The process of exiting a business is often handled as an afterthought, but determining the best strategy is essential for building value in the company and maximizing shareholder returns. It begins with understanding what the company needs to accomplish in order to achieve its objectives and ends with actually executing that plan. Here is how to plan the right exit strategy for your business.
Compare Major Exit Strategies
There are two major exit strategies: an initial public offering (IPO) and a trade sale. The primary objective of any IPO is to capture maximum returns for the founders, investors, and other shareholders. If you have co-founders or early-stage investors who want liquidity, that may rule out a trade sale strategy where they can continue to hold onto ownership of their shares.
Trade sales, meanwhile, represent a broad range of transaction types — from mergers and acquisitions to private equity investments in which the company becomes part of another portfolio company via rollup or white knight acquisition. There are dozens of potential scenarios for share sale and trade sale transactions depending on the circumstances surrounding your business. They all come down to three factors: the buyer’s motivation for buying your company; what the buyer will pay; and how you’ll get your money.
The process for exiting a business begins long before exit options are considered. In fact, an exit strategy is built from the ground up – starting with strategic planning and developing the company’s value proposition. This approach helps determine how to position a business for sale or trade (i.e., “Who is your buyer?”).
Then, management needs to consider what steps need to be taken in order to deliver that value proposition – executing against the plan and integrating new technologies, making acquisitions, improving margins through cost-cutting measures, etc. While it may seem like creating this blueprint requires a significant upfront investment, it pays off when buyers are ready to buy at a premium price.
Set A Target Sale Price
How much a company is worth today will be the baseline for any valuation, but it’s important to realize that target sale prices are often relatively conservative. The goal is not just to identify a price point; it’s also about building value in the business and ensuring you don’t put too high of a price on your hard work if an exit doesn’t happen within a certain timeframe. Determining the target sale price requires a deep understanding of comparable transactions.
When planning a business strategy, management sets expectations for investor relations and sales teams by outlining key metrics that will be used to measure performance against those goals. The same is true when planning an exit strategy – set realistic targets for yourself and work backward from there.
Be sure to time your revenue projections in relation to market cycles: Big-ticket deals may or may not close depending on overall economic conditions. It’s also critical to remember that timing really is everything – the sooner you get started, the better off you’ll be in the end. Avoid putting it off until now because it’s too early or results are taking longer than expected, and you will miss out on valuable time.
Know Your Options
An exit strategy should be thought of as an integrated part of any business plan, not a stand-alone initiative that can be executed by the CFO or Investor Relations team.
It requires input from across the organization and must incorporate elements such as Product development – including research & development, product launches, etc.; Expanding operations – key acquisitions & facility location/expansion; Creating value for shareholders – potentially through a combination of dividends and strategic share repurchases, etc.; Determining how much workers should participate in this value creation activity.
Probably the most important tip within this list is to have discussions with your employees about their personal goals and what they consider success to mean. This will help you create company goals that align with the personal plans of your workers.
Don’t Forget to Have Fun With It
The right exit strategy for your business is a long-term project, and there are many things that can go wrong along the way. It’s important to remember that just because something didn’t work this time doesn’t mean it won’t be tried again in five years or twenty: There is no such thing as failure if you don’t quit trying! Along the way, celebrate each small win and remember why you started the business in the first place.
The decision to sell your company is a big one. It can be tempting to make this decision based on short-term considerations, but the long-term consequences should also factor into your decision. If you’re considering selling your business, it’s important that you think through all of the options available and determine what fits best for both yourself and those who will inherit your legacy. There are many factors involved in determining an exit strategy – not just money – so don’t forget about things like culture or values when making these decisions.