Think your business is successful because you’re financially profitable? Think again. Your firm’s success isn’t complete until you’ve found a way to get those profits out.
Selling the business to investors is one way to do that. But there are other ways to exit a company, and you should consider them all before deciding that a sale is right for you and your firm. Here are five exit strategies available to most entrepreneurs:
Let it bleed.
One exit strategy is simply to bleed the company dry. Pay yourself a huge salary, reward yourself with a gigantic bonus, and issue a special class of shares that pays high dividends.
Although a bad practice in public companies, this isn’t always a bad idea for private companies. Rather than reinvesting money to grow your business, you keep things small, take out a comfortable chunk, and live on the income.
Remember, though, that money in the wallet is no longer money in the business. If you’re in a business that must invest to grow, taking out money can hurt your company’s future prospects. And if you have other investors, taking too much may not be fair to them. If you pursue this strategy, minimize your dependence on other investors, and structure the business to allow you to draw out cash as needed.
Another strategy is simply to call it quits, close the business doors, and sell off the assets. Remember, though, that any proceeds must be used to repay creditors; the remainder gets divided among shareholders.
If you’re emotionally attached to the company you’ve built, you might transfer the firm to a customer, employee, or family member who will preserve your legacy. In this arrangement, the seller often finances the sale and lets the buyer pay the debt off over time. Handing the business off to a friendly buyer lets the owner make more money than in a liquidation, but it preserves the business and gives the buyer an opportunity to run it..
The purest friendly buyout occurs when a family member buys the business. A family transfer only works, however, in a family that can manage the takeover peacefully. If yours tends to fight, the business will give them a golden opportunity to do just that. While they argue, your firm will slide into disrepair. Good planning and clear instructions can help.
Sell your firm to another business, and you exit the firm and leave your children a financial legacy while saving the business from second-generation ruin.
Choose the right buyer, and you can command a purchase price that’s based on much more than your company’s future cash stream. An acquirer may be able to use your firm to expand into a new market, offer existing customers a new product, or develop critical capabilities faster than they could alone. They’ll pay for those opportunities.
Acquisition does have a dark side. If there’s a bad fit between the two companies, the combination can self-destruct, with managers working more to quell inter-company strife than to move the firm forward.
There are millions of companies in the United States, and only about 7,000 of them are publicly owned. Some of those were spun out of existing publicly-traded companies, making the number of public companies founded by entrepreneurs even lower.
There’s a good reason for that. Initial public offerings are expensive, complicated, and time-consuming. They begin with a company spending millions on a road show that’s designed to convince investors and Wall Street analysts of the firm’s worth. If all goes well, they end with a firm that has a more complicated corporate structure, a greater number of rules to follow, less flexibility in running the company, and analysts who want information every 90 days.
Professional investors with a track record of taking companies public are an IPO’s best managers. If you’re the principle entrepreneur and have done a great job protecting your equity, you’ll make some money, too—but possibly at the cost of your sanity.