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Business exit strategy

This section of your business plan addresses your future plans when the time comes, how will
you exit your business? Early planning will give you the opportunity to consider all of your
options, including strategies that may take time to implement. For example, if you plan on
passing your business on to your children, you'll need sufficient time to train them and integrate
them into your business.

As you prepare your exit strategy, you will want to ask yourself the following questions:

When do I want to leave my business?


What do I want to do with my business? Options include selling it, passing it on to a
family member, or closing the business and liquidating its assets.
How will I determine the value of my business?
How much money will I require to lead a comfortable life after exiting my business?

Once you considered your options and set objectives, it's time to add an exit strategy to your
business plan. Although you may not be exiting your business for some time, a solid strategy will
be a roadmap to your future goals.

Succession planning
Find the right strategy for selling your business or handing it over to someone else.

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Succession planning

Find the right strategy for selling your business or handing it over to someone else, whether it be
an employee, a family member, a friend or another entrepreneur.

Table of Contents

Why plan for business succession?


When do you start planning, and how?
What are your options?
Seeking professional services
What is the value of your business?
What are the financial, legal and tax implications of business succession?
How do you prepare for transition?
Additional resources on succession planning
Why plan for business succession?
A good succession plan will help the transfer of your business go smoothly, and allow you to
maintain good relationships with employees and business partners. Succession planning helps
you:

Protect the legacy of your business


Maintain a service for your community
Build value for your business
Provide financial security for your family and your stakeholders
Deal with unexpected events (illness, accident or death)
Prepare for the future

Business Transition The Entrepreneur's Guide


Whether transferring ownership or selling your business, you will have decisions to make; plan
for the transition today.

When do you start planning, and how?


Start planning early if you intend to retire or exit from your business as the process could take up
to five years.

A business succession plan can help you make important decisions about ownership, maximizing
your company's value and tax strategies. A plan should touch on some of the following areas:

Goals and objectives


o Develop a vision for the business.
o Determine your retirement or post business ownership goals.
Decision making
o If appropriate, involve family members in the development of the plan.
o Have a conflict resolution mechanism a pre-established plan to resolve any conflicts
between family members, partners and/or employees.
o Select a successor.
Training
o Identify the core skills and competencies that your successor will need.
o Plan for training of the new owner(s).
Estate planning
o Prepare a financial plan and determine the tax implications of the transition of your
business.
Contingency planning
o Have a contingency plan that includes the financial resources required to ensure the
survival of your business in case of illness, accidents and even death.
Corporate structure and transfer methods
o Determine your options as a sole proprietor, partner or owner of a corporation.
o Decide whether you wish to transfer or sell the business to your successor.
Business valuation
o Find out the fair market value of your business.
Exit strategy
o Establish a timeline for easing your way out of the business.
Implementation and follow up
o Review and update your plan regularly.

It is a good idea to contact key advisors such as accountants, bankers and lawyers when
developing your succession plan. Communication with your successor(s) is important in order
for them to understand their roles in the business and to allow them to collaborate with you
throughout the transition process.

What are your options?


It is important to look for an exit strategy that fits both your personal and business objectives.
Some of the options to consider when planning for your business succession are:

Transfer to a family member


o Identify the candidate(s) and discuss the plan; make arrangements for the transfer or
sale of your business to your relative.
Sell to a partner, management team or employees
o Sell the business to current employees who know the business and are interested in
seeing it continue.
Sell to a third party
o Find a buyer and finalize the sale.

Plan your succession


Access information about succession planning including some of the options available to you
when it's time to hand your business over to somebody else.
Business succession (BMO)
Follow this guide to help you navigate the complexities of succession planning for your business.
Get help setting objectives, developing a strategy, and implementing your plan.
Management buyout: A common exit strategy when selling a business
Learn more about management buyout, which consists of the management team pooling
resources to purchase all or part of the business that they manage.
Selling a business
When you are selling your business, or part of a business, the CRA can answer your questions on
subjects such as business number, payroll and GST/HST.

Seeking professional services


The use of professional services is essential to the success of a small business, including its
transfer to another owner. Professionals can provide knowledge and expertise in areas where you
may have little experience. They can also round out your management team to ensure that your
business is operating efficiently.

