Exit Strategy

Anywhere you go when discussing business, people talk about growing a business or creating a successful start-up, but most don't discuss the point of creating an exit strategy or plan, prior to entering the exit stage. I've seen friends who run very successful companies, but they never think about what they will ever do with the company whether it be selling it, giving up a small portion to a bigger fish in the pond, or taking it public. All they are interested in is the present and sometimes that leads them into rushing when the time comes that they can't handle the work anymore.

You may think that I'm joking, but I'm not. Times do come, when entrepreneurs can't run a company any longer which can be caused from a number of issues such as personal health, lack of knowledge, no future vision, or just heading into retirement.

Some entrepreneurs think that they can run their own start-up forever, but it might not be the actual case when time passes. Just because someone has started a company and evolved it into a multi-million or even billion dollar business, doesn't mean they have the skill set to keep running it forever. If an entrepreneur is their own start-up's CEO, they might be good at working with the company at its infant stage, but might not have the experience to continue to run a grown company and lead it to future success. So sometimes, even if an entrepreneur started their company and were the CEO and don't wish to exit completely; it can be good to seek out a new CEO ahead of time and then hire that person, step aside and see where an experienced CEO can take the company.

Other times, entrepreneurs might want to completely exit the company instead of giving up small control of it. This is completely okay, but knowing that's what the goal is, is important. So when the time does come to sell, the entrepreneur isn't questioning themselves of what to do, or even if the company has multiple co-founders, they aren't debating over what to do.

Obviously there are outside factors that determine what the end game will be when the time comes, but having some thought after the company is up and running is truly beneficial to all those involved. A big factor is selling price. If a entrepreneur has a set dollar amount in mind and is offered more, chances are they won't hesitate. But if they are offered less, they might have second thoughts about selling and just sit on the company a little while more- or give up a certain stake. At the same time of thinking about an exit strategy, it is important not to create a company just to sell it.

The Art Of Negotiating

It is easier said than done. Negotiating is an art that only some can be fortunate enough to master, but you might be surprised at some quick tips that might end up sharpening your negotiating skills. I've negotiated many deals and I must say that I implement each of the following when I am in the middle of a deal maker or breaker.

Map It Out- Obviously when you are pursuing a purchase or sale, you don't just meet with a company or a person and talk numbers, you might have questions or comments. You should be prepared ahead of time, knowing what you need to ask and how to negotiate and get to the numbers you are willing to put fourth or settle on.

Stand Firm- It doesn't matter whether you are buying or selling a car, a business, or even a house. If you show to the person you are buying from or selling to, that you mean what you say, you will end up "exchanging words" to get to a common ground- or not, faster, rather than wasting time with small talk.

Don't Toss Numbers Around- You are not bidding at an auction, so don't simply toss numbers around like a game. Depending on the situation of the seller, they may withdraw their interest if you seem to be "playing games."

Don't Fly High- Sometimes sellers think they are selling a key to the world. The buyer isn't dumb and if they are, they won't be able to afford it. Don't inflate the price of something a billion times more than its value and try to convince the buyer it is worth it. It ends up being a waste of time.

Drop the Emotions- You know it and they sure know it. Don't say that you will give them an extra five cents just because they are your friend or because you like them. Being on either side of the table (selling or buying), don't bring emotions into the deal.

Well, I Can Get It For...- Don't ever mention that you can get the same thing for $X. The seller doesn't care and will make you out because you are there for a reason. You like what they have to offer. So stop comparing.

Walk Away- If you aren't getting in the ballpark of what you wish to pay or collect, just end it there. There is no need in pleasing the other parties needs, unless you are really desperate, but know this, when you get desperate, sometimes you will end up paying too much or not collecting enough.

Don't Create A Company To Sell It

Mergers, Acquisitions, Buyouts, they are all common terms, and usually when a company is acquired it is extremely beneficial for the owner, especially when we're talking a 7+ figure deal. But the reality is that you should never create a company and build it under the assumption that you will sell it. Operating under such a thought will eventually drag your company down or even drag you down at a personal level, financially and more.

Whenever entrepreneurs are under the assumption that a bigger company will come by, offer them a high valuation for their company and they will sell it, the tend to just pour money in blindly while they are operating the company. The also don't care about profits and cash flow through the company because they think that they have a "phenomenal product." While it is true, especially in the tech space, if you come up with a great product, chances are there will be a lot of offers on the table, it is necessary to keep things in prospective. If you just keep pouring your own money into the company and nobody offers to buy you out, then you will be in trouble because soon enough, you will run out of money and at a personal level, you will be struggling. It is a must to be wise when you pump money into your business. You also have to keep an eye on cash flow constantly. If you aren't making a profit, you should at least be aware of your losses.

There are times when company funds might be drying up and investors are willing to write you a check, buy you have to remember that each time you cash their checks, you are giving up a portion of your company. That said, taking the less money from VC's as you can, will probably be beneficial to you in the end. I personally believe, most that say that "Oh, we have the VC's money to burn through, who cares about making money," are foolish people.

