Five exit strategies explained: What’s the best way out?

19 October 2015 Kieron Johnson

Your business has done well – really well – and you want to cash-in. So, you want out. But what’s the best way to exit your business? Pick the right exit strategy and you could be knocking on the door to the big bucks before you know it.

Many of the steps you need to take to exit your business are the same ones you took to enter it.

We’re talking about implementing financial reporting systems and controls, looking at growth potential through internal functions and the like. All fun stuff (cough).

But you can exit your business in any number of ways. We take you through five of them.

Exit strategies explained

The path you take out of your business will depend, to some extent, on the path you took into it.

In other words, your motivation for starting a business in the first place will affect how you leave it.

Consider these five exit strategies and work out which one suits your circumstances.

1.The lifestyle ‘exit’

A ‘lifestyle company’ exit isn’t really an exit as such.

It’s an idea best suited to private companies (it’s considered bad practice in public ones).

You don’t reinvest cash into growing your business. You just keep things minimal, take out a sizeable chunk and live on the income.

It involves paying yourself a huge salary, rewarding yourself with a humongous bonus (regardless of your company’s performance) and issuing a class of shares – unique to you – that gives you many times the dividends of other shareholders.

Pros

  • Who doesn’t want a seven-figure take-home pay?
  • You don’t have to give any thought to exiting – just pull out the cash as and when you need it (ATM-style).

Cons

  • Withdrawing cash could have negative tax implications. For instance, a high salary is taxed as regular income whereas an acquisition could produce income such as capital gains.
  • Mismanagement in the withdrawal department could see you taking out money that you may need down the line.

2.The liquidation exit

Liquidation involves calling a halt to proceedings and closing the doors to your business.

If you liquidate your business, you have to use the proceeds to repay any creditors and split whatever is left between shareholders (if there are any).

Pros

  • Liquidation is a structured, straightforward process.
  • There are no negotiations involved and no headaches about transfer of control.

Cons

  • Liquidation can be seen as a huge waste. At best, you’ll only bag the market value of your firm’s assets.
  • Intangible assets, such as your brand, client lists and business relationships may hold serious value, but liquidation does away with them without any opportunity to restore their value.
  • Shareholders noses’ may be left a little out of joint at just how little you’re actually leaving on the table.

3.The ‘friendly’ buyer exit

If you’ve become emotionally invested in your business, you can always pass on ownership to a successor who believes in your business just as much as you do and is willing to preserve your legacy.

Buyers may include customers, employees or family members.

Pros

  • Due diligence isn’t a high priority. You know them and they know you.
  • Your buyer may continue the traditions that are most important to you.

Cons

  • If you sell your business to a mate or a family member, they’ll be less than pleased to find out that they’ve just bought the liability for 10 years’ worth of unpaid taxes.

4.The acquisition exit

Acquisition is the ‘daddy’ of all exit strategies.

You find a business that wants ‘in’ on yours and you sell it them.

Pros

  • If you’re able to get the attention of multiple potential acquirers, you can start a bidding war and shoot your selling price to the skyline.
  • If you have a ‘strategic buyer’ in mind (someone who has a specific reason for wanting to buy your company), they may well be prepared to pay over the odds for it.

Cons

  • Organising your firm around a specific potential buyer may make your offering unattractive to other suitors.
  • Acquisitions can be a royal pain in the neck when there’s a clash of cultures and systems to contend with.
  • Non-compete agreements are common in acquisitions, which can limit your freedom for a time (even if they can make you cash-rich).

5.The IPO exit

An initial public offering (IPO) involves you selling some of your firm on the public market.

Traditionally, you and your management team stay put for some time. Your investors and managers may be permitted to sell some stock and your business continues on much like it did before. The only difference is, your business will be regulated up to the hilt.

Pros

  • Your stock value will surge into the stratosphere.
  • You’ll likely make the cover of Newsweek.

Cons

  • The level of financial scrutiny your business is subjected to way exceeds the norm. If you don’t have adequate accounting systems in place from day one, an IPO probably won’t be the way to go.
  • Some types of company need to be reorganised before they can go public.
  • Your time will be spent selling your business, not running it.
  • Investment bankers take a certain percentage off the top and IPO transaction costs can make your eyes water.

Now you know the exit routes from your business, you’ve just got to choose which one to run with.