A finely honed business plan should include a detailed exit strategy. This, often overlooked element clearly outlines the owner's plan to get paid for their sweat equity at a designated point in time.
Operating without an exit strategy denies business owners the benefit of easing undue stress should the founder become incapacitated, while potentially helping to avoid losses that tend to accrue when the sale of a business is delayed.
If you are a middle-market business owner without an exit strategy, it's time to start the planning process. Keep in mind these critical factors that can affect your timeline:
1. The ideal date to exit. How many more years do you plan to spend working on or at your business? Even if you find it difficult to predict this key future milestone, select a potential date anyway, as you can refine it as your company evolves. Revisit your exit strategy periodically (at least annually) and adjust accordingly.
2. Adequate time if selling your business. An important reminder, CEOs who plan to retire soon should be aware that it takes 9 months to a year or longer to sell a business. The closer you get to retirement, the more important a definitive date becomes. If you aren't prepared to initiate the exit strategy process in a timely fashion, you could miss out on once-in-a-lifetime opportunities. Be prepared, so you can strike while the iron is hot.
3. The type of exit strategy you prefer. The more elaborate the exit strategy, the longer it will take to finalize the deal. It could take several months or several years. An investment banker experienced in M&A can explain the options and time needed to get different types of deals done. Common exit strategies include:
- IPO (initial public offering), where you offer shares of the business for sale to the public.
- Corporate divestiture, where you:
- Sell to a strategic buyer looking for financial or operational synergy.
- Sell to a financial buyer, such as a private equity firm, that is planning to grow the business then seek an IPO or another exit strategy at a later date.
- Passing the business down to family or heirs:
- Entirely.
- Partially, so you can gain liquidity through selling the other portion to a financial buyer.
- Management buyout, where management team buys the company.
NOTE: While these are some of the most common exit strategies available to middle-market business owners, you should speak with an experienced M&A firm to weigh your options. -
4. The stage of your industry's business cycle. While the economy plays a significant role in the viability of a business sale, your particular industry's business cycle is also critical. Your business will be worth more to buyers when your industry is trending up, not down. Since business cycles typically last several years, CEOs who are planning to sell a business in less than five years should watch industry indicators closely and be prepared to act.
5. The market's appetite for M&A. Supply and demand plays a critical role. When there are fewer companies available for sale and plenty of buyers in the market (as there are today), sellers are in the driver's seat. Business owners who plan to sell a company in the next few years should take advantage of a low supply-high demand environment available in today's market.
By way of example, when the housing bubble burst and the economy tanked, investors backed off. Today, investor confidence has returned. As the economy continues to recover, private equity and corporate investors, who have been sitting on trillions of dollars, are eager to mobilize and put their investment capital to work.
Whether you've been in business for five years or fifty, an exit strategy should be included as a key part of your overall business plan. It will provide you and your family a definitive plan that will ensure you stay on track and maximize the value you have accrued in your business.