As an entrepreneur, there are four types of professionals you may wish to consult:
Accountant
Lawyer
Banker
Insurance broker

When seeking out professional help, choose carefully. Find someone with whom you feel you
can establish a good working relationship. For first time meetings, be prepared to explain your
situation and what you are looking for. Ask what services the firm provides and how it can assist
you. Do not forget to ask how much the firm charges for its services.

What is the value of your business?


Before you sell or exit your business, you will need to evaluate your business revenues, assets,
property, etc. A number of other factors will need to be assessed like future potential profit,
competitors, intellectual property, and customer base. Buyers will be interested in your business
figures and history. A business valuator can help you in determining the value of your business.

Put a price tag on your business: A guide to business valuation


If you need to know the value of your business, learn about the different approaches to business
valuation.
What's your business worth?
Learn how to determine the value of your business and find ways to increase it.
Canadian Institute of Chartered Business Valuators
Enlist the help of an expert who can quantify the worth of all, or part, of your business or its
securities.

What are the financial, legal and tax implications of business


succession?
There are many financial, legal and tax implications when transferring or selling your business.
Each business and business owner has their own unique situation and seeking advice from a tax
professional could help answer some of these following questions:

Do you require a loan to finance your transaction?


What are the implications if your business is a sole proprietorship, partnership or a corporation?
Are you eligible for the capital gains exemption?
How do you minimize your tax bill?
Can you take advantage of an estate freeze? (Freezing the value of the shares you own and
issuing common shares to adult children who will be carrying on the business)

Selling a business
When you are selling your business, or part of a business, the CRA can answer your questions on
subjects such as business number, payroll and GST/HST.
Closing accounts
When closing your business, remember to complete the required Canada Revenue Agency
forms.
Corporations Canada: Dissolving a corporation
Learn the steps you must take and get the forms you need to obtain approval for the legal
termination of your corporation under the Canada Business Corporations Act.
Start, dissolve and change a corporation

Only Applies to : Ontario

Learn about the requirements for starting a corporation, limited partnership or not-for-profit
and how you can make changes to your current business.

How do you prepare for transition?


Establish clear but flexible timelines to help keep you on track.
Set milestones for achieving goals and objectives.
Keep the succession plan up to date to reflect any changes or decisions.
Review and modify your plan at least once a year as things can change quickly in the business
world.
Prepare a communication plan for notifying your successor, employees, suppliers and customers
of your succession plans.
Seek professional advice.

Additional resources on succession planning


RBC Business Succession planning: Your guide to success
Plan for the future of your business and your own retirement with the help of this step-by-step
guide.
Business succession (BMO)
Follow this guide to help you navigate the complexities of succession planning for your business.
Get help setting objectives, developing a strategy, and implementing your plan.
Business succession (NBC)
Find information to help you with your business succession and other forms of career changes.
CIBC - Succession planning
The CIBC has articles, tools and services to help you build a succession plan that reflects your
personal and business goals.
Buy or sell your business online
Find buyers or find a business to buy based on algorithms allowing you to find the best match
based on skills and goals.
Succession planning and business transfer
Know your options when it comes to succession and identify the best path for you and your
business to follow.
BDC transition financing
If you are retiring or selling your business, you could get a loan to help with the costs of the
transition.
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Exit Strategies for Small Business Owners

Quick links

Best strategies for exiting a business

Preparing for exiting the business

Real world business exit examples

This article is intended for small business owners who may be considering an exit within the next
3-10 years.

Although there are many variations, there are really only a few realistic exit strategies for most
business owners. Most strategies only make sense for certain classes of business, so for any
given business, even fewer options are viable. Here we review these basic options, which types
of businesses they work for, and outline the pros and cons of each.

Types of Exit Strategies for Small Business Owners


Shut It Down

Every week I read about a small business closing its doors because the new lease is too
expensive, the owner had a stroke, the owner just got tired, or because business was
slow. Hundreds of businesses go out this way every day often a small shop, a restaurant, a
small construction company, a shoe store, or a doctors office. Usually there is an asset sale of
some kind, and sometimes the business name is purchased by someone else for pennies on the
dollar and restarted with different owners.

If a business has been around for a long time, chances are there is a substantial amount of
goodwill. In other words, the business name (or brand) is valuable. If a business simply
closes, this goodwill is usually lost. Even if someone offers to buy the name later, because the
business has closed, the value has dropped, and the selling price is lower than what it would have
been if the business was still operating.

