assessed through a professional appraisal or by checking the market to see what similar firms have sold for recently.
The next step is often making procedures and policies more standardized and transparent, so that potential buyers doing due diligence know what they're getting into. This can be uncomfortable.
“A lot of closely held business owners have never really had to be accountable to anyone but themselves," Barrett says. “They're not used to having their books and records scrutinized."
Well-run businesses often revisit the exit strategy with board members and advisors annually and update it to reflect changing conditions, Gilbert says.
“You don't always have kids who want to take over the family business," she notes.
When the time arrives to execute the exit strategy, the process of finding a buyer and negotiating a deal begins. A smaller firm may employ a business broker to locate an individual buyer. Another could seek to become part of a private equity firm's portfolio through the help of an investment banker. Yet another may be absorbed into a one-time competitor with the assistance of a mergers and acquisitions advisor.
The negotiation process can be lengthy and tedious, especially for entrepreneurs used to making decisions on the fly.
“They can often be very frustrated when they get asked for the same piece of paper three times, or when contracts go back and forth and they're on the 12th version," Barrett says. “I tell my clients to stay focused and keep their eyes on the prize."
The Time May Be Now
The timing for an exit may depend on unforeseeable factors, such as the owner's unexpected disability. But business owners who are considering an exit and have some flexibility may find that today is as good a time as any to make a move.
Relatively low interest rates make it easy for buyers to borrow money. Changes to federal income tax laws allow for larger tax-free gifts to children. And private equity firms are currently on a tear when it comes to buying businesses.
“Markets often dictate when opportunity arises," Barrett says. “A business that might have been hard to sell 10 years ago, might sell for a great multiple today."
Read more articles on business plans.