Every Exit is an Entrance Elsewhere

By Michael Stier

“Look on every exit as being an entrance somewhere else.” My most obscure movie reference (so far). From Tom Stoppard’s ‘Rosencrantz & Guildenstern Are Dead’ — 1966 novel and 1990 movie starring Richard Dreyfuss and Gary Oldman. The story of Hamlet told from the worm’s-eye view of two minor characters, bewildered Rosencrantz and Guildenstern.

Whatever your specific exit plan, it should begin with your end goal (or ‘next entrance’) in mind. And give yourself plenty of time for it to take shape – 3 to 5 years is a good rule of thumb. 

As a small business owner your goal from the beginning was to build value but, at some point, you will exit the business. If you have executed an exit strategy plan over three to five years and created maximum value, you have options. 

  • Continue to grow your business and pay yourself a healthy income. 
  • Hire someone to run the business for you while you benefit from the profits. 
  • Transition the business to your family or other management. 
  • Sell the business. 

Let’s discuss the sale options in more specific terms. Please note that tax implications must always be considered when choosing an option. 

Sale on the Open Market – Fair Market Value 

Is this the right option for you? Consider: 

  • Will you be able to get the price you need in the time frame you have in mind? 
  • How difficult will it be to find a buyer? 
  • How much do market factors impact your business, and what is projected to happen in your industry and the market in your desired sale time frame? 
  • What are your goals for the terms of the sale? Is this realistic? 

Strategic Sale Within Your Market 

Your business may be in a position to be acquired by another company that has a similar product or service, or a similar customer base. That company may want to acquire you for a variety of reasons your company assets, access to your customers, intellectual property, or to remove you as a competitor. Here are some things to consider: 

  • What companies are potential acquirers (if there are any)? 
  • What is your value to an acquirer compared to your value to a buyer in the open market? It could be more or less, based on the why the other company wishes to acquire you. In some cases, the value may be much greater if the company is acquiring you for strategic reasons. 
  • Will you be required to stay with the company for a transition period? This is often the case. Do you want to do this? What are the risks to you if the acquisition/merger does not go well? You should make sure that the terms of acquisition include adequate protections for you. 

Employee Stock Ownership Plan (ESOP) 

Allows your employees to purchase the company over time. This can often be a favorable option for business owners who want to significantly improve the tax impact of the sale of their business. Here are some things to consider: 

  • How should you structure your ESOP in order to create the most favorable tax outcome for you, as well as a positive outcome for your business and employees? 
  • Do you have long-term valuable employees? If you do not, and have a high turnover of employees, an ESOP will not work well. 
  • What are the future prospects for your company? Your company needs to have a realistically viable future based on your current financial position (which should be low debt, good cash flow) and favorable long-term market conditions. 

Sell to an Insider 

You may choose to sell the business to a person(s) who is already involved in the business. It may be an employee, customer, friend, or family member. Often, in a friendly sale like this, the business owner finances the sale over a period of time. A friendly sale can also just mean that you are passing the business to your heirs, but often still taking an income from it during your retirement. 

Here are some things to consider: 

  • Is the buyer(s) qualified (and motivated) to manage the business successfully? 
  • Consider the impact on your relationship with the buyer if the business has issues or fails in the future. Are you willing to take that risk? 
  • Will you be able to sell with terms that will allow to achieve your financial goals? (i.e., are you going to be too nice to the buyer and put yourself at a disadvantage?) You may simply choose to let someone else manage the business and start taking as much cash out of the business as possible until you are ready to retire, and then sell it at a lesser value or just let it die. Here are some things to consider: 
  • Will you be able to get enough, and save enough cash to retire comfortably? 
  • Are you willing to sacrifice the value of the business by taking cash out rather than growing the business? 
  • How does this impact your employees, now or in the future? 

Liquidate the Business 

You may choose to simply choose to sell it in pieces when you’re ready to exit. Here are some things to consider: 

  • Are you so valuable to the business that it is unlikely to be viable without you? Typically, dissolving the business is only the best option if this is true. If the business won’t be successful without you, who will buy it? 
  • What are the assets of your business worth? Is it enough? 

The manner of which you exit your business should be based on 3 – 5 years of planning, not on a snap decision resulting from an unexpected event. You’ve spent considerable years of your life building your business. You owe it to yourself to prepare for the day when you will leave it. 

Michael Stier is an Area President for FocusCFO based in Charlotte, NC. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. For more information, visit us at focuscfo.com or follow us on LinkedIn. 

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