by Larry Chester
CFO Simplified is an IMA B2B Partner
I was visiting with a business owner the other day, and we were talking about his Cash Flow. The chart he showed me had a slow, but steady decline in cash flow over the past two years. I asked him what he was going to do about it, and he took a long ruler, laid it on the trend line, and pointed at the point where the cash flow hit $0. He said “That’s when I leave the company.”
This raises a lot of issues. The biggest one, and one I hear from an increasing number of business owners is “What happens to the company when I’m done?” That seems to be increasingly an issue. I’m also meeting more serial entrepreneurs. They start companies, build them, sell them and start other companies. And the same question keeps presenting itself. So, what is your exit strategy?
There are really a number of options open to every business owner:
- Close the door and walk away.
- Liquidation – sell the pieces
- Keep it in the family – sell it to your children
- Sell it to another business
- Sell it to your employees
Let’s look briefly at each of these:
- Close the door and walk away – Sure, you could call 1-800 Junk to clear out your office, but it’s the rare business person that just walks out at the end of the last month of their lease, closes the door, locks it and says good-bye.
- Liquidation – sell the pieces – You have decided that you have gotten everything that you want out of the business. You don’t feel that the company name that you’ve built up over the years has any value in the marketplace. You don’t really want to go through the hassle of selling what’s left, haggling with someone that will buy it for small change.
There’s not much equity left on the balance sheet, because you’ve taken it in payroll or distributions. You have a dwindling list of customers. The inventory is running low. You haven’t developed any new products or services in a while. Take the time to collect the remaining portion of your Accounts Receivable. Sell or give away your office furniture. Send a letter to your remaining customers thanking them for their business over the past years, and have a small good-bye party for your remaining employees.
- Keep it in the family – sell it to your children – This is dependent on a couple of things. You have a sustainable business, and you have children that want to keep it going. They’ve been working for you for a number of years. You’ve introduced them to your biggest customers, they understand your products or services. They have a knack for some aspect of the business that’s critical to its success – Finance, Marketing/Sales, Product Development. They can learn or hire someone to do the things that they don’t know, or don’t have an interest in.
Take the time to make sure that their shortcomings are covered. Teach them everything you can about what made you passionate about your business. And then, slowly turn over decision-making to them – projects, customers, employee responsibility. This will take a few years, and might take the following five sequential steps:
- You make the decisions, but have them shadow you. Talk to them about the alternative approaches to your decision, the plusses and minuses of each. Tell them why you made the decisions that you did. You want them to understand your process.
- You make the decisions with them. Present the problems, and discuss the opportunities and risks of various options. Have a detailed discussion about those alternatives, and work together to come to an agreement on the proper approach.
- You let them make the decisions, but shadow them through the process. Have them describe to you the factors that they considered, and why they made the decision that they did. Play devil’s advocate with them and question their decision. This assures that they truly believe in the approach they’ve selected.
- You let them make the decision, and they come to you after the decision is made for your final approval.
- You let them make the decisions, and they tell you about it over coffee the next day.
- Sell it to another business – Depending on the size of your business, or your industry, this could provide you with not only a new life for the baby that you created, but a nice nest egg as well. Depending on the size of your business and the industry, you could
- Sell it to a Private Equity Firm
- Use an Investment Banker to find a Strategic Buyer (someone in your industry) or a Financial Buyer (someone who’s buying it as an investment).
- Use a business broker to help you find someone to buy it.
- Sell it to your employees – So often, business owners are concerned about what will happen to their companies after a sale. Will their employees get fired? Will their customers be treated properly? Once you sell your business, those decisions are out of your hands. But if you sell it to your employees, either through a Leveraged Buyout to senior management or through an ESOP (Employee Stock Ownership Plan), your company and corporate culture will likely be maintained. Plus, with an ESOP, there are some special tax advantages.
There are certainly a number of options for your exit strategy. The best thing you can do for yourself is to put that plan in place years before you want to implement it. Because depending on your approach, you will want to make changes in how you are running your company to make that exit easier. You will want to be more careful about extended capital investments, long term leases or purchases, how much cash you’re taking out of the business. You will want to strengthen the balance sheet, your customer relationships, your market position. All of those things will create more value for the buyer, and more cash for you when you leave, and someone else takes your place.
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