How you plan to exit your business is potentially the most emotive topic you'll address while building it. It's a very personal decision that should generally be addressed when your business is still young, as it will influence many of the decisions you make along the way.
There are four general motivations for exiting a business:
When you "exit" your business, you are potentially ceding control of one or both of two distinct aspects of the business:
What aspects of your business you choose to cede and your motivations for doing so will impact the type of exit option you seek. Let's look at exit options and their operational or ownership implications to you.
There are generally three options for owners that would like to exit their businesses:
Each of these options has different implications on your future operation or ownership role in the company. The following table summarizes how the three exit methods impact the transfer of ownership and control in addition to how positively they align with the various potential motives an owner may have for exiting their business.
|Time to move on||No||Yes||Yes|
|Desire to cash out||Yes||Yes||Unlikely|
|Need to raise capital||Yes||No||No|
When a private company has an initial public offering of stock (IPO), holders of equity in the formerly private companies often think of this as a liquidity event. It is that, of course, as their private holdings are transformed into issues tradable in public markets (after some pre-designated "lock-up" period). But it is much more than a liquidation event. Having an IPO is also a financing event for the company. As such, pursuing an IPO only makes sense for companies that can benefit from a substantial infusion of cash. While the IPO transfers ownership of the company, the management team in place before the IPO will typically still be in charge of the company post-IPO. So if you pursue an IPO, you need to be aware that you'll still be responsible for running this company, it just won't be "yours" any more. You'll also have many more disclosure requirements as a public company than you ever did as a private one.
Selling your company, which is much more common than an IPO, usually involves both a transfer of ownership and a transfer of operational control. When a company is sold, the role of the previous owners is usually negotiated along with the terms of the sale. After your company is purchased, you may be asked to stay on during a transition period, but after that the new owners will most likely want to put their own stamp on your venture or integrate it into their other businesses. In addition, in most cases the acquiring company will want the selling founders or managers to execute some kind of "not to compete" provision to discourage the seller from forming a new company that could directly compete with the new owners.
The third exit option, transfer, is the most common exit option for family businesses. There may be many reasons for your motivation to personally step aside from a leadership position and transfer operational, but not ownership, control of your company. Maybe you desire to start something new, retire, or take on a different role in the company. No matter what your motivation, as long as you retain some ownership in the company, you'll want to ensure the company's future health. That means you'll need to spend some time thinking about succession planning. In the Harvard Business Review article "The Five Stages of Small Business Growth," authors Neil Churchill and Virginia Lewis discuss the specific skills that the company leadership must exude as the company moves beyond merely surviving. As your company continues to grow, skills such as strategic planning, systems and controls, and delegation become increasingly important. Therefore, when you are sizing up your successor, realistically consider the needs of the company today and tomorrow. While you may be tempted to hire a younger version of yourself as your successor, that is often not the best thing to do for the business. You need to realistically assess what skills are needed at the current and near-future stage of this company and hire someone that has those skills.
There is nothing that compares to building your own business. Successful businesses create wealth for you, your employees, your investors, and your customers. They positively impact your community, your state, and in some small way the global economy. I wish you all the best on your journey of a lifetime.
Contributing his expertise to this article was Tom Porter, Executive-in-Residence at the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies at the University of Michigan. In addition to his role at U-M, Tom is currently the General Partner for Trillium Ventures in Ann Arbor, Michigan. He previously co-founded and is a General Partner Emeritus in EDF Ventures, an Ann Arbor, Michigan-based venture capital firm investing in early stage market driven companies in health care and information technology.
Read more from Tim Faley's series on planning and growing a business:
The Process of Business Creation
There's no magic 10-step program, but there are steps you can take to help increase your chances of business success.
Is Your Business Idea Feasible
Making a critical evaluation of your business concept at an early stage will allow you to discover, address and correct any fatal flaws before investing time in preparing your business plan.
Creating Your Business Plan
Understanding the key questions you must answer before writing your plan will help you write one that not only helps you plead your case to investors, but also creates an operational document your business can live by.
Growing Your New Venture
There are three interrelated areas you should keep top of mind while plotting the growth of your young company.