It’s not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get the money back out. For entrepreneurs who like to plan ahead and for those of you who don’t but should, here are the five primary exit strategies available to you:
- The Modified Nike Maneuver: Just Take It. One favorite exit strategy of some forward-thinking business owners is simply to bleed the company dry on a daily basis. I don’t mean run it in the red–I mean pay yourself a huge salary, reward yourself with a gigantic bonus regardless of actual company performance, and issue a special class of shares that only you own that gives you ten times the dividends the other shareholders receive. Although we frown upon these practices in public companies, in private companies, this actually isn’t such a bad idea. It’s called a “lifestyle company.”
Pros
- Who doesn’t like seven figures of take-home pay?
- Private jets are fun.
- There’s no need to think hard about getting out: Just pull out the money when you need it.
Cons
- The way you pull the money out may have negative tax implications. For example, a high salary is taxed as ordinary income, while an acquisition could bring money in the form of capital gains.
- Without careful long-term planning, you may end up pulling out money now you’ll need later.
- The Liquidation. Even lifestyle entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to call it quits, close the business doors, and call it a day. I don’t know anyone who’s founded a business planning to liquidate it someday, but it happens all the time.
Pros
- It’s easy and it’s natural. Everything comes to an end.
- There’s no negotiations involved.
- There’s no worrying about transfer of control.
Cons
- Get real; it’s a waste! At most, you get the market value of your company’s assets.
- Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value.
- Other shareholders may be less than thrilled at how much you’re leaving on the table.
My favorite piano bar in Boston simply vanished one day when the owner decided he was tired of show tunes. His regular patrons were crushed, but then, he didn’t consult with us first.
- Selling to a Friendly Buyer. If my neighborhood piano bar owner had asked, we might have wanted to buy the business ourselves. You see, if you’ve become emotionally attached to what you’ve built, even easier than liquidating your business is the option of passing ownership to another true believer who will preserve your legacy. Interested parties might include customers, employees, children or other family members.
Pros
- You know them. They know you. There’s less due diligence required.
- Your buyer will most likely preserve what’s important to you about the business.
- If management buys the business, they have a commitment to making it work.
- Selling to family makes good on that regrettable offhand promise made 30 years ago, “Someday, son/daughter, all this will be yours.”
Cons
- You can get so attached to being bought by someone nice that you leave too much money on the table.
- If you sell to a friend, they’ll be peeved when they discover they just bought the liability for that decade’s worth of taxes you forgot to pay.
- Selling to family can tear the company apart with jealousies and promotions that put emotion way ahead of business needs.
- The Acquisition. The acquisition was invented so you can sell your business and leave the kids money, still spoiling them rotten, but at least sparing the business from second-generation ruin. Acquisition is one of the most common exit strategies: You find another business that wants to buy yours and sell, sell, sell.
Pros- If you have strategic value to an acquirer, they may pay far more than you’re worth to anyone else.
- If you get multiple acquirers involved in a bidding war, you can ratchet your price to the stratosphere.
Cons
- If you organize your company around a specific be-acquired target, that may prevent you from becoming attractive to other acquirers.
- Acquisitions are messy and often difficult when cultures and systems clash in the merged company.
- Acquisitions can come with noncompete agreements and other strings that can make you rich, but make your life unpleasant for a time.
- The IPO. I’ve saved IPOs for last, because they’re sexy, they’re flashy, and they get all the press. Too bad they make the lottery look good by comparison. There are millions of companies in the U.S., and only about 7,000 of those are public.
Pros
- You’ll be on the cover of Newsweek.
- Your stock will be worth in the tens–or maybe even hundreds–of millions of dollars.
- Your VCs will finally stop bugging you as they frantically try to insure their shares will retain value even when the lockout period expires (Warning: they won’t necessarily be looking out for your shares, too.)
Cons
- Only a very few number of small businesses actually have this option available to them since there are very few IPOs completed annually in the United States.
- You need financial and accounting rigor from day one far above what many entrepreneurs generally put in place.
- Some forms of corporation–S-corps, for example–will require a reorganization before they can be taken public.
- You’ll spend your time selling the company, not running it.
- Investment bankers take 6 percent off the top, and the transaction costs on an IPO can run in the millions.
- When your lockout restrictions expire, your stock will be worth as much as a third world hovel.
