For many owners, determining how to exit is the hardest question. Yet it is essential because the answer identifies the issues and challenges you face and the appropriate tactics you need to consider for a successful exit.
Ben Franklin observed that death and taxes were two of life’s few certainties. We must add a third. Every owner will exit from his business, one way or another. Either during your lifetime or at death, your business will be given away, sold, or liquidated. These three outcomes are not exit strategies. The word “strategy” implies a desirable result. Death is not a strategy!
There are, in fact, four plausible exit strategies. Identifying as early as possible your most likely exit strategy creates a clear path to what is needed to achieve a successful exit.
The four possible exit strategies are:
- Pass to Family
- Sell to Outside Buyer
- Sell to Inside Buyer
- Planned Liquidation
Notice that selling your business to an outside buyer and selling it to an inside buyer (typically one or more key employees) are different strategies. Conventional wisdom often lumps these two options together as simply “selling the business.” Selling your business to an outside party usually is a completely different process from selling it to one or more employees. We differentiate between those two strategies because the issues and tactics used for each strategy are different.
It is also important to point out the fourth strategy, Planned Liquidation, does not mean failure. Unplanned liquidation could signify failure. Planned Liquidation implies that in a time and manner of your choosing, the business will close in an orderly way. Owners who intend to eventually close down the business still have an acute need for exit planning; they must adopt a current-cash based approach to converting their business wealth rather than a future-equity based approach. Contrary to conventional wisdom, most closely-held business owners need to incorporate some current-cash based tactics into their exit planning and cannot afford just to sit back and wait for a future-equity based payday.
The Exit Strategy Decision Tree
At first, you may not be sure of your likely exit strategy. A process-of-elimination approach often helps identify or solidify your most likely exit strategy. While circumstances and your ultimate exit strategy may change, determining the most likely strategy helps you and your advisors consider tactics to maximize exit results. An exit strategy process of elimination “decision tree” starts with the following statement:
I want family, who have the desire, ability, and youth to succeed me, to one day own my company.
Do you agree or disagree with this statement? If your answer to this statement is “Yes” then your exit strategy likely is to Pass to Family. Each of the four exit strategies uses a short, easy-to-remember (if not, borderline corny) descriptive term. Owners whose likely exit strategy is to pass the business to family are called Passers.
If you said “No” to the first statement, then you must select from the following three statements which best fits your situation. You may have more than one that could fit, but approach this like the standardized tests many of us took in school—choose the answer that “best fits.” Read them carefully, for each statement includes several important details:
My business clearly offers to an outsider Transferable Value significantly above book (liquidation) value.
If this statement best fits, then you have the chance to sell your business to an outside party and be paid for its value as a concern. In this case, you are an Outie.
The next statement reads:
My trusted employee(s) could now, or in the future with preparation, profitably run my business. They also have the desire to own my business and the youth to outlast me.
If this statement best fits your situation, then your likely exit strategy may be to sell to one or more key employee insiders – you are an Innie. Note that there are several important parts to this statement. The employee(s) ideally is trusted, prepared, has the desire, and will be young enough to take over. Remove any one of those factors, and this may not be a viable option for you.
None of these previous statements may seem right for your business. The last statement to consider is:
None of the previous statements fit well. Most likely I will close my business in an orderly manner at the time of my exit.
In this situation, your likely exit strategy may be Planned Liquidation. This owner must consider tactics that use the business’s current cash to convert value along the way. In simple words, squeeze the business dry. If this is you, you are a Squeezer.
Determining whether you likely are a Passer, Outie, Innie, or Squeezer is one of the most important steps in your exit planning. Owners in the four different paths face four different sets of issues, risks, and tactics. Knowing which type of business owner you are, allows you to focus on only those tactics appropriate for your exit goals.
Click here to download our free Exit Strategy Tree infographic.
Read more about the four different exit strategies and the timing to begin your exit planning here.