Opinion: Co-founder and CEO of Orchestra, Casey Eden discusses strategies for business succession and company exits.*
When a company is still in the concept stage, why would the founder or owner already be thinking about exiting the business?
Many successful entrepreneurs create business exit strategies before they have even begun to create their business – and there’s a good reason for this. In the business discovery phase the founder needs to continually ask hard questions including what success will mean to them.
Some of the answers to these questions include the outputs the business is creating, the lifestyle the founder wants to create, and the money they wish to make from the business, either from dividends or an eventual sale.
Exiting a business may not be a goal for every entrepreneur- instead their goals could be creating long term income or a family legacy through succession. Exit strategies will also change over time, but they also play a very important role during tough decision-making moments in a business. Having real goals and targets, or even a hypothetical buyer which the owner is preparing the business to sell to, is a great way to get to the bottom of difficult questions. If companies ask themselves “what would ‘x’ future owners of this business want to see” then this may assist with decision-making and planning the way forward.
Developing exit plans can also prompt a choice for the founder to decide if they are willing to invest more capital, or possibly even walk away from a business.
There are many exit strategies for a business but typically in a small business or growing start-up the main ones are covered in the sections below.
An acquisition is when one party buys another business. With an acquisition exit strategy, the owners give up the business to the party that purchases it, and this may be in the form of the actual company or potentially the Intellectual Property (IP) and assets.
Generally this is the best way to create a large cash windfall, but equally the owner will most probably lose regular income opportunities and may be blocked from being part of this industry for some time as part of a restraint of trade.
Whether this is the right option or not will depend on the owner’s motivation and ability to grow the business further.
In many cases a merger could also technically be an acquisition depending on the structure of the deal, but generally a merger will combine two similar or complementary businesses into one.
The owner will still probably be involved in the business in some way, and may still need a subsequent plan for a business exit of some sorts. Mergers can be an excellent way to combine skills and create scale. The owner just needs to ensure they can work with the parties they will be joining with.
This is a tough pill to swallow, but sometimes a business just does not stack up. And having internal rules in place for when the business reaches this point is important. Luck is a big part of business success, and whilst owners can create luck in many ways, there is often no difference between the hard work put in by someone killing it in business and someone struggling.
In these cases the owner should also seek advice from their professional service providers to understand how to exit whilst minimising any potential losses.
Put simply, sometimes your goal may be to never directly sell your business, but rather plan for business succession and hand it to someone in your family or gradually sell to employees for them to benefit from.
This method will require identifying likely candidates and then training them to manage the business successfully. You also want to make sure that the candidates in question actually want this opportunity. For family succession you need to consider the effects of potentially one family member benefiting from a business whilst others miss out.
Management (or managed) buy-outs are a type of Employee Share Ownership Plan and can be used as an option for succession planning for a business. A management buyout plan outlines the process where the business’ management team or senior staff purchase the assets and operations of the business they manage over a period of time. This creates another way to incentivise key staff, and can be appealing to them because of the greater potential rewards from becoming owners of the business. For the original owner, it can create a controlled way to exit their business over a period of time.
The process of exiting a business is inevitably something founders and owners will need to do and take steps to ensure the process runs smoothly for a successful exit. Planning ahead with clear strategies will have benefits for founders, the business, and the new owners.
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*this article has been adapted from an original post which appeared on stuff.co.nz.
DISCLAIMER: This article is for informational purposes only, and contains general information only. Orchestra is not, by means of this information, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This information is not intended as a recommendation, offer or solicitation for the purchase or sale of any options or shares.