While shutting down is almost always an option, it is rarely the strategic business decision. As
long as the companys brand has any value, the company has a loyal or sizeable customer base,
or the company has a stable core of employees, the business owner would be significantly better
off selling the company as an exit strategy.
Drain It

Another option is to just take as much cash as you can out of the business each year, while
keeping enough in the business so it can continue operating profitably. This strategy makes sense
where the business generates a lot of cash flow and requires little hand-holding by the owner.
Examples might include certain manufacturing businesses, restaurants, nightclubs, real estate
brokerages, consulting firms, and others.

While the drain it option may not yield the highest possible return on investment, it does have
its advantages. It requires very little planning, and it can be very profitable.

However, there are a few potential disadvantages: a) If you take the money out in salary, your
tax bite could be considerable. Consult with your accountant or a financial planner. b) If you are
the majority owner, but not the sole owner, you could be violating operating agreements by
taking out too much money, with or without paying the other owners. c) And if you take out too
much money at the wrong time (for instance, just before an economic downturn) you could
quickly kill the business, and still face a huge tax liability.

Sell your business.

A sale is always an option: the question is how much can you get for your company? The key is
to find suitable buyers who assign a high value to your company. Generally, the more potential
buyers for your business, the better, since then you can establish a market price.

If youre looking to sell your business fast, you may be in for a surprise. The average time to sell
a company in 2014 was 153 days according to data from BizBuySell.com. Most business brokers
recommend you start planning for the sale at least 3-5 years in advance. This may sound overly
cautious, but in many cases even 5 years is not long enough. As a business owner it is very easy
to become overly attached to your business and lose sight of what the business really looks like
to an outsider. What makes your company valuable to you may not have any impact on a
potential buyer.

Friendly Buy-Out

This is when a business owner transfers ownership to family members, friends, or employees. It
is still a sale, but the terms and nature of the transaction are usually very different. The fact that
the buyers are close to you makes this both easier and harder to complete. Easier because you
have a much better knowledge about the buyer; harder because you tend to be less objective
about the buyer, and are more likely to let your guard down in negotiations and planning. Be sure
to engage an experienced professional so you protect yourself before, during and after the sale
through a transfer of business ownership agreement. And, as with all other options, start planning
early.
IPO

Although IPOs get most of the press, they are actually very rare. There were 853 companies that
went public in 1996, near the peak of the 1990s economic frenzy. In a more typical year the
number is more like 200, or even less. There are over 5,000,000 non-farm employer firms in the
United States, so in a typical year, less than 0.01% of all firms undergo an IPO in any given year.

The IPO process of taking a company public is both costly and labor intensive, and usually
requires an upfront investment of over a hundred thousand dollars. Public companies have to
produce detailed reports on their financials, staffing, marketing, operations, management, etc.
These reporting requirements typically cost hundreds of thousands, or even millions, of dollars
each year. The Sarbanes Oxley Act, passed shortly after the Enron scandal, costs even the
smallest of firms several hundred thousand dollars in consulting fees. Finally, many companies
are just not valued highly on the stock market. For instance, very few consulting firms go public.
Because a consulting firms assets are tied so closely to its staff, if the staff leaves, the assets
walk out the door.

Of course there are a very small number of firms for which an IPO makes sense, and may even
be necessary. However, for the other 99.99% of us, an IPO is just not a viable exit strategy.

Preparing for the Exit


Most exit strategies benefit from preparation and planning. Consider the case of a closely held
family restaurant. Suppose the owner is the head chef and his wife is the manager. The restaurant
has been in business for 30 years, has a loyal clientele, and is very profitable. If the owner and
his wife leave, the recipes and cooking style go with him, and the customer service and
operational efficiencies go with her. There isnt much left in the business except the name.
However, if the owner and his wife begin planning for a sale years before, they can make the
restaurant much more valuable to a potential buyer. For instance, the chef can train one or two
assistant chefs, and teach them his secret recipes and cooking techniques. The wife, who
manages the restaurant, can hire one or two assistants and train them. She can develop procedure
manuals (or at least define what the procedures should be). She can also introduce her protges
to regular clients so they know who they are. After a few years, a buyer could easily take over
the business and keep it going as long as he is able to keep the now well-trained staff on board.
By following the above steps, the owner and his wife have significantly increased the value of
their business.

