Think about the time and effort you’ve spent building your business. There have been countless hours devoted to creating a startup plan, pulling together the finances, hiring the right employees, and, of course, attracting—and keeping—customers. Now ask yourself: How much thought have I given to an exit strategy?
If you’re like most entrepreneurs, the answer is probably very little. Despite the intoxicating fantasy of cashing it all in to move to some warm tropical island, the reality is that most business owners aren’t thinking about the (far-off) day when they’re no longer in charge. John Brown, president of the Business Enterprise Institute (BEI), a firm that helps business owners successfully exit their companies, says most surveys show that only between five and 30 percent of business owners have done some type of exit planning. And that lack of foresight could be a big mistake, say business advisors.
“It’s very difficult to get an entrepreneur, especially when the business is fairly new, to think about the day when they’re going to give it up,” explains Dan Bowser, president of Value Insights Inc., a business valuation and exit strategy-consulting firm based in Summerville, Pennsylvania. “But the truth is that when you begin a business with an exit strategy in mind, you wind up with a better economic return when it does come time to sell or leave the business.”
The good news is that the very nature of starting and running a business means that you’ve already put in place some of the essentials of a smartly-planned exit strategy. Among them: a solid business plan, financial reporting functions, and a map for future growth. “All of these are needed to run a successful business and to sell one,” Bowser adds.
Even so, many entrepreneurs push aside the planning necessary to exit a business for a multitude of reasons—not all of them business related. “If you’re running a successful, profitable business, there’s no reason to think about what you’re going to do in the next chapter of your life, so the thought of leaving is scary and you don’t do anything about it,” says Brown. Bowser adds that he has counseled entrepreneurs who felt that without their company, they had no identity.
Choosing the Right Exit
Before planning a graceful goodbye, it’s important to understand the various options for stepping away from your company and what they entail. Some of the most common are:
- An acquisition
- A management buyout
- Passing it down to your children
If the choice is an acquisition, then another company will buy your business either with cash, stock in the acquiring company, or a combination of both. That was the exit strategy for Ken Graul, 62, who started Mechanical Maintenance Inc. with two partners in 1985. The mechanical contracting business, based in Chandler, Arizona, grew over the years, reaching $34 million in revenues and over 200 employees by the mid-2000s. It was around this time that Graul says he spoke to his partners about selling the business. “I was frustrated with them over the direction and strategy for the company and wanted out,” he says. “I loved the work, but not the arrangement.”
In October 2009, Graul and his partners sold the company to Midstate Enterprises, a larger firm that was looking to expand into the areas that Mechanical Maintenance had experience in. Graul is now executive vice president at Midstate Mechanical, a division of the the parent company, doing the work he loves, and his partners were able to cash out. “It’s the best of both worlds,” he says.
Keeping it In House
In a survey of 700 exit plans prepared by the Business Enterprise Institute, more than 40 percent involved selling the business to a management team. The upside of such an arrangement, says Bowser, is that it keeps the business going, yet allows the owner to cash out. The downside: employees rarely have the money to purchase the business outright so the transaction is often financed with debt that is collateralized by the assets of the business. Even so, the transition is often smooth since the basic structure of the company remains the same.
Passing it to the Kids
In years past, this was the most common exit strategy for business owners, but not anymore. In BEI’s exit planning survey, just 24 percent of the respondents were interested in passing the company on to their kids. That’s because the third-party marketplace for small businesses—those with revenues between $2 million and $50 million—has grown substantially over the past two decades, says Brown, making it possible to do something other than pass the business down to the next generation.
But for those entrepreneurs who envision the grandkids running the family firm someday, there are some guidelines to follow. First off, don’t leave on Friday and expect your kids to run the show solo on Monday. “Chances are the second generation hasn’t really been given the chance to fully spread their wings yet so you want to be around, at least part-time, to make sure everything is okay,” says Bowser. Taking on the title of chairman is often a good idea. “You’re involved with setting goals and objectives of the company, while allowing the next generation to run the daily operations,” he says.
Of course, there are some business owners whose exit strategy is to run their company until the bitter end. “About six percent of our survey respondents said they’re never going to leave,” says Brown. Eventually when the end does come, the business is typically liquidated and the proceeds passed on according to a will or estate plan.
But for most entrepreneurs, having an exit strategy is a smart thing to do. And just think—even if you don’t want to sip margaritas on a beach for the rest of your life, isn’t it nice to know you’ve got a plan in place in case you change your mind?
Of course, since the details of each business situation are unique, you should always seek the services of a qualified financial planner and tax advisor.
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