There are many options available for business owners to successfully exit his or her business. Most owners don't realize that there are many roads that lead to a successful transaction. Exit Strategies fall into three main categories: internal transitions, external transitions, and other transitions. This article will provide a little information about external transitions of exit so you can start to narrow your focus on the types of plans that best suits your needs. There is one way to guarantee that a business owner won't be able to exit successfully and that is to fail to plan for it. #exitstrategy
SALE TO A THIRD PARTY: The majority of business owners (close to two-thirds) are interested in this Exit Path, which is often the first or second choice for many business owners. A third-party sale is often the easiest and most rewarding option for business owners.
SALE TO INDIVIDUAL BUYERS: For very small businesses, the most likely buyer is an individual, sometimes with industry experience or specific interest in the market served by the business.
- Individual buyers might keep the business owner’s legacy alive.
- The individual may have industry experience allowing for a smooth transition - The owner may be able to stay on for a long term consulting agreement providing additional cash flow as they transition to the Third Act.
- Individuals may not have the ability to pay cash or be able to finance a transaction therefore potentially requiring owner financing. - The individual may not have industry experience typically causing a longer transition period whether the owner wants to stay or not.
SALE TO FINANCIAL BUYERS: There are several types of financial buyers such as private equity firms, venture capitalists and family offices. These buyers typically have the cash to invest but don’t always have industry experience.
- Financial Buyers of all types are experienced at business transactions and so for the most part, they will know what they are doing. - Financial buyers will typically ask the owner to stay on and retain some ownership so that they can have a “second bite of the apple” when the business sells again - Many times, financial buyers will pay the highest price for a business, mostly because they have committed capital that needs to be deployed and put to work for their investors.
- Financial buyers almost never have specific industry experience, and therefore are not particularly helpful with operational issues and challenges. Sometimes they do have a panel of experts that can help but make no mistake, they are about driving higher revenue and profits.
- Financial buyers will have a higher level of scrutiny on the financial performance of the business, even if the owner stays on in a key role.
- Financial buyers will almost always require the owner to stay on with the company. Although they rarely disclose it during the purchase process, financial buyers always have an investment thesis, and the owner will have to conform to the new business strategy or they will be forced out. By the way, the average tenure of a former owner of a business that sells to a financial buyer is about 2 years.
SALE TO STRATEGIC BUYERS - A strategic buyer is usually a larger company that has some reason they want to buy another company - typically technology, product or customer base. They also usually are entrenched in the same industry as the company, but may also be in a related industry and looking to expand into the company’s market.
- Because by definition, strategic buyers have a specific strategy in mind when they complete an acquisition, they are frequently the highest offer for the business netting the owner a higher value outcome.
- In most circumstances, strategic buyers know a great deal about the business and are buying it for strategic reasons. Therefore, they have great industry experience and can contribute really meaningful input.
- Many times, a strategic buyer is also interested in the owner of the business and therefore may offer a short or long term employment agreement providing additional income and security.
- For owners looking to walk away quickly, strategic buyers are a great option because they already know the business and market.
- Because strategic buyers are likely in the same or a very similar business, they may not need all of the former overhead, so some of the employees may lose their jobs and facilities may be closed. - For business owners that personally own their real estate, if the buyer decides to vacate the property, the former owner may not be able to find another tenant for the space, thus reducing future income potential.
- If a transaction with a strategic buyer falls apart, that buyer will have tons of information about the acquisition target that could negatively impact the business.
INITIAL PUBLIC OFFERING - An IPO is a sale to the public markets typically through one of the stock exchanges, or more rarely by purchasing a “shell” that is already public. IPOs are typically reserved only for fast-growing businesses that have reached at least $100M in revenue, or for disruptive businesses that have raised significant investments already and have attracted lots of attention. Therefore only a tiny percentage of business owners consider it a viable exit option.
- Capital infusion to the company for new stock issued that can used for R&D, growth, debt reduction, etc. - Financial benefit to the business owner and early investors who can liquidate their formerly illiquid asset. - Often generates publicity by making the company and products known to a wider potential swath of customers.
- IPOs are really expensive and business owners will need lots of help from experienced service providers and professionals - Increased reporting requirements, not to mention added scrutiny of the Securities and Exchange Commission