Often, when we think about exiting a company, we conjure an image of a spectacular business sale where a strategic buyer swoops in, pays an enormous price, and the business owner rides off into the sunset.
The reality is that there are several ways to exit the day-to-day operations of your business, and the smartest founders align their exit type with their reason for leaving.
For a successful exit, you need to be able to say “Yes!” to two important questions:
1. Is your business ready for you to exit?
2. Are you ready to exit?
The question is easy enough to ask but may be difficult to answer. So, how can you ensure that you have a happy, lucrative exit from your business?
In most cases, you may want to exit your business because of factors that are either “pushing” you away from your business or “pulling” you to something else.
Typical push factors include: reaching retirement age, getting bored, or experiencing a health issue. Pull factors may include: wanting to travel the world, get fit and healthy, or spend more time with family and friends.
The happiest exits happen when there are just as many pull factors as there are push factors.
Once you’ve decided your reasoning behind the departure, your next step is to align your exit type with the reason you’re leaving. There are multiple exit types that may work for you:
This is the closest exit to the stereotypical sale where you sell 100% of your business to a third-party buyer and walk away.
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.
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.
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.
The next step is to figure out your number. No matter how much you want for your company, or what you think you need – the ultimate judge of your company’s value is the market itself.
In addition to getting a business valuation to understand what your company might be worth to a third party, you should calculate what your business is worth to you. When the market valuation and your personal valuation coincide, it may be time to consider an exit.
It’s important to get clear on the maximum amount of time and money you’re willing to commit after a transaction. As a general rule, you stand to earn more money from the sale of your business the more willing you are to participate in a transition period.
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 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.
Stewart Guthrie is broker for The Liberty Group of Nevada and is a member of the International Business Broker Association.
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