You Got It Off the Ground and Flying, Now How Do You Safely Land It?
Just as you must plan how to start your business, you must prepare for your exit to get the best results. You need to know what you’re looking for in an exit, what kind of exit strategy will get you there and what steps you need to take to exit your business.
“You don’t have to plan an exit strategy; you can just run your business into the ground until it stops,” said small-business consultant Debra Esparza, owner of Esparza & Associates in Long Beach. “But most people want what they’ve created to pay off for them.”
In thinking of an exit strategy, you need to consider your business life cycle. You may think you’ve established a business to take you to retirement age, but your business has an age cycle of its own. You must pay attention to that cycle or risk pumping money into an enterprise that isn’t performing in sync with your age cycle, Esparza said.
At the point in the business life cycle where your business matures, peaks or resists continued expansion because of a saturated market, you should have ready an exit strategy.
A number of exit options exist. They include closing your business, having your partners buy you out, selling the company, passing it on to another generation, positioning it for merger or acquisition or going public. All, except closing, are different types of sales.
The keys to any successful exit, however, are timing, valuation of your business and the terms of the exit deal, Esparza said. No matter which of the above options you pursue, these three elements are crucial to your success.
* Closing: Unless you are a self-employed consultant or own a “lifestyle” business, you should not shut down your enterprise until you have explored selling it first.
“If a company is of any meaningful size whatsoever, there are buyers out there,” said Jourdi de Werd, managing director of Greif & Co. in Los Angeles.
Once you decide to shut down, time the closing as close to the peak as possible. You want to wring out as much profit as possible before selling. But you want to avoid keeping the business alive as it slides downhill, eventually costing more money to run than it brings in, Esparza said.
So, keep a watch on your financial statements. If you notice it’s starting to cost you more to make the same amount of money, you might want to consider ending the business. And watch the market. If your market or industry changes and you can see no way to avoid a negative impact on your business, again, getting out may be the most prudent course.
When you close your business, you are simply dismantling it and selling off the pieces at the best possible price. There is no exit deal to negotiate except to get the best prices for the equipment and inventory. Thus, avoid liquidators and auction houses, which pay as little as 10 cents on the dollar for your equipment and inventory. Instead, sell off your resources piece by piece to individuals interested in specific equipment or fixtures, Esparza said.
* Buy Out: Even if your partners are buying you out, you want to make sure your exit is timed before the business peaks so that you get the best cash value, De Werd said.
Your partnership agreement should contain a buyout clause, which typically addresses how the company will provide a cash buyout to family members of a partner who dies or is disabled. But the clause should also contain noncrisis buyout provisions.
The most common is a pre-agreed-upon formula specifying how much you will receive based on a multiple of earnings or company equity. Or the partnership agreement might specify that an independent valuation will be done by an outside consultant.
However you arrive at the buyout amount, your partners probably won’t have the full cash amount and you’ll have to get your money over time.
* Selling: Unlike dismantling a business, when the proper time to sell is at the peak, selling your business whole should be done just before it peaks, Esparza said. By timing your sale this way, you’ll get the highest dollar because of the perception of additional value to come from growth.
When valuing your business, remember to add the monetary value for “goodwill.” Goodwill is the positive business reputation your company acquired over time, its standing in the community and the recognition of the company name that can draw customers long after you have left the business.
Do use an outside consultant to value your business. Most entrepreneurs have an inflated view of the value of their business and need another set of eyes to take an objective look, said Jim Ellis, director of the family business program at USC Marshall School of Business.
“You tend to get emotional because it’s your baby,” Ellis said, relating one incident in which an owner broke down in tears when simply asked if he was sure he wanted to sell.
You can sell your business by placing a classified ad under business opportunities in newspapers, magazines and trade-association publications that you use now to help you network and operate your business. But selling a business is much like selling a home. You can do it yourself or you can use a business broker experienced in buying and selling businesses and the legal requirements.
Once you’ve agreed on a sale price with a buyer, the terms of the deal can be structured in a variety of ways, but in general, you probably won’t get the entire value of the business up front in cash, Ellis said. For example, if your business is valued at $10 million, you might get $5 million up front with payments over time.
“The old adage, ‘Your price, my terms,’ applies here,” Ellis said.
In addition to examining the terms of the deal, you also need to make sure the buyer is financially sound. You don’t want to end up turning over your business now for payments later, only to have the buyer ruin the business, declare bankruptcy and fail to pay you.