Other times when entrepreneurs are under the assumption that they will just create a company and sell it for multiple folds of its value, they tend to just focus on the end picture. Any other partnership offers or deals that might pass them by, before there are any buyout offers will be ignored. I always think, it doesn't hurt to review offers, even if you are not going to accept.

Now lets say an entrepreneur has been running a company for five years, hoping for a buyout, but there are no offers on the table and they have been careless with the company. Chances are they are holding a rotten apple and each day it is getting worse. Any chance that there was for the company to strive and be profitable might be lost and eventually someone might just acquire the company for a "steal" leaving the founder with pebbles instead of boulders.

I feel that is it always beneficial to run a company as if you will run it forever. If and when the time comes that you are looking at a buyout, you will have two options:

1) continue to run the company because it is doing better than you expected and you planned to run it and not just sell.
2) sell the company because the offer is more than you expected or you feel that it is the right thing to do.

...not to mention that you will probably hate running a company if it doesn't sell.

Buy, Sell, Hold...

Everyone keeps saying it is a buyer’s market in the current economy, but what does that truly come down to? Person A stuck with something wanting to sell to Person B for a minimal loss on their original investment. Pretty simple, right? Not so much. On a day to day basis, I get about 2-5 offers to buyout existing business that want to get rid of every asset so their credit isn’t hurt or is minimally hurt. Some of these deals are really “deals,” some are “steals,” and others are just traps to set myself up for the same situation. Not that the original owner is playing games, but instead if I buyout a business for a “great deal,” I still won’t be able to make it profitable and essentially end up in the same situation with that business.

This also goes with the real estate market right now. I get numerous offers to invest in shopping centers, whose owners are going bankrupt, invest in homes that banks are stuck with, and some other real estate investments. The thing with real estate is that you have to look at the long term outlook. If I am investing $500,000 into buying a building, I cannot be looking to sell it within the next 6 months. If so, I am just setting up myself to be in a credit crunch- at a personal level. Instead, I have to pursue all my buys with the instinct that I will be holding on to them for at least 1.5 years – at a minimum. Also a good strategy with land purchasing, I found successful, is to search for undeveloped areas that seem to be "hot spots" where prime businesses would want to come. Having anchor businesses in an area where you own land can possibly become a quite valuable.

That said, it doesn’t mean that there are no lucrative offers in the market, because there are TONS. But you have to be skeptical. Don’t just jump into anything because the upfront investment doesn’t seem much or is a “deal.” Even though you may be paying $X for a property or a business, there may be some other strings attached. If you don’t plan for obstacles, you WILL HIT ONE and it will anchor you for a long time if not destroy you financially.

How do I pursue making a deal?

There is no written policy about how to analyze if a business is being sold for a deal, but I do take some things into consideration when I am investing in a “deal.”

-First I look at the upfront costs- Looking at these costs will give me a fair judgment of whether or not I want to look more into a certain business.

-Study the average market- If I think I’ve found something awesome, I analyze a bit more, to see if the costs that I am paying are less than what the typical costs of the business or property would be in a average economy. This takes some homework, but it proves if the price is legitimately low or “cheap.”

-Dig into the “behind the scenes” costs- Legal fees, taxes, etc. All of this comes into the behind the scenes costs. I have seen so many people try to buy businesses, in a regular economy, that they don’t plan for a lot of processing costs, which either delays the deal or even cancels the deal altogether.

-Plan for trouble- I am not one to be pessimistic, but it is only realistic to plan for downturns or things going wrong when going through with a takeover or buyout. Everything may not be planned when figuring out the “behind the scenes” costs, but the “unknown buffer,” what I call it, can set aside some cash reserve for me to run into trouble.

-Talk to my team- I talk to my lawyer, accountant and partners in certain deals, to see if something is worth going for or not. I can’t say how many times discussing things have brought up questions that really have saved me a lot of money.

-If all is a go- Then I set up a strategy to follow through on. How to implement new things into a business to make it profitable if it is currently at a loss, a growth plan, etc.

-Discount the venture immediately- Yeah, you read right, I count that every deal I make, being a loss, until the day I either sell it for a profit, or it starts to turn a profit where it can start paying for itself. This is the only wise way to invest. Never plan on something you don’t have- because you don’t have it, until you do.

Selling a business…

I have spoken to many business owners that say that “if I could only sell, I would be able to get out of being worried.” What is that? I mean seriously. Just because you sell your business, doesn’t mean that you are home free. What if the valuation of the price you sold your business for is worth about ½ the value you would have got in a great economy, or even worse yet, what if that amount of money just can’t buy as much five years down the road? And the last problem with selling a business is that people don’t have unlimited funds. While it is true that you will probably get money when you sell, you will eventually use up those funds and if you have no income stream, how can you survive? There is no guarantee that you will be able to start another business which makes a profit or even find another business to buy.

To conclude, I say buying anything, in any economic state, is a risk. There is always the fact that there is no “Turnkey Guarantee.” When selling you have to be careful that you aren’t setting yourself for failure in the long run. Sometimes holding onto something until you can better predict what you will be doing in the future can be the real winner. And sometimes holding your current position can save you from making a sour deal.