A Guide to Small Business Exit Strategies

Second only to helming a spectacularly successful company, entrepreneurs dream of one day taking their leave, packing up their fortunes and sailing off into the sunset — cashing out, so to speak. On the other hand, if you’re a serial entrepreneur, you’ll likely chart a course toward new opportunities.

Either plan requires an exit strategy.

As the term suggests, an exit strategy entails the planning and steps that an entrepreneur takes to stage an exit from a business. Usually, this means growing your business to a point where selling off your stake or the entire company — an exit strategy almost always involves some sort of transaction — gives you a nice return on the blood, sweat and tears you poured into it.

In other words, it sets you up for life, or at least enough to move you comfortably to your next project. But be warned, an exit is just that. Unlike Steve Jobs, when the typical small business founder leaves, it’s usually for good.

How does an entrepreneur go about making a graceful and lucrative exit? See if any of these exit strategies fit the bill.

Plan for the Worst First

It’s a sad fact, but sometimes we don’t get to control how or when we make our exits. Death, disability and a million other of life’s unexpected turns can derail our dreams.

Though unpleasant, draw up a succession plan, review your contracts and insurance, and legally protect your assets and button-up your retirement plan. As usual, the U.S. Small Business Administration offers great advice (a must-bookmark site for small business owners) on getting started. The process will require legal advice and a ton of paperwork, but it’s a smart way to make sure that your business and net worth are set up to survive an abrupt change or a terrible twist of fate.

The Buyout: Take Your Leave, for a Price

Chances are that your small business has more than one principal. If the business is on solid ground and financing isn’t an issue, why not approach your partners about buying you out at a fair price?

It’s one of the most straightforward ways of leaving a company. You’ve likely partnered and endured the challenges of growing a startup with people that share your vision, work ethic and management style. In short, you already like them — at least enough to go into business with them.

Feelings aside, there’s still a considerable amount of work that needs to go into a buyout. Valuating the company, negotiations and legal agreements; it’s a serious transaction, so expect to spend time with lawyers and accountants before you walk away with a big check.

The Acquisition

Put your business up for sale. If you created a successful business, you might be fielding some offers already. If not, test the market.

Float the possibility to a rival or a related business in another region that might be looking to expand into your territory. Like a buyout, this is a big legal transaction, so no shortcuts. A good valuation is paramount in this case.

Pay especially close attention to how the deal is structured, how the money is divvied up and what the tax implications are. You don’t want to be on the hook for an onerous financial obligation once the ink has dried.

The IPO: Going Public

An initial public offering (IPO) is not for the faint of heart. Sure, IPOs grab headlines, but realistically speaking, few small businesses have the resources to pull off turning a private company into a publicly traded one. Check out this Wikipedia entry for a sense of the monumental and expensive IPO process.

Unlike Facebook, which was already pulling in millions in revenue a month when it went public this summer, most startups simply don’t have the money on hand or the cash flow to finance an IPO. But that doesn’t mean that an IPO is out of reach.

If your startup is on a blistering trajectory and has the makings of a big, sustainable company down the road, an IPO could provide its founders a big pay day. Mind you, an IPO is just one step in making an exit…eventually.

In general, CEOs and founders don’t call it quits right after an IPO because investors would revolt if a company’s leadership bailed on them. Think torches and pitchforks. It would send a bad signal, which could crater the company’s stock price.

Remember, if you wind up pulling off a successful IPO someday, your exit might end up getting postponed for a while. But when the moment arrives, you could truly end up set for life.

Pedro Hernandez is a contributing editor at Internetnews.com, the news service of the IT Business Edge Network, the network for technology professionals. Follow him on Twitter @ecoINSITE.

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