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S I N E S Business Services



S a n F r a n c i s c o , C A 9 4 1 0 3 i n f o @ G r e e n B u s i n e s s O w n e r. c o m w w w. G r e e n B u s i n e s s O w n e r. c o m Copyright Green Business Owner 2010

Executive Summary!
Why Plan for the End?! Document Summary! Exhibit 1-The Questions We Will Discuss in More Detail in This Chapter!

2 2 2 2 3 3 4 4 4 5 5 5 7 8 9 9 9 9 10 10 10

Part 1--Timing!
When Should You Start Planning Your Exit Strategy?! What is the Best Time to Exit?!

Part 2--Options for Your Exit Strategy!

The Four Basic Options! Exhibit 2-Options for Your Exit Strategy! Option 1--Liquidation! Option 2--Selling to an Individual Buyer! Option 3--Acquisition! Option 4--Initial Public Offering!

Part 3--Valuation: What is Your Business Worth?!

Determining What Your Company is Worth!

Part 4--Executing Your Strategy!

Keep Your Options Open! Know Your Legal Rights! Always Keep in Mind the Values of Your Business!

Appendix 1--Glossary of Terms!

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Executive Summary
Why Plan for the End? Donald Trump once famously said that what distinguishes a good entrepreneur from a bad one is the ability to plan for the end. While there are so many other things that might seem like a higher priority for entrepreneurs, a little foresight in terms of what the future holds for you and, potentially, your partners can save you not just hassles and headaches, but very tangible losses of substantial amounts of money and time, and even worse, the very real possibility that your dream business, what you put your blood, sweat, and tears into for many years, may radically change for the worse beyond your control. Document Summary In this chapter we will discuss different options for your exit strategy as well as the nancial and personal implications of each option. In part 1, we discuss the timing of when to set up your exit strategy. In part 2, we cover the basic options for your exit strategy, including the benets and drawbacks of each. In part 3, we discuss how you can go about nding out a fair value for your company when youre ready to sell it. In part 4, we discuss the actual execution of your exit strategy when that time eventually comes. The document closes with a glossary of relevant terms for your reference, both current and future. Exhibit 1-The Questions We Will Discuss in More Detail in This Chapter

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Part 1--Timing
When Should You Start Planning Your Exit Strategy? Ideally, you will want to start planning your exit strategy well before you open your doors for business. It may seem morbid to think of exit strategies when you are still just at the beginning - almost like having to sign a prenuptial agreement before getting married. But the earlier you determine what your exit strategy will be, the better you will be prepared: Some of the decisions you make in the very beginningincluding equity distribution, employee training, and legal statuswill inuence your exit strategies immensely. Make sure you understand the implications of your decisions from the very start. This is particularly important as you consider the green and social implications of your business. How sustainable are your business practices under a different owner? Are you planning to set up a green strategy that can last for multiple generations or are your plans limited to your own management style? If you are trying to decide between a for-prot and non-prot business model, make sure to consider your exit strategies. As Tim Ledlie, founder and manager of Quad Bikes (a socially responsible non-prot bicycle shop in Cambridge, MA) explains about his own decision: It seemed to me that the only benet of being for-prot was that I could sell the business, something I was not interested in, and something I did not want inuencing the shop and its directors in the future. What I did not realize at the time was that being non-prot would make people more likely to donate bikes and to support the shop. 1 Clearly, these are considerations you must incorporate into your thinking when you start your business, not just when you end it. But why? Why should you have an exit strategy at all? While you may be thinking that you cant imagine changing paths after youve spent a lot of time and energy starting a company, youd be wise to plan for the end. Most entrepreneurs are not with their startup after ve years, according to CIBC World Markets. Either the company went under, or the owner left the company for one reason or another. Dealing with the unexpected always plays a role in business decisions:

illness change in family status (i.e. divorce, birth of child) drastic shifts in the market.

These and many other unexpected events may alter your business strategy signicantly and ultimately lead to your desire to sell or leave the company. Other reasons you may be able to anticipate, and will help dictate how you create an exit strategy. These may include:

a spouse whose work may take them to a new location in a few years the graduation of your children from high school and your newfound empty-nestedness planning for retirement in a few years knowing when enough is enough! Is your goal to make $500,000 and then youre done? An exit strategy may help get you there.

