But We Just Got Here! Developing an Exit Strategy

Welcome to our class on “How to Start a Business”, our first topic is on “Exit Strategies”! This opening never fails to get a class full of raised eyebrows, but I’m convinced that considering your exit strategy is an exercise every small business should start with and periodically review.

Starting with your company name…

…most of your decisions will be affected by your exit strategy.  Let’s say you want to build your plumbing business over a few years and then sell.  Using your name as the brand will detract value for a new owner with a different name.  The legal entity; C-corp, S-corp or LLC, that you choose is another big decision made early in the start-up process that can be dependent on your exit strategy.  Hiring employees, the value model, buy or lease decisions – your exit strategy may effect all these decisions, which is why I encourage every small and medium business to have one.

Controlled Dissolution

In a controlled dissolution exit strategy the business stays in operation as long as the owner is working.  When the owner decides to stop working the business is done.  This exit strategy is typical of many professionals who are the primary revenue generator for the company – a consultant who bills all the hours or a plumber who does all the labor.  There is no passive revenue and the value of the business is basically zero without the owner’s daily involvement.

There is nothing wrong with this exit strategy, as long as it is a conscious decision and the owner plans the rest of the business around it.  For instance, the value model is that you pull out as much cash as possible and invest in outside resources, which means the marketing strategy should maximize profitability and cash flow.

Ownership Transfers

An ownership transfer exit strategy is one in which the owner plans to sell his ownership to another party in whole or in part.  The most common transaction for smaller businesses is a complete sale to another person or another company.  For a few entrepreneurs with the right business concept, “going public” is a valid strategy where the “sale” of the company is to many outside investors on a public stock exchange.

In an ownership transfer exit strategy the value model is about building “transferrable” value.  This is the kind of value that can be realized even in the absence of the owner.  With this exit strategy the sky is the limit for your return on investment.  The value of the company can be a passive revenue stream, typical of insurance agencies, or the potential for growth from a new technology, a high value customer mix or demand for a specific product or process that you own.  In general owners with this exit strategy should always be looking for ways to make the business less dependent on them through solid processes and a strong work force.  That will make the business much more valuable to any potential outside buyers.

Transition to Passive Investment

This exit strategy is used very often in family businesses.  As the kids are able (and willing) to take over the business, ownership is sold or gifted to them over time.  The owner either sells them the business and finances it over a number of years, or maintains a diminishing ownership stake as they buy ownership through the transition process.  The passive income for the owner is in the form of principle and interest payments on a long term loan, additional sale of their ownership and distributions from the profit of the company over time.

This is a solid strategy when done correctly.  First of all, it is imperative that the owner ensures the transition of operations is to someone competent, because if the business fails, the passive income source is done.  Also, if you are dependent on distributions or dividends as an income source, make sure the new ownership is planning to make those.  If they decide to put everything back in the company, your income source could dry up quickly.

Pick One and Decide Accordingly

Picking an exit strategy is not about predicting the future and yours will probably even change over time.  The important thing is to have one in mind so that when you make daily decisions they are based on a long term vision, not just a gut feel for what’s easiest at the time.

Of course there are many variations and nuances to exit strategies and I’d love to hear about your experiences or struggles in deciding on and implementing an exit strategy.  If you need help in this area give Sigma College of Small Business a call and we can help.

The Economic Impact Of “March Madness” from The Vantage Weekly

As I was enjoying the first couple rounds of this year’s NCAA Tournament and thinking up a great blog topic using basketball as a metaphor for business, Monday’s issue of The Vantage Weekly came to my inbox.  My good friend John Stewart gave me special permission to repost the Management Impact from this week.  Thanks John!

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The Economic Impact Of “March Madness”

The Madness in March extends well beyond the court action of the NCAA Basketball Tournament. We chuckle after hearing reports on the losses in worker productivity from time spent on all things “tourney”. In fact, Challenger, Gray & Christmas estimates the losses in productivity to be between $1.8B and $4.0B, but it’s nearly impossible to confirm and weigh against generated revenue.

One offset to lost productivity is the revenue from added consumption. The economic impact to the hosting cities for first weekend games is estimated at $4M to $6M each. The Final Four weekend is worth an estimated $13 million to it’s host city, though there is variation depending on the city and the contestants.

In their 2003 study, “An Economic Slam Dunk or March Madness?”, Matheson and Baade did the math and found that the men’s NCAA Division I tournaments since 1970 actually provided only a slight economic gain to host cities in opening rounds while the final four lost money. However, this seemed counterintuitive so we took a quick glance for ourselves. Estimates from the Indiana Department of Revenue show that 2006 Final Four host Indianapolis (Marion County data) had average annual tax revenue growth of 45% in March and April of 2006, which slowed to about 10% in 2007 and was -1% in 2005. They also hosted in 2010, but it’s very hard to control for economic conditions. In other words there was a clear and significant direct economic impact from spending. Also, indirectly more people would be hired temporarily and revenues would be raised by local government on local projects in preparation, which would also boost local economic activity. Of course this is much more difficult to measure but does help.

It’s not just the basketball that’s competitive. One estimate states that 70 cities bid for the 39 spots to host the 2011, 2012, and 2013 tournaments. Being competitive requires cities to invest 100’s of millions for facilities and other NCAA standards for hosting. Amortizing these expenses and accounting for the losses in productivity shows a quick offset to the aforementioned gains. We may never actually know with any precision the real economic impact, but we do know it’s arguably one of the greatest annual sporting events. And, although productivity might fall briefly, the happiness it brings may just be better in the long run! Enjoy.

Thanks John for a great post!  I forgive you for kicking my butt in our bracket competition.