Larger businesses have much more at stake. The best approach is to postpone the sale for a few
years, and gradually put some key elements in place to maximize the value of the company.
Basically anything that increases transparency, efficiency, revenue or profitability, or decreases
risk or costs, should be considered. These include

Build a real management team. Start at the top (for example a CFO, a COO and an HR Director),
and fill out lower level positions as needed. Define roles and responsibilities for each position,
and hire top-notch people. A solid management team adds value in several ways: a) better
decision making since each member of the management team builds on specialized knowledge
in their area of expertise, b) separation of powers if there is one bad apple, you can replace it.
This is simply not possible otherwise. c) redundancy if one manager leaves on short notice,
often another manager has enough knowledge to act as an interim replacement.

Set up and document business processes and systems. This includes an employee manual, an
automated accounting system, a CRM system, a marketing and sales process, etc. Such systems
reinforce and support the management team. They also provide transparency, and give further
evidence that the whole business is not just smoke and mirrors.

Clean up the companys books. This starts with a professional accounting audit, but ends with
actually implementing the auditors recommendations. Examples include better documentation
of expenses, invoices, backorders, payroll deductions, benefits, cash management, etc.

Conduct an inventory of all physical assets. Update this inventory at least once a quarter. This
typically includes furniture, books, hardware, specialized equipment, manufacturing or office
supplies, and software. There are numerous good software programs available to track and
manage physical inventory at larger businesses; for a small business you can simply use an Excel
spreadsheet. Many companies over-estimate or under-estimate the value of their physical
assets. If you under-estimate, you are leaving money on the table when it comes time to exit the
business; if you over-estimate you create suspicion in the buyers eyes and endanger the exit
strategy negotiations.

Form an advisory board. This is different from a Board of Directors, since the advisory board
members have no formal fiduciary responsibilities and therefore assume no legal liabilities. They
are advisors, not directors. Bring in smart people that you trust, who understand your business,
and who will ask tough questions and help you find the answers. There are many variations, but
all effective advisory boards have the following in common: independent advisors who think for
themselves, understand the business, work well with each other, and who are willing and able
to spend at least a few hours a month on the business. Avoid the temptation to form a
showboat board where the advisors are famous but have no time or interest in helping your
business. Also limit the number of golf buddies, relatives, and friends on the board.

Hire an outside firm to conduct an audit. Note that I am not talking about a financial audit. A
business (or operations) audit covers marketing, sales, customers, partners, internal operations,
management structure, compensation, and more. The audit is usually quick (just a few weeks)
and identifies and prioritizes outstanding issues in every area of your business. The auditor
should be objective, so dont try to save pennies by having internal staff do it. Ideally, if you plan
to sell the company in 5 years, you should do an operations audit now, with follow-up audits
every 12-18 months thereafter. The follow-up audits can be focused on the areas that need
most attention (for instance, marketing, sales, or Information Technology). Audit price range
from $3 K to $20 K, depending on the size of the company and the extent of the audit.

Designate a competent leader and create teams to address any problems uncovered in the
audits. Make sure each team understands that they are responsible for solving these problems,
and set up a reasonable reporting framework (update you once each quarter, for instance). Hold
the leader and his teams accountable for results. Even if you hire an outside firm to guide you
through the process, you will still need an internal resource to coordinate things within your
company.

Hire a competent firm to conduct a valuation for your firm. Repeat this every few years as you
approach your target sales date. A valuation serves several purposes: a) it provides an unbiased
estimate of your companys value by a third party. If you hope to sell the company for $25
million, but the valuation comes in at only $6.5 million, you know something is wrong. b) it
typically identifies at least a few areas of concern: perhaps the issue is too slow a turnaround on
inventory, or too much spending on executive compensation, or limited growth among more
nimble competitors. Professional valuations range from as little as $5,000 all the way up to
$50,000. The lower end should be fine for smaller businesses (say less than $5 million).

Review all insurance policies and make sure the company is adequately insured for all major
risks. The easiest way to do this is to bring in one or two insurance agents from competing
companies. Most insurance agents will develop a comprehensive proposal at no charge. Once
you decide on an insurance package, be sure to have your corporate attorney review the policy
to make sure you are actually covered for the risks you deem most important.

