A couple of weeks ago we discussed the idea of the road map and having your plan set out from the beginning to make the start-up process easier to handle. I detoured a bit because I wanted to dedicate a whole blog post to the importance of having an exit strategy. From the very beginning of your venture you need to have an idea of how you want to get out in the end. Basically the concept is self-explanatory: What is your plan to get out of the business, and/or how do you plan to cash in on your initial investment?
Knowing what your exit plan is can also have an effect on what business type you choose as each business type has different tax implications and various other elements that play a role in different exit strategies. If you wanted to take your company public someday, it might be a good idea to structure it as a corporation from the start to make things smoother. If you want to pass your company down to the next generation, there is a little more leeway in what type of entity you choose. These are all things to consider on the road map and knowing your exit strategy will help you make those decisions.
I’ve said it before, and I’ll most definitely say it again, but when thinking about exit strategies you should also consult professionals. Often times they’ve handled a similar case to yours and they can help you parse out the details of any legal or tax issues that may arise when you plan to exit the business. This foresight will make for much smoother sailing down the road and eliminate many headaches.
Here are two examples of what some of the big players do.
Sell Out (Acquisiton)
For many companies, especially newer tech companies, the exit strategy is to be purchased by a larger company like Google or Facebook. The small start-ups come up with a novel way to generate e-commerce, or new code that makes technology better. They build up their portfolio of clients, improve upon their ideas, and sell the company to the highest bidder. This example can be seen in industries other than the tech sector, but that is an example fitting of the times we live in.
Another fitting example, especially living in Oregon, is the craft brewing industry. Many small breweries have been
growing from a few thousand barrels of the sudsy stuff every year to huge operations and one way they are able to grow so fast is through investment from one of the “Big Three” brewing companies like Anheuser Busch. A case in point is the recent sale of 10 Barrel Brewing in Bend, Oregon. They had an extremely popular product and a sexy brand that was attractive to AB-InBev, so they cashed in their company for an undisclosed amount, but it’s safe to assume that they didn’t walk away with empty pockets. It wasn’t necessarily the most popular decision in terms of many consumers, but it was a brilliant move in terms of business practices.
The cool part about selling your company is that you can include clauses in the purchase agreement that allows you to continue managing the business you built without being the owner. In the case of 10 Barrel, they are now wholly owned by Anheuser Busch, but the management team that built the brand is still in control of the product. They have to answer to higher ups now, but for a few million I think their willing to give on a few issues if they have to.
Another popular exit strategy is to take a company public. The term “going public” simply means that the companies ownership will be bought and sold on the stock market. Depending on the company and industry there are different markets that you can sell your companies shares on, but the one that most people are familiar with is the New York Stock Exchange.
Similar to selling the company outright, you can still maintain the controlling percentage of shares in your company so that you can continue to run it as is. A lot of companies, like Facebook, have gone this route. Mark Zuckerberg still calls the shots in the end, but the company is now owned by anyone willing to buy its shares on the open market.
One thing to keep in mind when taking a company public is that when you release shares to the open market, your ownership will be diluted because there are more shares available to everyone. The thing you need to be careful about is maintaining your majority position in the company if you want to continue running your company. Otherwise other investors can have more weight when voting on the way the company is run.
Exit Strategies for Normals
The previous two options are very effective methods of cashing in on your investment, but are usually saved for some of the bigger players in the game. Here are the more common exit strategies for everyone else.
A more realistic scenario for the average business may simply be selling to someone who wants to continue what you’ve started, but you’re ready to get out of the game. Perhaps you started a local athletic retail company that provides apparel and athletic equipment for local fans and athletes. You build up a client base and a good reputation in the community, but you don’t want to do it forever, so you find someone equally as passionate who would like to continue the business. They can buy the company and all of its assets and you can go on your merry way with cash in your pocket.
The big bonus of going this route is that the company is likely going to continue with the values that you set forth from the beginning. When you sell your company to someone you know and trust, they understand what you stand for and will likely try to continue the reputation and name that you worked so hard to create.
Included in this category is the handing down of the business to the next generation. This is an extremely popular exit strategy of many mom and pop shops that have made a career out of building their business and what to see their children continue the legacy. Whether or not your future children want to take over is another story, but having the plan of one day selling to your kids is good to prepare for in the beginning.
The Lifestyle Business Model
One potentially risky, but attractive way to run your business is to simply not grow by reinvesting profits back into the company, but just take large chunks of money out when you want it. If you’re a small, privately held company there is no reason you can’t do this. I highly recommend doing your due diligence and being careful about how much you take out at a time, but if you want to keep your business small then so be it.
The way you would go about it is to pay yourself a large salary and distribute dividends to yourself in large quantities so you can support whatever lifestyle that pleases you. If you can manage to pay yourself an exorbitant salary and not run your company into the ground in three months than knock yourself out.
The major plus side of this strategy is that you can enjoy the fruits of your labor as they come and not have to worry about deferring it to later in life. This puts less pressure on the exit at the end of your tenure with the business, but on the other hand, it does limit your value if you chose to sell the company when it’s all said and done. Like I said, it’s a risky way to go, but if done correctly, it can be a very fulfilling way to run your business.
Shut ‘er Down!
A very common, but incredibly non-lucrative way to exit your business is simply to just close and call it good. This process is called liquidation because you liquidate, or sell for cash, all of the assets that are involved in your business. At most you’ll just get back the market value of any hard assets that the business owns, but not much more.
As Entrepreneur.com put it, “I don’t know anyone who’s founded a business planning to liquidate it someday, but it happens all the time.” This is a very true statement and some business owners are just simply done and want to call it quits. There is nothing wrong with this exit strategy from a legal standpoint, but there are a lot of drawbacks that you should consider when thinking about this option.
First and foremost, you are leaving so much value on the table when you choose to liquidate. Yes your physical assets will get you cash that you can take to the bank, but there are so many more valuable things that you can capitalize on. Client lists, reputation, distributor agreements, et cetera will all create more value above the assets of the business. The only way you can cash in on that value is to look at the option of a sale. You worked hard creating that value, don’t you want to get something back from it? Unless the business is floundering and there aren’t any other options, I suggest you choose another strategy.
Our Exit Strategy
We can talk all day about hypothetical situations, but it’s usually best to give real examples to put things into perspective. When Olivia and I were in the process of taking over Old Town we had a good conversation about this topic. We sat down and discussed what we wanted to get out of this business and how long we wanted to invest ourselves in the venture.
In college neither one of us ever really imagined owning a restaurant, but it worked out that we did. Because of that, we had to make sure we knew exactly what our expectations were. We made the decision that we are going to get in, make the changes we want to make, build the Old Town brand, and then after a set amount of time we are going to re-evaluate our positions in the company. We’ve discussed both selling the business and simply hiring a manager to take us out of the day-to-day operations.
Another option we have is to simply sell the restaurant part, but maintain ownership of the property through our LLC and that will provide us passive income while not having to run the restaurant. This option rises out of the way we structured the purchase of the business from the previous owner and was one of the many benefits of having a professional accountant and lawyer provide us guidance in the very beginning of our personal road map.