About to exit?Submitted by The Entrepreneur's Advisor - Derek Notman on January 2nd, 2019
Things to consider before the sale of your start-up is final.
So, you’ve done it! Your company has finally achieved success and you’re looking to cash out on the effort you have invested. Deservingly so, however, you’re not done yet. The most critical and challenging stage, which is the exit stage needs to be finalized.
A founder can’t just hand over the reins in exchange for a lucrative payday. There are complications as exiting is a strategic decision and one that founders must be aware of early on.
As an experienced financial advisor with a Certified Financial Planner® designation with vast knowledge and expertise working with business owners, I would like to assist you in understanding what it is you should consider prior to the sale of your start-up.
What is the reason for the sale?
One of the fundamental factors to consider and not overlook is this - “What is the reason for potential buyers to want to buy your company?” Outside investors want to collect on their return and equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold.
Entrepreneurs thrive on the art of the start of a business. Assuming your start-up takes off, you will probably find that the fun is gone by the time you reach 50 employees, or a few million in revenue. Within three to five years, some entrepreneurs are anxious to start a new venture, with new ideas and spinoffs that have built up in your mind.
When it comes to preparing your exit strategy, consider these few points:
Merger & Acquisition (M&A)
This usually means merging with a similar company or being bought by a larger company. This is a win-win situation when bordering companies have complementary skills and can save resources by combining. For bigger companies, it's a more efficient and quicker way to grow their revenue than creating new products organically.
Initial Public Offering (IPO)
Back in the day, this was the preferred method, and a quick way to riches. But since the Internet bubble burst in the year 2000, the IPO rate has declined every year until 2010, and is now at about 15 percent. This approach is not recommended to start-ups these days as shareholders are demanding, and liability concerns are high.
Sell to a friendly individual
This is not an M&A, since it is not combining two entities into one. Yet it's a great way to "cash out" so you can pay investors, pay yourself, take some time off, and get ready to have some fun all over again. The ideal buyer is someone who has more skills and interest on the operational side of the business and can scale it. Make it your cash cow. If you are in a stable, secure marketplace, with a business that has a steady revenue stream, pay off investors, find someone you trust to run it for you, while you use the remaining cash to develop your next great idea. You retain ownership and enjoy the annuity.
Liquidation and close
Even lifetime entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to shut down, close the business doors, and liquidate. There may be a natural catastrophe, or the market you counted on could implode. Make rules up front so you don't end up going down with the ship.
To some, an exit strategy sounds negative, however, on the contrary, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. This allows you to run your start-up and focus efforts on things that make it more appealing and compelling to the short list of acquirers or buyers you target.
The type of business you choose should depend on your goals, and the way you grow it should be aligned with your exit strategy. Don't wait until you are in trouble to think about an exit, rather think of it as a succession plan, or a successful transition.
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