Develop and test a disaster recovery plan. This is especially important for businesses with major
computer infrastructures (dozens or hundreds of servers) and time-sensitive, mission critical
applications. Many firms specialize in disaster recovery planning. A good plan usually requires
months of preparation and testing before it is considered complete.

Review all employee, partner, and vendor contracts and policies to make sure the company is in
compliance with all applicable city, state and federal laws, and minimize chances of frivolous
lawsuits or other legal actions. Many small business owners have their real estate attorney
handle all of their legal issues this is a huge mistake. You need a competent business attorney
who understands and works with businesses like yours.

There is a chance that key employees will leave the company if they hear rumors of an
impending sale. A stay agreement specifies the terms and conditions under which an
employee may leave. It can impose penalties for leaving before a certain date or event, such as
loss of stock options, etc. Talk to your attorney and HR Director and have appropriate stay
agreements drawn up and signed by key employees.

Start networking with business buyers, other business owners, business brokers, and others. A
good place to start is a local entrepreneurship group, Chamber of Commerce, or a local chapter
of a business broker association. MBBI (the Midwest Business Brokers and Intermediaries), for
instance, has monthly meetings where business buyers and sellers can get together to learn
more about buying and selling a business typically for the cost of a lunch. Other useful groups
are The Entrepreneurship Institute (www.tei.net), the Turnaround Management Association
(www.tma.org), and the Association for Corporate Growth (www.acg.org).

Finally, although it usually takes years of preparation to sell a business, sometimes the right
opportunity comes along much sooner. Be sure to watch market trends and keep your ego in
check. Many entrepreneurs have missed opportunities because they were convinced they could
do better later, only to watch their window of opportunity close over time. If a great offer
comes along before you have everything in place, take it or at least give it serious
consideration. This is especially true for fast-moving, trendy businesses, where being first to
market can create huge valuations (which usually decrease rapidly once the trend fades).
Examples include companies like Facebook, YouTube, Airbnb or Uber.

Real examples of small business exit strategies


The owner of a residential construction firm (with over 100 contractors) had a heart attack at
least partly because he was so stressed by the daily hassles of running his business. He survived,
but decided to simply give his business away to a friend because he couldnt handle the stress.
Given the fact that his business was well established and generally profitable, by giving the
business to his friend, the owner probably missed an opportunity to sell the company for several
million dollars.

Lesson: A lack of planning is often the same as planning to fail.

Another business owner built his real estate consulting company to about $60 million annual
revenues over 20 years. At the peak he had over 200 aggressive brokers and sales people
generating revenue, and he paid himself most of the companys profits each year. Along the way
he came close to going broke several times, because there simply wasnt enough cash to keep the
business going. He also alienated large numbers of dedicated employees who had worked very
hard to grow the company and were constantly frustrated by the apparent lack of planning. About
7 years before he sold the company he began preparing the company for a sale. He cleaned up
the company (hired a management team, formed an advisory board, documented internal
procedures, upgraded the company computer systems, etc.). He also brought in a variety of
consultants and reviewed every aspect of the company IT, accounting and finance, marketing
and sales, etc. He ended up selling the company for over $100 million.

Lesson: Planning usually pays off.

A public company formed a third party fulfillment business in the late 1990s. The parent
company planned to spin off the subsidiary through a sale, or possibly an IPO. For a few years
the subsidiary boomed, riding the wave of Internet sales fulfillment. However, two things went
wrong almost simultaneously: the outsourced fulfillment market changed for the worse, and the
parent company became embroiled in an acrimonious and hostile shareholders revolt. The
subsidiarys Chief Operating Officer (COO) realized they had missed the window for an IPO,
but thought there was still an opportunity to prepare the company for a sale, or fold the
subsidiary back into the parent company and ride out the downturn. He made a presentation to an
interested suitor who was willing to offer several million dollars for the company. Unfortunately,
the parent companys management team thought they could do better and decided not to pursue
the offer. The parent company then let the subsidiarys management team go, and eventually sold
the company for under $1 million. Although they did sell the company, they got a much lower
price than the earlier offer.
Lesson: Timing is important and obstinacy is not the same as planning.

