Navigate an effective — and realistic — exit with these approaches.
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Most of us hear about the entrepreneurs who exited their company for life-changing sums of money. Go and speak to your local high-net-worth wealth advisor and you’ll find that a lot of their clients made their fortune when their company was acquired.
Those are excellent stories, sure, however the reality for some businesses is that you can’t sell them for just one big lump of money, particularly if they are worth between $500,000 and $5 million.
To begin with, other entrepreneurs won’t purchase your business for over $500,000. Entrepreneurs typically believe they are able to contend with you and instead of spending half of a million or even more to purchase your business, they’d rather spend it on creating a competitive product or growing their own business. Additionally, entrepreneurs are rarely cashed up; if indeed they do have spare money they rush off and purchase houses with it.
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Big companies have big lumps of cash to go and purchase businesses however they don’t typically do deals for under $5 million. Normally acquisitive companies are publicly traded or are backed by private equity funding; in any event, they have to report back again to an army of stakeholders who would like to see piles of supporting documentation on why any acquisition was made.
This implies acquisitions are usually “mandated by the board of directors” to become a minimum deal size. An extremely small mandate will be $5 million but most big businesses want to invest at least $20-100 million on an acquisition considering it’s roughly the same amount of work to get either.
Most entrepreneurs certainly are a good way from selling their business for $5 million or even more, however they also don’t want to market it for under $500,000. Listed below are three alternative arrangements for selling your small business that’s valued somewhere in-between.
Exit 1: The Mini Cash Cow
This exit isn’t about selling your business but instead exiting yourself from the day-to-day operations of the business enterprise. You’ll probably have to scale the business back again to a little core team (typically 6-12) and concentrate on the profitable and repeatable work that you’re best at. In the event that you get your business running in a manner that only requires you to accomplish a couple of days a month but still pays you a decent income, in ways you have exited the business enterprise.
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Exit 2: The Mini MBO
In case you have a little team of managers working in the business already, you can explore a management-buy-out (MBO). In this deal, several of the individuals who already know the business enterprise choose the controlling shares and dominate its ownership.
For smaller businesses that can’t access independent funding to complete this deal, you may be necessary to sell down your shares over 2-5 years for a price the business are able. For protection, you can structure this deal just like a loan and put debentures over the business enterprise for security. It’s not the big lump sum you wished for but at least you can’t go and blow everything on a yacht that you will regret later.
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Exit 3: The Mini Merger
In the event that you go looking, you may locate a competitor or complementary business who’s in an identical position to yourself. You both are too small to be bought by a bigger company but together you’re the proper size. In this deal, you’ll “bolt together” several businesses and have them working as one, and approaching larger companies for a cash exit. Instead of having 100% of a business that can’t be easily sold, you will probably find yourself with 35% of a business that sells for millions.
To accomplish these alternative exits you will require a skilled business coach, accountant and lawyer who each includes a history of getting businesses in to the right shape.
Be warned though, entrepreneurs are notorious for only lasting 3-6 months prior to going off to star