Author Topic: Exit Plan for Business  (Read 1785 times)

nara

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Exit Plan for Business
« on: November 26, 2017, 05:23:50 PM »
For those especially who have already exited from a business or who have plans to...

Would you rather sell your business for a large lump sump? Or would you rather give your business to employees and retain a small portion of ownership (maybe 10%) to have an income stream that may potentially last for years?

What factors should be considered when making this decision?

mubington

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Re: Exit Plan for Business
« Reply #1 on: November 26, 2017, 06:00:59 PM »
I tried selling but it was a massive amount of hassle achieving my preferred valuation, so I backed out in favour of hiring a good manager who wanted a long term gig and took a step back. Less stress in my case. I take on some risk on future earnings but no one is better placed than me to estimate those.

Maybe could also have looked for an earn out which is a kind of seller financing where prt of your lump sum comes from future profits. But why take on the risk without the long term reward?

webguy

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Re: Exit Plan for Business
« Reply #2 on: November 27, 2017, 10:29:34 AM »
I would much rather sell for a lump sum but the fact that it could be a long difficult process to find the right buyer, potentially having to reveal our financials to competitors or other parties, puts me off. Financing to an employee, or hiring a manager to take over my current role would probably be the approach I will take. It means I have to endure more risk, but I think Id rather that than spend a year or more going through the sales process for a non-guaranteed outcome.

My approach currently is to keep running the business until Ive made enough money from it to be FIRE (probably another year or two), then to transition to someone running it on my behalf.

JG in Hangzhou

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Re: Exit Plan for Business
« Reply #3 on: November 27, 2017, 09:28:08 PM »
If you can't get, don't need or don't expect any money from it, go with the 10%. 
My experience with a 10% share is that the majority owners can reinvest without paying you anything, can siphon off money by contracting themselves, friends or using the money in other ways, and decide to dump in more money to dilute your share.  Generally you have no say in what you get or when, unless your written agreement specifies it.

Suzanne

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Re: Exit Plan for Business
« Reply #4 on: December 25, 2017, 12:30:24 AM »
Due to tax reform at our place I have decided to exit the business and take up a job.
I am at my own risk as government has risen the tax upto 26%.

AccidentalMiser

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Re: Exit Plan for Business
« Reply #5 on: December 25, 2017, 04:46:45 PM »
For those especially who have already exited from a business or who have plans to...

Would you rather sell your business for a large lump sump? Or would you rather give your business to employees and retain a small portion of ownership (maybe 10%) to have an income stream that may potentially last for years?

What factors should be considered when making this decision?

Not enough information.  Ceteris paribus, I would take the lump sum.  When you say GIVE your business to your employees, how would that work?  Why would you give away 90% of your equity stake?

Fishindude

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Re: Exit Plan for Business
« Reply #6 on: December 27, 2017, 01:32:39 PM »
I recently sold to employees and think it was the way to go for all parties.   They got in without taking on excessive debt and I got out on my terms, taking the money over time and gradually reducing my responsibilities and salary as I exited.   Biggest factor influencing this decision was that I felt obligated to employees who had given many years of their lives to the business.  This way they could keep their jobs and retire from this company.   Had I sold to an outside interest there is a possibility I could have gotten a little more, but who knows how they would have treated long term employees?

chasesfish

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Re: Exit Plan for Business
« Reply #7 on: December 27, 2017, 07:09:24 PM »
My opinion is it entirely depends on the underlying cash flow of the business. 

If its over $2mil/year in cash flow, hands down, 100% of the time sell it to an outside party.  Reward your loyal employees in cash, take care of your family.  If its under $2mil/year in cash flow, there are many variables to consider.  Depth of management, cash flow, net asset valuation, owner financing.

Happy to give further input with more details

nara

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Re: Exit Plan for Business
« Reply #8 on: January 01, 2018, 11:36:04 AM »
My opinion is it entirely depends on the underlying cash flow of the business. 

If its over $2mil/year in cash flow, hands down, 100% of the time sell it to an outside party.  Reward your loyal employees in cash, take care of your family.  If its under $2mil/year in cash flow, there are many variables to consider.  Depth of management, cash flow, net asset valuation, owner financing.

Happy to give further input with more details

We're projected at $636k revenue for 2018 and net $148k. We anticipate leveling out around this figure and just maintaining going forward (unless we do decide to expand in the future which I am not planning on but may be open to). My husband and I are the owners, but this revenue is also very dependent on us producing billable hours for the business so this is very much not an employee run business. We also only maintain 5-6 clients at a time (our source of revenue)--so losing even just one can have a impact on the business.

We're planning on exiting in 3 years, so our options are to either sell out to a large company in our industry for the largest gain (least preferred) which means we would have to start now to focus on growth to peak the interest of these sort of buyers, sell to a private owner with similar professional credentials to myself to serve as an owner and operator or to an employee for a much smaller lump sum amount (maybe $50k). I like this best because we can remain a smaller operation and therefore much more affordable/manageable to an individual buyer like myself who is more likely to remain loyal to the type of business model we have created. Or lastly, I can largely remove myself from the day to day operations of the business, while still having a small % of annual revenue coming in. I am not sure of the legalities and liabilities associated with this (it almost seems easier to free myself completely of the business and then make myself available to them as a contractor, etc.)

chasesfish

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Re: Exit Plan for Business
« Reply #9 on: January 01, 2018, 04:52:49 PM »
Thanks for the reply.   It sounds like you already know the pros and cons of your options.   You have a job, but you have jobs with a client base that's attractive to a larger organization.

Does your company require you to see clients in person, or is it something you can do while location independent?  To me I think you only have one or two options, sell the goodwill and client base to a larger company for cash up front, or slowly wind this down and work less hours and for fewer clients, but for the most profitable clients. 

Best of luck to you!