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Entrepreneurs live for the struggle of launching their businesses. But one thing they often forget
is that decisions made on day one can have huge implications down the road. You see, 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 those of you who like to plan ahead--and for those of you who don't but should--here are the
five primary exit strategies available to most entrepreneurs:

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."

Rather than reinvesting money in growing your business, in lifestyle companies, you keep things
small, take out a comfortable chunk, and simply live on the income. In one of my most
memorable Harvard Business School moments, my fellow classmates and I asked the owner of a
small, fabulously profitable manufacturing company why he didn't grow the business bigger and
sell it for a gazillion dollars. His response: "Excuse me? You've had way too much schooling.
What part of 30-hour work weeks and a $5 million personal income don't you understand?"

Remember, money in the wallet is no longer money in the business. If you're in a business that
must invest to grow, taking out too much money can hurt you down the road. Also, if you have
other investors, taking too much can upset them. Imagine their surprise when investors in a small
business I once worked for received the company's internal loan repayment spreadsheet, showing
that the business owner was pulling out bucks by paying his family exorbitant interest on loans
while investor loans were repaid at rock-bottom rates over as long a time period as possible.

If you think you're in business for the lifestyle, minimize your dependence on other investors and
structure the business to allow you to draw out cash as needed.

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. If you liquidate, however, any proceeds from the assets must be used to repay creditors.
The remainder gets divided among the shareholders--if there are other shareholders, you want to
make sure they get their due.

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.

The fictional Willy Wonka handed off his chocolate empire to a little boy who was a loyal
Wonka customer, someone who was chosen with great care through a selection process designed
to weed out all but the most dedicated Wonka devotees. Wonka was able to choose his heir
apparent and ride off into the sunset a happier entrepreneur.

Of course, the buyer needn't come from outside. You can also sell your business to current
employees or managers. Often in this kind of sale, the seller finances the sale and lets the buyer
pay it off over time. A hair stylist I knew learned a local salon owner was shutting his doors and
decided to propose a low-money-down deal to acquire the salon. The owner still makes more this
way than he would by closing, and the stylist gets to earn his way into owning a business. It's a
win-win for everyone involved.

The purest friendly buyout occurs when the business is passed down to the family. But
remember, the key to "family business" is the word "family." Is yours functional? No sooner than
you leave the family business to the kids, it's likely they'll end up fighting over who got the
larger share, who does or doesn't deserve the ownership they got, and who gets the final word.
They'll finger-point for a decade while the business slowly declines into ruin, then blame you for
not leaving clearer instructions. If you decide to go this route, you've got a lot of planning to do
before getting out.

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.

In an acquisition, you negotiate price. This is good. Public markets value you relative to your
industry. Who wants that? In an acquisition, the sky's the limit on your perceived value. You see,
the person making the acquisition decision is rarely the owner of the acquiring company, so they
don't feel the pain of acquisition cost. Convince them you're worth a billion dollars, and they'll
gladly break out their employer's checkbook.

If you choose the right acquirer, your value can far exceed what would be reasonable based on
your income. How do you select the right company? Look for strategic fit: Which acquirer can
buy you to expand into a new market, or offer a new product to their existing customers? I
recently read that a classmate of mine started a company that was acquired during the Internet
boom for $500 million when it was just 18 months old. He commanded a huge price because his
acquirer thought the acquisition gave them critical capabilities faster than they could develop
those capabilities on their own.

But acquisition has its dark side. If there's a bad fit between the acquirer and acquiree, the
combined companies can self-destruct. The acquired management team can end up locked into
working for the combined company, and if things head south, they get to watch their baby
implode from within. Time Warner recently announced that they're thinking of spinning off
AOL, almost exactly five years after the two companies merged. What, exactly, did the merger
accomplish? It made two CEOs very wealthy--and destroyed years' worth of work and billions of
dollars. I'm sure the AOL employees who stuck it out enjoyed that particular ride!

If you're thinking of acquisition as your exist strategy, make yourself attractive to acquisition
candidates, but don't go so far as to you cut off your other options. One software company knew
exactly whom they wanted to sell to, so they developed their product in a way that meshed
perfectly with the prospective suitor's products. Too bad the suitor had no interest in the
acquisition. The software company was left with a product so specialized that no one else wanted
to buy them either.