* Passing to the next generation: In a family-owned operation, the best time to pass on your business is when the next generation is reaching its prime, in their mid-30s to early 40s, said Quentin Fleming, a Marina del Rey management consultant. Before that, the younger generation may not be sufficiently prepared or experienced to run the business and, after that, they may not want to take on a grueling business or may have already developed other careers or interests.
Also consider whether your children are capable and even want to run your business. If not, they could operate it half-heartedly or incompetently and lessen its value. Decide if you would do better to sell to an eager outsider. And consider whether you, the owner, are truly able to let go of the business and stand by only as an occasional advisor.
If you do decide to sell to your offspring, communicate the decision early on so there’s a smooth transition and not a shocking announcement, Ellis said. And get a business valuation by an outside consultant. Too often, owners of family-owned companies don’t separate the business from the family and emotion skews the value, Fleming said.
Finally, family-owned businesses can run into problems when it comes to the buy/sell agreement because, if the entire family has been living off the business, the children may not have the resources to buy it. Deals can be structured whereby the offspring are given a discount that is subtracted later from their inheritance, or the parents can be paid over a certain number of years from the business’ profit. But be sure you know your children’s business talents. It may be wiser for you to have them get a loan and pay back the bank instead of you.
* Positioning for merger or acquisition: If you want a larger company to acquire your small company, timing may not be as important as appearances. A large corporation may want a smaller company not to run it as is, but for the territory, technology, distribution network, customer lists or as part of corporate expansion.
So, it’s to your advantage to research what some of these corporations are interested in and need. Some large companies, desperate to get your company and tear it apart for the pieces they need, may be willing to pay a premium price, higher than could be gotten if you sold the business to another small operator, Fleming said.
This type of corporate buyer is called a “strategic buyer.” Once in possession of your company, the bigger firm may let go not only you--the owner--but all your top management, Ellis said.
A second type of buyer, a “financial buyer,” is more likely to want your company to continue to operate as is and will likely keep your top management. But the large company may also require you to stay on a few more years guiding your company, Ellis said.
In selling to a corporation, the same precautions should be taken as in selling to an individual. Don’t get overawed by the status of the company acquiring you. Make sure you arrange a sound buy/sell agreement.
That agreement could include yearly payments, provided you stay on managing the company for a few more years, or payment in stock from the corporation acquiring you.
* Going public: Although at first glance it may seem that selling stock in your company is a painless way to get your cash out and leave, in reality it takes a long time and subjects you to risk that the money you receive will vary depending on the value of the company stock, De Werd said.
In addition, at the initial public offering, or IPO, investors are not likely to put their money into a company whose owner--you--wants to leave. To avoid creating investor doubt, you can usually sell only about 10% to 20% of the company. At a secondary public offering, you might be able to take more money out by selling your shares, but only if the company has performed well, De Werd said.
Going public is actually more a strategy for recapitalization, expansion or attracting and retaining employees, than for exiting.
When it comes to selling a business, the process can take as little as a month, if an offer comes in out of the blue, to six months. But you should begin planning to sell your business from a year to three years ahead of time, Fleming said.
And don’t be leery of using outside consultants. You’ll probably need a financial consultant to value your business, a CPA or business attorney to deal with taxes, structure and legal matters, and a business broker or investment banker to sell your company.
Exercise: Before taking concrete steps to sell your business, examine your emotions. Ask yourself: Who am I apart from my business, how will I occupy my time without the business and what do I enjoy most about the business that I will miss?
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Entrepreneurship 101
Chapter 1: HOW TO CHOOSE A BUSINESS
Chapter 2: HOW TO START A BUSINESS
Chapter 3: HOW TO DEVELOP A BUSINESS PLAN
Chapter 4: HOW TO FINANCE YOUR BUSINESS
Chapter 5: HOW TO GROW YOUR BUSINESS
* Devising a Strategic Plan
* Making Alliances
* Using Technology
* Using Human Resources
* Forming an Exit Strategy
The Bottom Line
“Entrepreneurship 101” is a tutorial on how to choose, start, finance, plan and grow a business. The program, written by Times staff writer Vicki Torres, was developed by Debra Esparza, a faculty member at the Entrepreneur Program of USC’s Marshall School of Business. Esparza also heads USC’s Business Expansion Network, a community and economic development project that has counseled more than 5,000 small-business owners in the Los Angeles area over the last six years. BEN provides help with financing, business planning, accounting, marketing and other issues. The tutorial can also be found on The Times’ Small Business Web site at https://www.latimes.com/smallbiz.