1 History of Quad Bikes,

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What is the Best Time to Exit? The top reasons for failed exit strategies are bad market conditions and lack of preparation in the management team2 . If we consider the social aspect, a big reason for failure may be not realizing you dont have to sell out when selling your business. Keeping these facts in mind, remember not to rush into a sale or liquidation before the timing is right. A good general rule is to not sell if the economy is in a lull because youll likely not get as good a sale price. There are some businesses that do well when the economy is in a lull dentists happen to be doing well during the current recession. So we might more accurately say not to sell if your market segment (as opposed to the economy) is in a lull unless you have something that sets you apart from others in your market niche. But even if the economy is going strong, make sure to wait until you have the best buyer you think you can get. You dont need to sell your business below fair market price. And you dont need to sell to others outside of your company if you believe that those taking over will signicantly change the way your business will operate. You dont have to sell out when selling your business. Take a good look at alternative strategies that preserve jobs, continue cherished policies and continue with products and services that may not be continued by a buyer only looking for bottom line results. Be persistent and be patient.

Part 2--Options for Your Exit Strategy

The Four Basic Options There are four primary exit strategies you can choose from. We start with a brief description of each strategy before explaining the advantages and disadvantages of each. With each of these strategies bear in mind the goal of any good exit strategy: Protecting your value (e.g., nancial security) and your values (e.g., your commitment to the Triple Bottom Line of environment, social justice, and economic sustainability. In deciding which exit strategy to pursue, weigh your options against both goals and determine how important each goal is to you.

2 Center for Private Equity and Entrepreneurship at Tuck Business School, April 2005
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Exhibit 2-Options for Your Exit Strategy

Option 1--Liquidation Easy exit but little value In a liquidation, you sell the assets at market price but the company name and trade-mark are discontinued. Unless you are cash-strapped or in emergency, we recommend avoiding a liquidation scenario. Liquidating is quick and easy, but a signicant value is left on the table with this approach. Most importantly, in a liquidation you do not get a return on your intangible assets (e.g., brand, reputation, customer base). Dont underestimate the value of these assets. In fact, brand and reputation are the hardest assets to come by. How much time and resources have you invested in building a customer base? Do not throw it away by taking the easy liquidation route. Moreover, the environmental and social business practices you have worked hard to build will be lost in a liquidation. By the time you close your business, you will have developed innovative and creative approaches to doing green business. Try your best to keep these practices alive by passing them on to a new owner. Option 2--Selling to an Individual Buyer Ideal option but highly dependent on nding a good buyer If you can nd a good buyer, selling to an individual is the best approach. Why?
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Financial value is protected: Unlike the liquidation approach, this approach allows you to negotiate a fair price that includes the value of intangible assets. Ensure your buyer understands that the value of your business is far greater than just the market price of your hard assets. Your values and business practices can be continued: Your choice of buyer can depend partially or wholly on their willingness to continue your environmental/social business practices. For example, your buyer might be a previous employee or a committed environmentalist who shares your goals of running a green business. In contrast, selling your business to large companies or putting your company up for an initial public offering leaves you with little control over how the business is managed going forward. You can sell your company to someone you care about: Many entrepreneurs choose to sell or leave their company to their kids or family members. Your involvement can come to a gradual end: Most individual buyers understand the need to keep the previous owner or manager involved to ensure a smooth transition


There are many advantages to selling to an individual. But though this approach may seem like the obvious option, nding the right buyer can be more difcult than you think. We recommend starting to scan for potential buyers as early as possible, many months and years before you want to sell. If a particular employee seems like a potential option, consider grooming him/her so that they are ready when the time for change in ownership comes. For example, if you have an employee who takes an interest in more than his/her own job, continually demonstrates an attitude that shows that they care about more than just their hourly rate, and shows promising leadership qualities, you might consider them as a potential future owner. Begin grooming him/her by involving them in occasional strategic decision-making to see how they respond to higher-level thinking. Over time, you will be able to tell whether the employee is a right t and begin a gradual conversation about potential leadership options with them. Do not over-promise and ensure to keep the authority while you are still the owner. But make sure your employee knows the job may have signicant opportunities in store for them.

How? While a simple sale of the business for a cash payment is the simplest option, buyers often do not have sufcient capital to purchase the company outright. Thus, when selling to an individual, you can consider creative options to execute the transactions. In addition to a simple sale, here are a few ideas you can consider:

Low money down deal: The buyer gets a loan from an outside lender to repay the total value of the company in installments. Owner nancing: In the case that getting an outside loan for the new buyer is not the most palatable solution, you as the owner can, in essence, lend the new buyer the money to buy your company. You arrange a payment plan and interest rate you and the new owner agree upon that look very much like a traditional loan. The new buyer can put a down payment on the loan, and pay a certain amount each month which will be part equity and part interest. This way, the new owner can use the proceeds from ongoing business operations to pay you back over time. It is crucial in this case to spell out all assumptions and expectations of both parties in a contract signed by both. Incentive and Performance Packages: In many cases, the new buyer will be hesitant to simply purchase the company outright, fearing that many of its existing customers may leave if the current
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owner also disappears. In these cases, it may be fruitful to arrange some sort of incentive or performance package. This way, if the company does well retaining its customers during the transition, both the new owner and the previous owner make out well. If the company faces a difcult transition, then the previous owner shares some of the burden, and doesnt make as much on the sale of the company. This kind of arrangement is fairly common in service industries, where company performance is closely tied to the level of customer service provided by the owner or manager of the company. For instance, a hair salon or gardening service is likely to be more closely associated with an owner than a retail store. Customers of these businesses are used to seeing the owner working in their garden, or appreciate that owners particular hairstyling techniques, and may not stay with the company unless the new owner can provide a similar level of service. Arrangements like this give the previous owner an economic incentive to assure a smooth transition, and give the new owner peace of mind that they will have someone to help them succeed. Typically, the incentives set up in this kind of arrangement are such that the previous owner stands to make quite a bit more than their desired selling price if the company continues to succeed, up to 50% more, but also stands to make quite a bit less if the company ounders under the new owner.

Partial sale of equity: If you own full equity, you can choose to sell part of your share but retain a minority control within the company. You will no longer be the primary owner, but will perhaps still have a voice on the board of directors and a direct stake in the success of the business. If you have great emotional attachment to your business, or simply think the company is bound for greatness, this may be the best approach. Slow equity transition. If a particular employee is designated as a future owner, you can consider compensating him/her in equity rather than cash over time. That way, the transition will be slow and smooth and will ensure a steady commitment from the part of the future owner. In essence, instead of earning a paycheck, theyre working off their debt to you and earning equity in the company until they are the owner. Licensing your business. Consider licensing your business as a way to stay actively involved. Judy Wicks, founder and CEO of White Dog Cafe, a famous Philadelphia establishment, has gone down this route and preserved the ethical and social practice of her business. Wicks gave up majority ownership and control of her business by selling the majority of her equity. However, in a very innovative way, she licenses the White Dog Cafe brand to other entrepreneurs who want to follow her model. The license is a kind of social contract. In order to maintain the values inherent in the White Dog Cafe, this social contract requires that entrepreneurs licensing the brand to buy and serve sustainable foods. This includes locally crafted beer, fair trade coffee, tea and chocolate, meat and poultry from sustainable local farms, and seafood listed as sustainable by the Monterey Aquarium. The restaurants must use 100% renewable energy, must compost and recycle their waste and make charitable contributions. Ownership of other White Dog Cafes must be kept local, and the company can never go public (issue an IPO, Initial Public Offering, to sell stock in a stock exchange like the New York Stock Exchange or NASDAQ).

Option 3--Acquisition Lots of money but little control over the future of your business Acquisitions are the best way to maximize the nancial value you obtain. Often, your company can be worth more to an acquirer than fair value would dictate, because it gives them critical capabilities they could not be able to develop on their own. For example, IT companies often command high acquisition prices, as

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buyers are willing to pay a signicant premium to gain rare know-how as quickly as possible. If you have a talented and trained employee-base, you may also be able to command high acquisition prices. Unfortunately, companies that have enough money to acquire you are almost always larger than you. You may nd yourself in a weak negotiating position and will have a harder time ensuring that the values you care about (especially environmental and social values) will be retained. As owner or manager, this sales process can be painful as it is much less personal than selling to a friend, family member or acquaintance. Consider the example of Ben& Jerrys: Before selling to Unilever, they were one of the most environmental food retailers on the market. Some of their most impactful social and environmental policies have been abandoned following the sale. If you are considering being acquired, ensure that your buyer is socially responsible and shares your values. Your commitment to running a small social business should extend beyond the lifetime of ownership selling your business to the right party is just as important as running it correctly while you own it. One option is to merge with a competitor and take a buyout that is paid out over time. This allows you to observe your buyers behaviour over time, before you relinquish full control of your business. To ease the transition process, we also recommend getting a professional valuation done on your business regardless of the size of your buyer, negotiations will be far easier if the price is based on true metrics. Another option is to insist that the values of your companys mission and vision are spelled out in the sale contract, and that they must be adhered to over a certain period of time. For instance, if one of your company policies is to have the highest paid employee (CEO) earn no more than 7x what the lowest employee makes, dene that in the contract. Or that the company must purchase carbon offsets for all of its energy usage. If that particular part of your company is a tremendous source of pride for you, ask that it be included it in the contract. Your buyer may balk. Be prepared for what you might do if they do. However, they may agree to continue that relation for x amount of time, perhaps 5 years. You could then hope that it becomes popular in the new company and stays longer than it is contractually obligated to. Another option would be to license your brand and company to the acquirer for a specic number of years with a similar social contract to the one mentioned in Option 2, above. However, an acquiring company is not very likely to accept these conditions.

