Introduction to the Series:
The purpose for the Mr. Venture Capitalist Series is to help you to have a holistic perspective and an intimate relationship with your business. It's only when you know what your business is truly capable of that you will witness high performance.
Red Flags
Just like any new relationship if there are too many red flags you should be concerned. Red flags in this case are the fact that you can't answer any purposed question with ease and clarity. Red flags mean you need to go to work to find out the answers.
The Business Game
The business game is about maintaining a certain posture and confidence. The more you know about what you are doing the easier it will be to maintain this mindset. The more you know this the easier it will be to put together effective marketing and business strategies.
The Strategy
An exit strategy is much like asking you 'what is the purpose of your business?' If you are moderately to extremely successful this is something you should consider. What is the business going to look like when you are finished?
Chances are in 20 years you are not going to want to in inherit the same ol' business. As we grow older our values change. Years down the road you may feel burnt out or feel that you would rather move on. Now is the time to create your options, before it is too late.
Suggestion:
What I recommend if you haven't created an exit strategy, is to take a weekend to consider how you want to exit. Figure out what you want before you ask your partners or investors. If what you want is in line with what they want, great! If what you want is not what they want; you may want to consider a personal exit strategy, before the time of conflict arrives.
If you're thinking ahead to the day when you'll no longer run your business, think about these five exit strategies now so you'll be prepared for your future.
By Stever Robbins from: Entreprenuer Magazine
Entrepreneurs live for the struggle of launching their businesses. But one thing they often forget is that decisions made on day one can have huge implications down the road. You see, it's not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get the money back out.
If you think you're in business for the lifestyle, minimize your dependence on other investors and structure the business to allow you to draw out cash as needed.
Pros
- Who doesn't like seven figures of take-home pay?
- Private jets are fun.
- There's no need to think hard about getting out: Just pull out the money when you need it.
- The way you pull the money out may have negative tax implications. For example, a high salary is taxed as ordinary income, while an acquisition could bring money in the form of capital gains.
- Without careful long-term planning, you may end up pulling out money now you'll need later.
- The Liquidation. Even lifestyle entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to call it quits, close the business doors, and call it a day. I don't know anyone who's founded a business planning to liquidate it someday, but it happens all the time. If you liquidate, however, any proceeds from the assets must be used to repay creditors. The remainder gets divided among the shareholders--if there are other shareholders, you want to make sure they get their due.
- It's easy and it's natural. Everything comes to an end.
- There's no negotiations involved.
- There's no worrying about transfer of control.
- Get real; it's a waste! At most, you get the market value of your company's assets.
- Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value.
- Other shareholders may be less than thrilled at how much you're leaving on the table.
- My favorite piano bar in Boston simply vanished one day when the owner decided he was tired of show tunes. His regular patrons were crushed, but then, he didn't consult with us first....
The fictional Willy Wonka handed off his chocolate empire to a little boy who was a loyal Wonka customer, someone who was chosen with great care through a selection process designed to weed out all but the most dedicated Wonka devotees. Wonka was able to choose his heir apparent and ride off into the sunset a happier entrepreneur.
Pros
- You know them. They know you. There's less due diligence required.
- Your buyer will most likely preserve what's important to you about the business.
- If management buys the business, they have a commitment to making it work.
- Selling to family makes good on that regrettable offhand promise made 30 years ago, "Someday, son/daughter, all this will be yours."
- You can get so attached to being bought by someone nice that you leave too much money on the table.
- If you sell to a friend, they'll be peeved when they discover they just bought the liability for that decade's worth of taxes you forgot to pay.
- Selling to family can tear the company apart with jealousies and promotions that put emotion way ahead of business needs.
- The Acquisition. The acquisition was invented so you can sell your business and leave the kids money, still spoiling them rotten, but at least sparing the business from second-generation ruin. Acquisition is one of the most common exit strategies: You find another business that wants to buy yours and sell, sell, sell.
If you're thinking of acquisition as your exist strategy, make yourself attractive to acquisition candidates, but don't go so far as to you cut off your other options. One software company knew exactly whom they wanted to sell to, so they developed their product in a way that meshed perfectly with the prospective suitor's products. Too bad the suitor had no interest in the acquisition. The software company was left with a product so specialized that no one else wanted to buy them either.
Pros
- If you have strategic value to an acquirer, they may pay far more than you're worth to anyone else.
- If you get multiple acquirers involved in a bidding war, you can ratchet your price to the stratosphere.
If you organize your company around a specific be-acquired target, that may prevent you from becoming attractive to other acquirers.
Acquisitions are messy and often difficult when cultures and systems clash in the merged company.
Acquisitions can come with noncompete agreements and other strings that can make you rich, but make your life unpleasant for a time.
The IPO. I've saved IPOs for last, because they're sexy, they're flashy, and they get all the press. Too bad they make the lottery look good by comparison. There are millions of companies in the U.S., and only about 7,000 of those are public. And many public companies weren't even founded by entrepreneurs but rather were spun out from existing companies. Heck, AT&T and its spin-offs are almost a significant fraction of the listed exchanges!
If you're funded by professional investors with a track record of taking companies public, you might be able to do it. Of course, the professional investors will also have diluted you down to the point where you only own a tiny fraction of your company anyway. The investors will make out great. And maybe, if you're the principle entrepreneur and have done a great job protecting your equity, you'll make some money, too.
You start by spending millions just preparing for the road show, where you grovel to convince investors your stock should be worth as much as possible. (You even do a "reverse split," if necessary, to drive up the share price.) Unlike an acquisition, where you craft a good fit with a single suitor, here you romancing hundreds of Wall Street analysts. If the romance fails, you've blown millions. And if you succeed, you end up married to analysts. You call that a life?
Once public, you bow and scrape to the analysts. These earnest 28-year-olds--who haven't produced anything of value since winning their fifth grade limerick contest--will study your every move, soberly declaring your utter incompetence at running the business you've built over decades. It's one thing to receive this treatment from your loving spouse. It's quite another to receive it from Smith Barney.
We won't even talk about the need to conform to Sarbanes-Oxley, or the 6 percent underwriting fees you'll pay to investment bankers, or lockout periods, or how down markets can tank your wealth despite having a healthy business, or how IPO-raised funds distort your income statement, or ...
In short, IPOs are not only rare, they're a pain in the backside. They make the headlines in the very, very rare cases that they produce 20-year-old billionaires. But when you're founding your company, consider them just one of many exit strategies. Realize that there are a lot of ways to skin a cat, and just as many ways to get value out of your company. Think ahead, surely, but do it with sanity and gravitas. And if you find yourself tempted to start looking for more office space in preparation for your IPO in 18 months, call me first. I'll talk you down until the paramedics arrive.
Pros
- You'll be on the cover of Newsweek.
- Your stock will be worth in the tens--or maybe even hundreds--of millions of dollars.
- Your VCs will finally stop bugging you as they frantically try to insure their shares will retain value even when the lockout period expires (Warning: they won't necessarily be looking out for your shares, too.)
- Only a very few number of small businesses actually have this option available to them since there are very few IPOs completed annually in the United States.
- You need financial and accounting rigor from day one far above what many entrepreneurs generally put in place.
- Some forms of corporation--S-corps, for example--will require a reorganization before they can be taken public.
- You'll spend your time selling the company, not running it.
- Investment bankers take 6 percent off the top, and the transaction costs on an IPO can run in the millions.
- When your lockout restrictions expire, your stock will be worth as much as a third world hovel.
Also Part of this Series:
Mr. Venture Capitalist #1: Securing Experience
Mr. Venture Capitalist #2 General Business
Having your FREE evaluation with a business coach is a $500 value.
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