Before you create or rewrite your business plan, I would like you to think about the concept of planning your exit strategy. An exit strategy is not a plan for failure. It’s a plan for success. Developing an exit strategy before you work on your business plan will enable you to make the best decisions for your company. I think that as you read this two-part article, you’ll come to understand why an exit strategy is important and how you can apply it to the business planning process.
Where Is the Finish Line?
Have you ever seen runners line up for a race not knowing where the finish line is? This would never happen, right? Whether you’re starting a new business or expanding a current business, the implication is the same. Before you begin the race, you need to know where you expect to finish.
Businesses (publishing companies) are started for many reasons. Some of the more common reasons include:
Building a successful publishing business for yourself instead of for someone else
Pursuing a passion (e.g., “I’ve always wanted to own a publishing company.”)
Being your own boss and the master of your own time
Earning money doing what you really like to do (writing, woodworking, quilting, photography, etc.)
Capitalizing on an invention or a new idea
Replacing income from the loss of a job
Creating net worth (long-term capital appreciation).
It’s also inherent in the makeup of entrepreneurs to think early on about future expansion of their enterprises. What new products or services can be added? Can new markets be reached? Can the business use more employees? Can it open more offices?
The list of reasons for start-up and expansion could go on and on. What’s really important, though, is to understand that, in all cases, it’s critical to develop an exit (liquidity) strategy.
Developing an Exit Strategy
Is the Secret
It’s a given that professional investors (i.e., Venture Capitalists) will require a well-thought-out exit strategy as part of the business plan for any venture in which they plan to invest. However, most entrepreneurs, intent on creating an immediate source of income or just caught up in the excitement of launching or expanding their businesses, have a habit of overlooking the “finish line.” Consequently, they are unprepared for this certain-as-taxes event.
So What Should
Your Strategy Be?
Before we go any further, you need to understand that there are no right or wrong strategies—only different ones. Your strategy should fit your goals. The logical place to start is with your long-term goals. The most obvious and often cited goal is retirement. Some entrepreneurs like to develop one business and then leave it to start another venture. You may have other reasons that you foresee will eventually cause you to exit your own business. Whatever your goals may be, there are three things that you need to know before you begin to build a better business plan:
1. Where you are headed
2. When you want to get there
3. What your business (publishing company) will look like when you arrive
What Are the Exit Possibilities?
Some of the potential forms of exit include:
Selling all or a portion of the business: It may be possible to sell the business outright to an independent buyer. If this is the case, you’ll want to maximize the net income of the business. Keep in mind that you should avoid having assets tied up in the business which you intend to later keep in your personal possession.
- Passing the business to a family member: This can be a good way to transfer value to your heirs in a way that minimizes estate taxes. Proper structuring is important, as well as determining who will run the business.
Selling to an Employee Stock Ownership Plan (ESOP): This can be a valuable vehicle when the new owner group is comprised of key employees in the business. There are certain tax advantages to ESOPs. Existence of the ESOP can also add to the value of the enterprise by giving employees a sense of ownership in the business.
Taking the company public: For those interested in gaining liquidity quickly while having the option to share in future stock appreciation, this might be a good option. The complexities of this form of exit are substantial, as is the demand on management’s time leading up to and continuing on after the “event.” This option is not for the faint of heart!
Liquidation: In some cases, the best option to gain liquidity may be to simply discontinue conducting business, in which case you would sell off the business assets, pay off creditors, and keep the proceeds (after taxes, of course). While this is, in some respects, the simplest option, it often yields the least return to the owners because there is little or no value given for the “going concern” or goodwill of the business. This is often the method used when the business value is closely tied to real estate or other productive assets. It’s also common for sole proprietor service businesses where income production is dependent solely on the owner practicing his or her skills.
Each of the above involves a variety of considerations. For instance, if you plan to sell the business, what kind of market can you expect for your type of business? How big might it need to be to achieve optimal value? If you plan to pass it on to a family member, who will that be? How will you train them to run the business? Will the person you have in mind to succeed you be interested in taking over when you are ready to get out? When will you need to begin the transition? Many of these questions are difficult to answer, but ultimately your successful exit will depend on it.
Once your exit strategy is in place, you’ll be in a good position to make some major decisions about your business. These decisions include the type of financing you want to pursue, the legal structure to choose, and the tax issues you should consider. Part II of “Developing an Exit Strategy” will cover these various issues. Look for this second article in an upcoming issue of the PMA Newsletter.
Linda Pinson runs an award-winning small-business publishing company called Out of Your Mind… And Into the Marketplace. She is also developer of the software, “Automate Your Business Plan 9.0,” and author of the book, “Anatomy of a Business Plan.” You’ll find her Web site at www.business-plan.com. John P. Neal is an expert in business exit strategizing. He is CEO of the Ace Group Inc. of Solana Beach, California