It may not be an overstatement to say that it is never too early to start thinking about your business exit strategy. Your exit strategy can influence how you manage your business and what strategic decisions you make to get closer to your end goal. The closer you get to a possible exit without thinking through your end game, the more you are leaving things up to chance and allowing circumstances to dictate your outcome.
When thinking of an exit strategy, there are generally three approaches to consider.
1. Maximize Price (Sell to a third party, ‘highest bidder’)
Pros
– Generally, you would receive the highest value for your business and probably would receive more of that value upfront than you would using other methods
– The exit for you is more immediate (this could be a con for some of us)
– Future business risk is off the table
Cons
– You immediately lose your importance/identity in the business
– The process is more emotionally taxing and generally more expensive, despite a better overall payout
– Tax inefficient
– Little to no control over the legacy of the business
Considerations
– Does your financial situation make it necessary for you to receive the highest payout from your business?
– Will you regret this decision if the business is taken in a different direction after you are gone?
– Do you have plans for your time after the sale closes?
2. Maximize Continuity (Internal succession)
Pros
– Generally, creates the least amount of friction internally
– More tax efficient than other methods
– More control of the mechanics of your exit
– Ties to the business gradually decrease rather than disappear all at once
Cons
– Less lucrative than an outright sale
– Risk that internal successors are not ready to take over the business
– Long payout timeframe
– Business risk is lower but still exists on the backend of the deal
Considerations
– Is internal continuity important to the structure of your business?
– Do you have a personal desire to see part of your legacy carried out in the business after you are gone?
– Is your personal financial situation strong, independent of business assets?
– Do you have worthy successors internally?
3. Maximize Legacy (Family/friends type of deal)
Pros
– Business wealth stays in your family
– Significant continuity within the business
– Accomplishes goals of legacy and cash out
– Creates bonds throughout your family around the business (if done properly)
Cons
– Family relational risk at stake
– Generally, the least lucrative of all options with the longest payout
– Difficult to fully exit from the business due to ‘dinner table’ conversations
– Family wealth is undiversified, concentrating financial business risk
Considerations
– Do you have a strong desire to see you children or grandchildren carry on your business legacy?
– Is your family strong enough relationally to separate business conflicts from personal relationships?
– Is your personal wealth diversified away from the business?
– Can you afford to discount the value of the business and still exit?
– Do you have a clear succession and continuity plan to execute the succession process?
Your path to an exit has a significant bearing on how you manage your business today. A third-party deal will drive you to find ways to maximize the valuation of your business for a potential buyer. An internal succession will force you to create a path for growth within your corporation as well as provide financial incentives to keep high quality employees. A family deal creates the greatest need for you to build wealth outside your business so that you don’t need a payout from the business to be able to retire.
How does your strategy change as you think about your options to exit?
