The 6 types of business exit (and which is right for you)
So you’ve decided to sell your business?
If you want to walk away with the biggest possible paycheck, then you need to know the options available to you when it comes to your business exit.
Pick the wrong route and you’ll cause yourself a lot of stress and strife – without ending up with much to show for it.
Get it right and you could be set for life financially.
To help you navigate the world of business exits, I’ve created this guide to the options you have when it comes to selling your company.
But before we get into that, it’s important to answer one crucial question...
Who will want to buy your business?
If you want to sell your business you’re going to need a buyer.
And if you want to make the sale on your terms, you’ll need to find the right buyer for your business.
Most entrepreneurs don’t really consider this. Which is why most entrepreneurs don’t get what their business is worth when they sell.
You’ll find prospective buyers in two places: inside the business and outside the business.
Selling to a buyer from inside the business
Handing your business to someone inside the organisation often leads to the most stress-free exits.
If you run a family business then the next generation might be keen to take the reins.
If not, your management team – or even an individual employee – might put an offer on the table when you take your company to market.
Either of these exits will be smooth sailing – in theory.
First, there’s already a huge amount of trust between you and the person succeeding you.
And they already know the business back-to-front – the market, the customers, the processes, and much more. So there’s no need to go through extensive due diligence.
Also, you might have a lot more faith that an earn-out agreement you go into with an internal team will come good than you would with an external buyer.
However, a word of warning from someone who’s been burned on this before: don’t let all this lull you into a false sense of security.
I made the mistake of relinquishing control in one of my businesses in an earn-out deal, and unfortunately, when my management team took over it didn't perform as well and I had little recourse.
You’re giving up what is almost certainly your most valuable asset here, so be sure to be just as diligent when you’re negotiating with an internal party as you would with an external buyer.
It’s also wise to build systems into the deal that allow you to claw back equity or retain control until you are paid in full.
Taking these kinds of precautions might feel like overkill when you’re dealing with friends and family, but trust me – you’re better safe than sorry when it comes to a deal that’s ultimately going to define the rest of your life.
Selling to an external buyer
Selling your business to an external buyer is almost always the most profitable option.
Broadly speaking, there are two types of external buyers: financial buyers and strategic buyers.
A financial buyer is an organisation or individual that’s purely looking to make a profit by buying your business.
Some of these buyers might trade businesses like people trade stocks. These are people who crunch the numbers to figure out if they'll get a decent return on their investment and likely want to get out with a profit in less than ten years.
Family members or employees are also financial buyers, although they may well take a long-term view. They're looking to grow the company you started and sell it for a profit when they retire.
You also have private equity firms, which have a much higher tolerance for risk when it comes to investment. Your business will become part of its portfolio, which it will hope to make a profit on as a whole.
Strategic buyers are larger organisations looking to enhance their own business by acquiring yours.
These buyers aren’t interested in your business because it’s going to give them a return on their investment in purely financial terms.
Instead, they’re looking to unlock the strategic benefits that would come from owning your business.
For example, if your business would provide a buyer with significant commercial opportunities or help them deal with a major problem or threat to their organisation, it’s worth much more to them than a traditional business valuation would suggest.
This means that if you can find a strategic buyer for your business you could drastically increase what your business is worth.
The 6 types of business exits
Now you understand the two kinds of buyers that are going to be interested in taking your business off your hands, it’s time to dig into the different kinds of exits available to you – and which one might be best for you:
1. Sell your stake in the business
The simplest type of business exit is selling your stake in the company to one of your partners or investors.
It should be quite a straightforward deal, given you and the buyer are already in business together and (hopefully!) have each other’s full trust.
And this is a great option if you want to take your money and sever all ties with the business.
If you’re lucky enough that the stars align and one of your partners or investors is happy to take over your shares in the business for a price you're happy with when you want to sell, then you’re set for one of the most stress-free exits possible.
Of course, things rarely work out that way, and they can actually get very ugly very fast when you’re dealing with people who you know so well and have worked so closely with over the years.
So, be sure you and the person you're selling take on external advice so there’s no nasty surprises or bad blood for either of you down the line.
2. Succession planning
Many entrepreneurs dream of passing their business down to a family member.
A succession plan is often something that’s been years – or even decades – in the making, during which time you’ve primed the next owner to seamlessly transition into being the key decision maker through your efforts to remove yourself from the day-to-day running of your business.
