Start from the Finish Line: Plotting Your Exit

Fifth Third Bank

 

If there is one thing a founder should think about early in the lifecycle of a business it’s their eventual exit.

Why think so far ahead?

Because the decisions you make today can greatly impact your exit options down the road—and vice versa. How you raise capital, when you make improvements and where you expand or invest are all impacted by your ultimate exit strategy.

Here’s a look at four exit scenarios for small and medium businesses, along with a few short- and long-term considerations for owners to keep in mind.

Strategic Buyer

Large corporate buyers are often willing to pay a premium for a company possessing operations, talent or intellectual property that can enhance its own long-term plans.

As a seller, this means you'll want to consider how your company’s strengths compliment that of a potential acquirer, as well as how the two entities might ameliorate the other’s weaknesses or market gaps.

Then take a critical look at your own business through their eyes. Does your business have growth potential? Is it structurally sound? What improvements should you make or hold off on with such a buyer in mind?

If you’re considering a merger as opposed to an acquisition, consider whether the individual owner’s long-term plans are aligned.

A seasoned investment banker can be a great resource—and, in fact, may already have clients who would potentially be interested in a business such as yours.

Financial Buyer

This category can include investors ranging from private equity to venture capital, all with their own specific objectives and strategies. A family office, for example, may buy a company because of the cash flow it generates, while a private equity investor may take a majority stake with the goal of transforming operations and ultimately selling it for a profit. A venture capital firm may invest with an eye on an eventual initial public stock offering (IPO).

The common element is a buyer interested primarily in the potential financial return your company offers, so you'll want to ensure your company can demonstrate consistent returns or the potential to do so.

To be sure, there are many facets to working with financial buyers—and key considerations go beyond valuation. You will, for example, need to think through how much ownership you want to retain, the degree to which you want to stay involved and how comfortable you are with changes to your operations and management.

Employee Stock Option Plan (ESOP)

An employee stock option plan or ESOP may be right for businesses seeking to reward and incentivize loyal and long-term employees. ESOPs essentially turn ownership over to your employees through stocks, providing employees a vested stake in the future earnings of the company. This may be a good option for companies that do not have a natural strategic buyer.

Keep in mind that not all company structures can be turned into an ESOP. A company with many outside investors may, for example, find the option a more difficult sell than a closely-held private company with fewer moving parts. These are considerations that business owners should weigh early—preferably beforepursuing new capital for growth—lest the interest of investors may be at odds with an ESOP exit.

Family Succession

Keeping the business in the family can be both rewarding and challenging.

It's important to get future successors involved in learning the business as soon as possible—especially if the product, service, and/or inner workings are complex. Transitioning a relatively straight-forward retail operation, for example, may take a year to groom an heir while preparing the future CEO of a manufacturing concern may take decades.

The more competence family members can demonstrate in key management roles, the more predictable and painless the transition becomes. Further, maintaining a long-standing outside corporate board can settle contentious issues, eliminate the potential for perceived bias in major decisions, and act as an objective tie-breaker during family transitions.

Building and growing a company takes time. So does navigating the road to an eventual exit. The upshot: Thinking through a company’s long-term objectives—and its role in the broader marketplace—can be tremendously beneficial, no matter which path you end up following.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.