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. And many public companies weren't even
founded by entrepreneurs but rather were spun out from existing companies. Heck, AT&T and
its spin-offs are almost a significant fraction of the listed exchanges!

If you're funded by professional investors with a track record of taking companies public, you
might be able to do it. Of course, the professional investors will also have diluted you down to
the point where you only own a tiny fraction of your company anyway. The investors will make
out great. And maybe, if you're the principle entrepreneur and have done a great job protecting
your equity, you'll make some money, too.

But if you're a bootstrapper, believing in a fair IPO is a touchingly na?ve act of faith. Besides, do
you have any idea what's actually involved in an IPO?

You start by spending millions just preparing for the road show, where you grovel to convince
investors your stock should be worth as much as possible. (You even do a "reverse split," if
necessary, to drive up the share price.) Unlike an acquisition, where you craft a good fit with a
single suitor, here you romancing hundreds of Wall Street analysts. If the romance fails, you've
blown millions. And if you succeed, you end up married to analysts. You call that a life?
Once public, you bow and scrape to the analysts. These earnest 28-year-olds--who haven't
produced anything of value since winning their fifth grade limerick contest--will study your
every move, soberly declaring your utter incompetence at running the business you've built over
decades. It's one thing to receive this treatment from your loving spouse. It's quite another to
receive it from Smith Barney.

We won't even talk about the need to conform to Sarbanes-Oxley, or the 6 percent underwriting
fees you'll pay to investment bankers, or lockout periods, or how down markets can tank your
wealth despite having a healthy business, or how IPO-raised funds distort your income
statement, or ...

In short, IPOs are not only rare, they're a pain in the backside. They make the headlines in the
very, very rare cases that they produce 20-year-old billionaires. But when you're founding your
company, consider them just one of many exit strategies. Realize that there are a lot of ways to
skin a cat, and just as many ways to get value out of your company. Think ahead, surely, but do
it with sanity and gravitas. And if you find yourself tempted to start looking for more office
space in preparation for your IPO in 18 months, call me first. I'll talk you down until the
paramedics arrive.

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.

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In three to five years, you will be anxious to start a new entity, with new ideas and spinoffs that
have built up in your mind, and certainty that you can avoid all those potholes you hit the first
time around. If your startup was less than a success, youll definitely want to erase it from
memory.

So here are the most common exit strategies and considerations these days for planning
purposes:

1. Merger & Acquisition (M&A). This normally means merging with a similar company,
or being bought by a larger company. This is a win-win situation when bordering
companies have complementary skills, and can save resources by combining. For bigger
companies, its a more efficient and quicker way to grow their revenue than creating new
products organically.
2. Initial Public Offering (IPO). This used to be the preferred mode, and the quick way to
riches. But since the Internet bubble burst in the year 2000, the IPO rate has declined
every year until 2010, and is now at about 15%. I dont recommend this approach to
startups these days. Shareholders are demanding, and liability concerns are high.
3. Sell to a friendly individual. This is not an M&A, since it is not combining two entities
into one. Yet its a great way to cash out so you can pay investors, pay yourself, take
some time off, and get ready to have some fun all over again. The ideal buyer is someone
who has more skills and interest on the operational side of the business, and can scale it.
4. Make it your cash cow. If you are in a stable, secure marketplace, with a business that
has a steady revenue stream, pay off investors, find someone you trust to run it for you,
while you use the remaining cash to develop your next great idea. You retain ownership
and enjoy the annuity. But cash cows seem to need constant feeding to stay healthy.
5. Liquidation and close. Even lifetime entrepreneurs can decide that enough is enough.
One often-overlooked exit strategy is simply to shutdown, close the business doors, and
liquidate. There may be a natural catastrophe, like 9/11, or the market you counted on
could implode. Make rules up front so you dont end up going down with the ship.

To some, an exit strategy sounds negative. Actually, the best reason for an exit strategy is to plan
how to optimize a good situation, rather than get out of a bad one. This allows you to run your
startup and focus efforts on things that make it more appealing and compelling to the short list of
acquirers or buyers you target.

The type of business you choose should depend on your goals, and the way you grow it should
be aligned with your exit strategy. Dont wait till you are in trouble to think about an exit, rather
think of it as a succession plan, or a successful transition.

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