As an entrepreneur, planning your business exit is as crucial as its inception, if not more. The exit strategy you choose can either substantially amplify your gains or simply serve as a final bow, marking the end of your entrepreneurial act. In this article, we’ve categorized various exit strategies into three engaging themes – Selling Your Business, Transitioning Ownership, and Changing Your Role – and we’ll delve into how to maximize value in each. We’ll also share real-life success stories to bring these concepts to life.
Outright Sale
Nothing gets an entrepreneur’s heart racing like the thought of a business sale (that’s both the good and bad types of heart racing if you ask any of them). However, a maximized return on investment doesn’t happen by chance – it’s a result of careful preparation and strategic decision-making.
- Strategic Buyer: For a prime example of selling to a strategic buyer, consider the acquisition of LinkedIn by Microsoft in 2016. Microsoft saw unique value in LinkedIn’s extensive professional network and data, and they paid a premium for it. Just like LinkedIn, your business might have assets that are gold mines for strategic buyers, even if you have not yet found the ideal way to monetize these assets. To prepare for such a sale, start by identifying potential investment bankers in your niche (if you are LinkedIn call Goldman, but if you are a small SMB with a value of $100M or less, Objective or the like are your better bets). These investment bankers can help you find buyers in your industry, position your business to attract them, and negotiate on your behalf to create a deal structure that suits your goals. This process typically takes 6-18 months, but the increased sale price is often worth the wait.
- Financial Buyer: If you seek a swift exit, a sale to financial buyers like private equity firms might be an option. They’re primarily interested in businesses with robust cash flows and growth potential. To attract these buyers, your bankers, exit planners, and business coaches can help you focus on enhancing your financial performance and demonstrating consistent growth. This approach might yield slightly less financial return compared to a strategic sale due to the cost of capital considerations, but it allows for a quick and complete exit. You may also benefit from being in a hot industry, serving as the platform for future investments, or gain from being a bolt-on acquisition to one of their core portfolio companies.
Transitioning Ownership
Perhaps your dream exit doesn’t involve parting ways with your business completely, but passing the torch to someone who’ll keep the fire burning. In this situation, you may also benefit from being a consultant to the business, keeping the business within your family, or passing it on to your valued employees.
- Management Buyout (MBO) or Employee Stock Ownership Plan (ESOP): Take the example of Chobani, the popular yogurt company. In 2016, the founder handed ownership to the employees, demonstrating trust and gratitude in the team that helped build the business. If you wish to follow a similar path, start by building a strong, competent management team, and cultivating a company culture that encourages employee ownership. Either way, prepping a management team for succession is a key action that makes your business more attractive to other buyers as well.
- Family Succession: A shining example of family succession is Walmart, where the founder’s children continue to lead the company. If your dream is to see your business thrive within the family, grooming the next generation of leaders early is crucial. Engaging your family early is necessary to ensure a smooth transition.
Altering Your Role
Sometimes, the best exit strategy involves not exiting at all, but simply changing your role within the business.
- Passive Ownership: Warren Buffet’s Berkshire Hathaway is a great example of this strategy. Buffet entrusts the management of his acquired companies to their original leaders while he oversees the big picture. If this resonates with you, start by identifying potential leaders within your company and delegating responsibilities gradually. Well-paid employees don’t necessarily need to own your company (they may not even want to), and day-to-day operations are sometimes better left to others. Working more on the business as opposed to in the business can have a positive effect on growth and profitability.
- Franchising: McDonald’s global success can be largely attributed to its franchising model. If you believe your business model has similar potential, consider creating a replicable business manual and start small to test the model’s success before expanding extensively. Anything from retail to IT can be franchised, and your business may be better off with this decentralized approach to ownership.
Let’s summarize each business exit strategy and their key takeaways:
- Selling Your Business: Identify potential buyers and position your business to attract them. This process typically takes 6 months – 2 years, but the payoff can be significant.
- Transitioning Ownership: Build a strong management team, cultivate a culture of ownership, and if you’re considering family succession, prepare the next generation of leaders.
- Changing Your Role: Identify potential leaders within your company and start delegating. If franchising, create a replicable business model and start small.
Planning your exit strategy should start years before your intended exit. With the right preparation and strategy, you can reap significant rewards from your entrepreneurial journey. As always, consult with your trusted advisory team to ensure the best possible outcome.
Now that we’ve unpacked these strategies, it is up to you to determine which path you will take. If you’d like to discuss which option is best for you or get an accurate understanding of the current value of your business, reach out to us to discuss further.
About the Author
Jordi Pujol, CFA
Director
(213) 282-7910
Disclosure
This news release is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. Principals of Objective Capital are Registered Representatives of BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities.
