We’ll explain the value of having a plan in place, discuss your options for exiting the business, and weigh the benefits and drawbacks of each scenario.
Why Small Businesses Need Exit Strategies
All businesses need an exit strategy at some point, even if that just means transferring ownership of the company when one owner decides to retire. Leaving a business can be stressful, and emotions can often cloud your judgment. Should this occur, a good exit strategy that you’ve come up with in advance will enable you to address tough situations rationally. Here are some things to consider when making your exit strategy:
The length of time you plan on being part of the businessYour financial situation and expectationsAny investors or creditors who need to be compensated, and what that process will look like
Having an exit strategy in place early on can help you to make decisions that will support your eventual exit. This allows the process to be as easy and profitable as possible. Learn five common exit strategies for small businesses.
Liquidation
Liquidation is the process of closing a business and selling off its assets or redistributing them to creditors and shareholders. There are two main ways to do this.
Close and Sell Assets as Soon as Possible
One option is to close the business and sell the assets as soon as you can. This is often a last resort method for a business, as you only make money off the assets you can sell, while valuable items like client lists or business relationships are lost. Before liquidating a business, you’ll want to work with liquidation experts to make sure you’re following the right procedure for selling your assets, paying back all debts, employee protocol, and finalizing all legal and financial commitments.
Liquidating Your Business over Time
The other common liquidation option is paying yourself until your business finances run dry, then you ultimately close the business. This is often referred to as a “lifestyle business.” The owner takes the funds out over time instead of reinvesting them back into the business.
Sell the Business to Someone You Know
You may decide to sell the business to someone whom you’re familiar with, whether that’s an existing partner, a manager or employee, a customer, a friend, or a family member. Commonly, during a seller financing agreement, the buyer is able to pay off the business gradually. This allows the seller to maintain an income while the buyer begins to run the business without making a large initial investment. The seller can also act as a mentor during the transition, which helps to make the process smoother for everyone. Be aware that valuation, business transfer, and estate planning issues can be complex when selling to a family member. You’ll want to involve attorneys, accountants, and family successors when planning the transition.
Sell the Business in the Open Market
Buying an already established business can be an attractive option for entrepreneurs. This is because it’s less risky than starting a new enterprise, and seller financing makes the purchase easier to fund than it would be if you were financing a startup. Buyers also benefit from assuming a business’ existing systems, its sales stream and cash flow, established client base, and brand reputation. For these reasons, it’s best to put in the effort to prepare your business in advance and make it as appealing as possible to attract potential buyers. The U.S. Small Business Administration can also be an asset, as it provides helpful information regarding closing or selling your business.
Sell to Another Business
In some cases, a competitor or similar business may want to acquire your company. Your business could be a strategic fit for their enterprise or a competitor may want to eliminate the competition. This is a good option for someone who wants to continue work in their chosen industry but with less responsibility. Generally during acquisitions, the business owner is offered a position with the new company. If this is the case, make sure you’re comfortable with the role and fully understand the dynamics and culture of the new workplace. You’ll want to work with an attorney when structuring the acquisition agreement.
An IPO (Initial Public Offering)
An initial public offering usually refers to when a business first sells its shares of stock to the public. Companies typically go through this process to raise additional capital. Going public is a big step for any business—it’s a long, expensive process, and afterward the company is subject to public reporting requirements.
