Prepare An Exit Strategy Before You Sign that Contract

Prepare An Exit Strategy Before You Sign that Contract

an exit sign, business attorneyEvery entrepreneur should develop an exit strategy to limit losses and ensure the business owner has the ability to sell or transfer ownership of the business should the need arise. Exit strategies are crucial if the entrepreneur wants to retire, travel, or move on to a new idea. An effective exit plan allows entrepreneurs to address problems and cleanly disentangle from their business.

Basics of the Exit Strategy

The three common types of exit strategies are:

  1. Strategic acquisitions;
  2. Management buyouts; and
  3. Initial public offerings.

The most effective exit strategy for a business owner depends on how much the entrepreneur wants to stay involved in the business and how much control she wants to retain. The size of the business, the type of company, and the way the business is structured also play a role.

Business Exits and Liquidity

Strategic acquisitions offer the greatest liquidity in a short time-frame. However, market conditions impact the appeal of various types of exit strategies. For example, during a recession, an IPO might not be the best choice. Likewise, management buyout might not be feasible when interest rates are high.

Business structure and exit strategy

The exit strategy is also affected by the structure of the business. For example, a sole proprietor may take a buyout of the business and its assets. Conversely, in a partnership, the business owner may prefer selling the partnership interest to the other partner. Under this strategy, the company remains unchanged, and the partner receives a buyout. The more investors, shareholders, and partners, the more complex the exit strategy.

Special Issues for Franchises

Franchisors often impose restrictions on the ability of franchisees to sell their businesses. For example, standard transfer fees amount to either 25 percent of the sale or $5,000. Other franchisors require franchisees to contribute 20 to 30 percent of the initial investment. These provisions significantly erode the ability of franchisees to sell their business.

Franchisors also frequently enact mandatory terminations on the death or disability of the owner which could leave family finances in turmoil. Owners should ensure that there is a death/disability clause in the franchise agreement to be sure their family finances remain stable.

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