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Exit Strategy: Merger, IPO or Sale?

Date: August 19, 2010

Almost 80% of small business owners think “going into retirement” is when they should start pulling together their exit strategy, according to the Center for Women’s Business Research. (The study polled both men and women.) But every business broker and small business expert will tell you to start planning earlier. Much earlier.

The primary reason: The value of your business is best maximized when you’ve spent years preparing for the exit. (See: How to Increase the Value of Your Business—Before You Sell It.) Mergers and IPOs are two exit transactions that can increase the value of your company before you leave it. Here’s how they differ from an outright sale.

Merger
Why it should (or shouldn’t) be considered: A merger is a “great way to plan an exit” because it can significantly increase your business’ value, says Dan Bowser, president of Value Insights, a Chandler, Ariz., consultancy that helps businesses develop and carry out exit plans. (See: Is a Merger Right for Your Business?) For example, two $15 million businesses that join forces can expand much more rapidly into a collective $50 million business five years down the road. (Think: a doubled sales force and lower overhead.) At that point, your shares in the merged company will be worth much more than they could have been with your individual business.

A true merger—when two companies join to create a bigger company—shouldn’t be considered when you want an immediate out. Mergers often expect owners and management to be invested in the business’ future.

When it makes sense: A merger makes sense when you meet the perfect acquiring company, but it doesn’t have the cash to buy your business outright.
What it entails: In a merger, there is rarely an exchange of cash—you are instead exchanging the ownership interest in your business for interest in another entity.

Initial Public Offering (IPO)

Why it should (or shouldn’t) be considered: Most small business owners do not consider an IPO—that is, take their company “public” to a stock exchange—because they cost hundreds of thousands of dollars to facilitate, says Bowser. An IPO might seem like a good way to grow your business to eventually cash in, but “just because you’re publicly held doesn’t mean anyone will be willing to buy your stock,” he says. Public companies are also required to report detailed financials.

On the other hand, an IPO should be considered by small businesses backed by venture capital or “for businesses that could really be the next Apple.”

When it makes sense: IPOs make sense for profitable firms that have a market value of $25 million to $50 million, says Bowser. (In terms of revenue, that’s a range of about $30 million to $50 million.)
What it entails: An IPO will take at least a year of preparation.

Business Sale
Why it should (or shouldn’t) be considered: An outright sale is one of the simplest and most common exit strategies for small business owners. The only time it shouldn’t be considered: When you’re expecting to stay involved with the business for years to come.
When it makes sense: When compared with the first two options, an outright sale makes sense for the business owner who wants to retire right away. (Though “right away” can include as long as a couple years for transition.)
What it entails: When looking for an exit strategy, Bowser says most small business owners search for a buyer who is “just like them” because they want (and expect) the business to be managed the same way forever. But those transactions haven’t proven very profitable in his 22 years of experience. Instead, he suggests finding a buyer company that does what you do, or could use what you do, but is greater in magnitude. “Those transactions make enormous sense,” he says. “You bring something to the table they need, and they’re willing to pay for it.”
 

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