Steven Covey, in his book The Seven Habits of Highly Effective People
entitles one chapter, “Begin with the End in Mind.” In this chapter,
the author talks about keeping your ultimate goal in focus, day to day,
using it as a benchmark for all your decisions. Aiming at a goal over a
long period of time greatly increases your chances of actually hitting
it. One key point in the chapter is that how you start a journey can
determine how you finish it. As entrepreneurs, we all need to make sure
that our starting foundation is consistent with our intended goal.
Building a business is lots of fun. It’s a great way to spend your
career. But unfortunately, it has to end sometime, preferably as a
result of your good planning. What’s your exit strategy? What will be
the end result of all your day to day work? Having fun along the way
shouldn’t distract you from your ultimate goal, whatever it is.
We are lucky because in our industry, we have not only the standard
exit options, but there are other choices which are not always
available in other businesses. Here’s a look at the basic strategies I
see. Which one are you aiming for?
The Classic Move: Sell Your Business for Cash or Stock.
What entrepreneur doesn’t dream of that big payday when Daddy Big Bucks
walks in the front door and pulls out a wad of cash and says “You have
built a fine business here! How about a jillion dollars for it?” Sounds
great! Where do I sign up for that?
If this is your vision, you need to plan for it from the beginning. You
will need to create a business someone else would want to buy. I know
that sound elementary, but it’s not. You have to think about it from
the buyer’s point of view. Do you have an annual audit? Do you have
professional, trained staff in place who will be there when you are
gone? Do you have documented systems and procedures which anyone could
follow? Is all your software documented clearly in plain English so if
your IT guy gets run over by a bus, the business can still go on? These
are the kinds of questions a buyer would ask and want answered. They
aren’t always the kids of questions independent business people take
seriously, especially at the beginning of a business. Things like
annual audits are always low on the priority list when you have the
typical start up woes.
But a buyer who is looking at a ten year track record of audited
financial statements is going to feel a lot better about his purchase
than one who is asking you to go back and audit the last three years
right before the closing. That kind of last minute audit can slow your
deal down and even kill it.
Furthermore, what kind of portfolio are you building? Do you take risk
and is it clear that you ‘own’ the merchants? If so, your chances of
the cash payday are better. Or, are you building a no-risk portfolio
which means you do not (typically) ‘own’ the merchants? There are
buyers for these kinds of portfolios, too, but not as many as for
Selling for cash is easy: You know what cash is worth. Selling for
stock is a bit of an art form, since you will probably have what is
called a “Lock Up” agreement which prohibits you from selling the stock
for a period of time, usually about a year. Gauging the value of that
stock a year ahead is a tough job, and has some serious risks to it.
The Standstill: Reaping the Residual Harvest over Time.
One of the great things about our industry is that you have ongoing
residual income. What a marvelous invention. I don’t know who invented
residuals, but whoever you are – THANK YOU! I have a small statue
dedicated to you in my office with incense, flowers and candles. A
great strategy for your long term future is to hold on to residuals and
let them run off into the future. Cut merchant support expense to the
bone and reap the profits of years of hard work.
This approach can create a stable base of income for years. I recommend
putting some of it aside for that proverbial rainy day. Merchants do go
out of business and gradually, your residuals will shrink over time. So
you need to prepare for that day when the check is not big enough to
support you. But, if you have done an effective job building a
good-sized merchant base, then that day will be long into the future.
For example a merchant base of 1,000 merchants will still yield about
$8,500 per month after seven years, assuming 1.5% per month attrition.
The Handoff: Grooming the Next Generation.
You can always leave the business to your kids. This assumes that they
want it and that it’s really the best opportunity for them. Now that
inheritance taxes are less onerous, you can just will them the stock
and, depending on the valuation, the taxes could be little or none. You
can also sell it to them over time in small chunks.
Or you can sell it to loyal long-term employees. Usually, they have to
buy the stock from you some how over a period of time. There are
several ways to do this, one is called an Employee Stock Option Plan or
ESOP. These plans are complicated, but basically, they involve the
business borrowing some money and using it to buy some of your stock.
The employees contribute to a pension plan which pays off the loan and
buys out the remainder of your stock. A typical ESOP takes at least
five years to play out, and often ten.
Whatever your long term vision for yourself and your business, it’s not
too soon to think through the basics and how you will achieve that