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Back to Business Basics (B2B2) - Part 4 The Exit Strategy
My
old school
motto was
"Respice
Finem"
which
translated
from the
Latin
means
"Look to
the
End". I
always
thought that
this was a
somewhat
morbid motto
while at
school. We
were all
starting out
in life
whilst being
advised that
we should
start
thinking
about how we
would exit it!
However, the
founder of
the school
was a
self-made man
who built a
successful
trading
business in
the early
eighteenth
century.
There perhaps
lies the clue
behind the
motto.
Setting the
goal is only
part of the
story. It is
knowing how
to work
backwards
from the goal
that defines
the
successful
"exit"
strategy.
This final part of the four part series will look at all the options for devising your
own "Respice Finem".
The Types of Exit
1.Selling to a strategic buyer -- a supplier, customer or competitor
2.Selling to a financial buyer
3.Going Public
4.Selling to heirs or employees
5.Liquidation
6.Enforced Liquidation
7.Managing for Life
1. Selling to a strategic buyer
A
strategic
buyer
benefits from
the innate
value of your
business and
from the
specific
synergies
that result
from a
potential
acquisition.
In the
current
economic
climate the
value of a
company is
more likely
to be its
customer
assets than
any
intellectual
property.
The
key element
in developing
this strategy
is to know
beforehand
where your
competition
are weakest.
Therefore,
their cost of
entry into
your market
is likely to
be
prohibitive
and so
acquisition
becomes the
cheapest
alternative.Our
industry has
only recently
realised the
false
expectation
that
Microsoft
will buy a
company
because of
"innovative
technology"
syndrome.
Companies
like
Microsoft are
very shrewd
in that they
understand
the purpose
of acquiring
companies.
By
far the most
compelling
reason for a
strategic
sale is that
you possess a
customer
base, the
bigger and
more
geographically
focused the
better. It is
far more
expensive for
a company to
build
successful
channels to
market, and
long-lasting
customer base
than it is to
develop new
technology.
2. Selling to a financial buyer
A
financial
buyer brings
money and
management
skills to a
deal, but may
have no
particular
interest in
your area of
business. The
key element
here is that
you are
profitable
and can
demonstrate
both a clear
history of
profitability
and a
positive
future
outlook.
Investment
banks are
constantly
reviewing and
analysing
company
returns to
spot such
opportunities.
SSP
has observed
that many
Venture Funds
are now
looking at
these types
of companies
as they are
clearly the
least risky.
3. Going public
Strictly
speaking,
taking a
company
public isn't
an exit
strategy,
because the
owners
typically
have to stick
around for a
while before
they can sell
their stock
and cash out.
Although in a
"Strategic
Sale"
the buyers
may also
apply the
same
"golden
handcuff"
rules.
However,
the key
factor is
that there is
an
established
market for
the stock of
all employees
and owners
alike. The
problem at
the moment is
that
valuations of
all
companies,
let alone
technology
stocks, is
dreadful.
Also,
the rigours
of going
public are
not for the
fainthearted
and involve
considerable
expense and
management
time
explaining to
analysts and
brokers the
very nature
of your
business
umpteen
times.
In
the UK the
Alternative
Investment
Market (AIM)
could
genuinely
provide the
capital via a
flotation
that normally
is sought
through
venture
finance as
markets look
to offer a
wider array
of services
in the
current
challenging
market
conditions.
4. Selling to your heirs or employees
The
main
advantage of
this route is
that your
buyers are
intimately
familiar with
the real
value of the
company, but
generally
don't have
the money to
buy it or the
credentials
to raise the
money. The
structure of
the deal will
be quite
different
from other
strategies,
involving a
long-term
payout from
the profits
of the
company. What
is most
important is
ensuring that
you've
sufficiently
trained the
future owners
to protect
your
investment.
5.Liquidating your assets
Sometimes
the parts of
a business,
with its
assets and
goodwill, are
worth more if
sold
separately
than if the
whole
business was
sold at one
time. SSP has
successfully
used this
strategy to
create joint
ventures that
could be
disposed of
without
significant
disruption to
the core
business.
6. Enforced liquidation
It's
not a
strategy you
plan, but if
sales dry up
to such an
extent you
may be forced
into a full
liquidation.
This exit
consists of
"salvaging
as much as
possible from
the
ruins".
7. Managing for life
This
is the de
facto
strategy
frequently
chosen by
entrepreneur-owners.
Simply put,
you keep your
business
until you
die. That's
fine, if it's
what you
choose. If it
just happens
because you
never got
around to
figuring out
what to do
with the
company after
you're gone,
it's a mess
for everyone
you leave
behind.
So what is your business ?
In
looking at
these exit
strategies
two themes
emerge as to
the types of
exit
strategies
that most
businesses
follow: Those
who plan and
those that
wished they
had.
That
is not to say
that you can
anticipate
all
eventualities
but a serious
look in the
mirror may be
required to
honestly
assess the
options. It
may be a case
of having to
accept a
different
exit strategy
to that you
would likeat
the
moment.Are
you prepared
to
"cross
the exit
chasm"
or do you
really prefer
a lifestyle
business? Do
you want
power and
control? Or
do you prefer
an intimately
managed small
team? Or
do you envisage being absorbed by a larger "partner".
These
are all
personal
choices as
you decide
your own
"Respice
Finem",
but remember
- the
earlier you
do so the
better.
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