You can do this on your own terms as well, even baking a transitional period into the exit strategy.
And you don’t need to go through the bother of finding a buyer, going through due diligence, and negotiating a deal.
This is also a great option if you don’t want to completely turn your back on the business, as you’re in a great position to stay on in an advisory role.
Of course, succession planning isn’t an option if you haven’t brought family or friends into the business.
And it also certainly comes with its fair share of risks, as even the most hard-headed business person’s judgement can be clouded by family loyalty. If you’ve spent years training your son or daughter to take over the family business and it’s obvious they’re not cut out for the job are you sure you’ll be able to see it?
Plus, family and business simply don’t mix for a lot of people, so you might want to keep work and home separate by taking the option off the table from the start.
And, realistically, you’re never going to be able to entirely extricate yourself from your business if it’s still in the family, which means a clean break is out of the question if you choose this route.
3. Management buyout
Like a succession plan, a management buyout has a lot of positives.
When it comes down to it, a management buyout largely has the same pros and cons as a succession plan.
You know and trust the people you’re handing over the keys to your castle to, which also means the deal is likely to go through relatively smoothly. Plus, the new owners are likely to want to keep you involved in some capacity if that’s something you’re interested in.
However, mixing business and friendship doesn’t always end well. For one thing, are you sure you’ll drive a hard bargain on the price of your business when you’re negotiating with people you’ve worked closely with for years?
And I can speak from hard-earned personal experience that management buyouts sometimes aren’t quite as simple as they seem, especially if you’re not making a clean cut from the business.
4. A merger or acquisition
When it comes to business exits, the real money is in being acquired by or merged into another business.
This comes in many shapes and sizes, from a private equity firm looking for a financial purchase to a leader in your industry looking for a strategic merger.
But be warned: the negotiations can be long, drawn-out, and often frustrating.
Plus, buyers will put your company through the wringer when it comes to due diligence, and if they find anything they don’t like they could pull the plug on the deal or drastically slash the price.
But build a business you can sell at a premium and you’ll be in a great place to make as much money as possible from your business through a merger or acquisition.
5. Beware the earn-out...
I've included the earn-out as a type of exit because most business sales involve some kind of seller-based financing.
An “earn-out” is a tool acquirers use to reduce the risk of buying your business.
It's typically used when you think your business is worth more than a buyer, so you compromise with an earn-out – and exit where you get an upfront sum for your business, plus a percentage of its earnings for a handful of years after the new owner takes over.
For example, you might get $1 million upfront for your business, plus 5% of its gross sales over the next three years. Or the acquirer might pay 50% upfront with the balance paid over a period of three years, subject to certain performance warranties.
I’d strongly advise against taking an earn-out, as they rarely work out in your favour. A lot can happen during the years of the earn-out period – including the business getting liquidated – and you’re not in control of any of it.
Instead, put in the time and effort into building a valuable business and you won’t have to worry about compromising on what you think your company is worth.
6. Liquidate your business
If you’re completely done with your business and want out now, you can liquidate it and sell the assets.
However, I strongly recommend you don’t go this route. You’ll get a much bigger payout if you stick it out another few years and execute a business exit strategy.
Trust me, I understand if you’re burned out and feel trapped by your business. But all your stress and struggle will have been for nothing if you choose to pull the plug on your business and liquidate.
So instead, change your mindset, remove yourself from the day-to-day running of your business, and work on improving what your business is worth.
You’ll be thankful you did in years to come when you sell your business for what it’s truly worth.
Which business exit is right for you?
Some business exits are plainly better than others. There’s no doubt that you’re going to come out of an acquisition better off than if you liquidate your business.
But the right option for you depends on:
- How desperately you want out of your business,
- How much money you’re happy walking away with,
- How much thought you've put into your exit strategy, and
- What options are on the table when you come to sell.
No matter which type of exit you end up taking, you’ll get the highest possible price for your business if you execute an effective business exit strategy.
So, before you look for an internal or external buyer, make sure you’ve removed yourself from the day-to-day running of your business, switched to a recurring business model, and implemented the nine changes that increased the value of my business the most.
You’ll then be in an incredibly strong position to walk away from your business with a healthy profit, no matter which type of business exit you choose to pursue.
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