Option 4--Initial Public Offering Risky, expensive, and only worthwhile for large players Unless you are an experienced entrepreneur with a large business, we recommend staying away from IPOs. The average IPO deal is worth $200 Million3 , so if this gure seems entirely out of range for your scale, do not consider going public as a viable option. It is not saying anything bad about your business if it isnt large enough for an IPO - most companies arent, and it is simply a matter of scalability. Even if your company is large enough for an IPO, this may not be the best option. IPOs are difcult to execute and require a lot of time and patience. Do not underestimate the hidden costs of going public:

Publicity costs to make your company known to potential investors (most often through a national roadshow) Legal costs to ensure smooth transition

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Banking costs to rm that manages your IPO

The costs and risks of an IPO are high. Consult us or other experts if you are considering an IPO as a viable option.

Part 3--Valuation: What is Your Business Worth?

Determining What Your Company is Worth To determine how much your company is worth, follow a two-thronged approach. Prong 1: Back of the Envelope Calculations Do your homework before seeking professional help. Start by looking for similar businesses that have recently been up for sale and understand what price they sold at. Contact owners and seek their advice on valuations - they have been in your shoes before and know better than anyone what you should expect. A very quick and dirty analysis with several aws (but effective for companies without many tangible assets, like service companies) is that your company is worth 1 years revenues. Prong 2: Seek Professional Advice In addition to using simple back of the We recommend getting professional advice from expert valuation rms. Professional valuations are not cheap - while you may be tempted to save yourself this nal cost, it is absolutely necessary for you to know what you should expect to get for your business: negotiations with buyers will be far easier for you if you can show proof of professional valuations. George S May International Co. ( is an experienced rm focusing on small business valuations. Consider consulting with them or similar rms during your sales process and also make sure you to check out SCORE online for helpful information on this topic.

Part 4--Executing Your Strategy

Keep Your Options Open Even once you have determined your ideal exit strategy, you should still pursue at least one other option as a back-up. For example, you might decide that you would like to sell your business to a trusted friend or familymember. Even as you search for the perfect buyer among your existing circle of acquaintances, scan the market for outside buyers, such as existing competitors in your market. A Tuck Business School survey of 113 successful entrepreneurs and private equity managers recently found that 90% of them practiced a dual-tracking (i.e., pursuing two exit strategies at once) 4. Knowing which exit strategy you prefer is important; but being exible in which exit strategy you actually end up executing is just as critical.

4 Center for Private Equity and Entrepreneurship at Tuck Business School, April 2005
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Know Your Legal Rights Even when selling to family and friends, always seek legal advice. Ensure your process is air-tight so that no future problems can arise. In particular, ensure adequate legal representation (spelling out assumptions and payment plans in a contract that both parties sign) when crafting low-money down deals with employees or acquaintances. Always Keep in Mind the Values of Your Business You started out as a green sustainable business and we hope you can end on the same note. Dont lose sight of what you believe in during the sales process -- choose your buyer carefully and ensure there are adequate clauses in place to protect the basic principles you believe in. These consideration should not just be limited to your green business practices, but to your broader management philosophy: everything from how you treat and compensate your employees to where you obtain your every-day goods and how dispose of your trash are important factors in determining who the best owner of your business should be. An example of a sales process in which the values of the company were protected was Burts Bees, a honey producer that was sold to Clorox for $913 Million in 2008. Following the sale, some of the most cherished business practices were still maintained:

Employees bonuses are based, in part, on whether the company meets its energy conservation goals Employees are encouraged to drive hybrid cars (and offered prime parking space if they do so) Burts Bees offsets 100% of its carbon emissions The CEO is setting out to stop sending any trash to landlls by 2020

Remember, starting your business was about more than just prot. Ending it ought to be as well.

Appendix 1--Glossary of Terms

Acquisition--The process by which one company takes over another. In many acquisitions, the social and environmental values of the company are not retained in the way that they were intended by the previous owner. Equity--Ownership of a company. In this case, the equity of a company is transferred in one form or another to new owners when an entrepreneur exercises his or her exit strategy. Initial Public Offering (IPO)--This is the process by which a company goes public. The companys equity is distributed in stock, shares of which are sold on the open market in an IPO and then traded afterwards. This process is only realistic for companies that have expanded signicantly from the startup phase and have millions of dollars in revenue. Liquidation--Sale of a companys hard assets. The company is typically dissolved and all assets sold at below market prices. The owner of the company usually gets no compensation for brand, intellectual property, and goodwill the company has generated over the years. Valuation--Assessment of your companys value when you are considering selling all or part of your equity.

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