EN­TREPRENEURS, BE SURE TOMAKE AN EXIT PLAN

Know­ing how you might end your busi­ness is just as im­por­tant as how you start it

Chicago Sun-Times - - MONEY - Rhonda Abrams @Rhon­daAbrams Spe­cial for USA TO­DAY

When you’re about to launch your great start- up or build a small busi­ness, you don’t spend a lot of time pon­der­ing how you’ll even­tu­ally leave it. Sure, you might imag­ine your ter­rific new app will be bought for mil­lions. Or per­haps you think one day you’ll make enough money to re­tire. But with­out a strat­egy, those dreams are just that— dreams. You need an “exit plan.”

An exit plan is a long- term strat­egy for how you, or oth­ers, will ex­tract value from the com­pany you built and trans­fer own­er­ship to oth­ers. “Whoa, Rhonda,” I imag­ine you say­ing. “I hardly know what I’ll be do­ing next month. Why should I fig­ure out what I’ll do with my com­pany five, 10 or 20 years from now?”

An exit plan helps shape your com­pany’s pri­or­i­ties. If, for in­stance, your exit strat­egy is to be ac­quired in the next few years, you’ll need to build your com­pany fast and rein­vest most prof­its in growth. If you plan to run your com­pany for many years be­fore sell­ing or pass­ing it on to your chil­dren, you’ll grow more slowly and take more of your prof­its out as in­come.

If you have a busi­ness part­ner, you cer­tainly want to dis­cuss your exit strat­egy with her or him. One of the messi­est busi­ness dis­so­lu­tions I’ve seen hap­pened be­cause one founder dreamed of build­ing a com­pany worth mil­lions of dol­lars to sell, while the other hoped to build a mod­est busi­ness she could run for the rest of her life. They never shared their exit goals, and, not sur­pris­ingly, they quickly clashed over ev­ery ex­pen­di­ture and strate­gic de­ci­sion.

If you’re look­ing for an in­vestor, you’re cer­tainly go­ing to have to spell out an exit: In­vestors want to know how they’ll get their money back.

So how can you even­tu­ally— and hap­pily — exit your busi­ness one day and

con­vert the value of your com­pany to cash?

SELL. This is the tra­di­tional way to get value out of busi­ness. All types of com­pa­nies can be sold, not just retail or man­u­fac­tur­ing en­ter­prises. Typ­i­cally, pro­fes­sional busi­nesses, such as doc­tors’ and den­tists’ prac­tices, are bought into by new part­ners. Even a one- per­son con­sult­ing busi­ness can be sold, but it’s not nec­es­sar­ily easy to find a buyer or to get a suf­fi­cient price for it.

BE AC­QUIRED. You­may have some­thing an­other, larger com­pany wants. Per­haps they want your cus­tomers or to reach a new mar­ket you serve and they don’t. Per­haps your com­pany of­fers cer­tain ca­pa­bil­i­ties or tech­nolo­gies that add value to the larger com­pany. You can of­ten com­mand a higher price for your com­pany if you have as­sets that are valu­able to an­other com­pany.

MERGE. This is sim­i­lar to be­ing ac­quired, but the as­sets of the two merg­ing com­pa­nies form a new en­tity. Youmight merge with an­other com­pany in­stead of be­ing ac­quired be­cause they don’t have suf­fi­cient funds to buy you out im­me­di­ately. You would prob­a­bly still own stock in the merged com­pany, and oth­ers could buy you out over time.

GO PUB­LIC. When you is­sue shares in your com­pany that are traded in a stock mar­ket, this is re­ferred to as “go­ing pub­lic” or is­su­ing an IPO — ini­tial pub­lic of­fer­ing. Once you go pub­lic, you prob­a­bly won’t de­part from man­age­ment of the com­pany, but you now have a way to get money for your own­er­ship in­ter­est by sell­ing some of your per­sonal shares of stock. You gen­er­ally have to grow a fairly large en­ter­prise to go pub­lic.

HAVE FAM­ILY MEM­BERS TAKEOVER. When Levi Strauss started sell­ing jeans in 1853, he al­most cer­tainly didn’t en­vi­sion his com­pany still be­ing fam­i­ly­owned 160- plus years later. But even if you know you’d like this to hap­pen, you need a plan. Your fam­ily mem­bers might not want to run, or be ca­pa­ble of run­ning, the com­pany.

EM­PLOYEE BUY­OUT. You can re­tain the jobs you’ve cre­ated by struc­tur­ing a way for ei­ther key man­age­ment or em­ploy­ees as a whole to buy the com­pany. An ESOP — em­ployee stock own­er­ship plan — can help them fi­nance the pur­chase and give you the cash you need.

Of course, there’s one other way to exit your com­pany: Close the busi­ness. You get the least fi­nan­cial re­ward, but you can get on with the rest of your life and fi­nally go golf­ing.

An exit plan shapes your com­pany’s pri­or­i­ties. If, for in­stance, you want to be ac­quired in the next few years, you’ll need to rein­vest most prof­its in growth.

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