How to Create an Exit Strategy for Your Small Business
And Why Your Business Needs One
Choosing an exit strategy for your business might not seem like an obvious step when you’re just getting started, however planning ahead is an important part of building a business. An exit strategy is a plan for how you will eventually leave the business. It also includes details on what will happen to the enterprise after you have left.
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 business
- Your financial situation and expectations
- Any 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.
You’ll want to revisit your exit strategy often to see if it still fits your situation and goals. Then, you can make adjustments as necessary.
Learn five common exit strategies for small businesses.
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.
- Relatively simple exit
- Depending on the sale of assets, it can be a quick closing process
- You only make money on the assets you’re able to sell (real estate, inventory, equipment, etc.)
- If there are creditors, they must be paid first from any money generated
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.
- You have cash flow to maintain your lifestyle
- The business’s growth potential and sale value are stunted
- If there are other investors who aren’t being benefitted, they will likely be upset with the situation
- How you withdraw the funds will affect your tax situation
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.
- A long-term buyout could help incentivize employees, making them feel more committed to the business’ success
- If sold to someone who’s already familiar with the company, there may be less disruption to the business
- You may be able to remain involved in the business if you want to
- Could stress family relations and cause disagreements among the family
- You may be tempted to sell at a discounted price, which means you won’t recoup the full amount the business is worth
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.
- If your business is in good financial condition, it will likely be attractive to buyers
- The business’ goodwill can be incorporated into the company’s value, enabling the seller to profit from years of relationship and brand building
- It can be a long, tedious process to find a buyer for your business in the open market
- Valuing a business can be complicated, and you might not receive the selling price you want
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.
- The purchasing business may be willing to pay a high price for your company
- The cultures and systems of the two businesses might clash
- Some or many of your employees may be laid off during the transition
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.
- It can be very profitable to become a public company
- Going public can help boost publicity, reputation, and brand awareness
- Taking your company public is a tedious, lengthy, and expensive endeavor
- Going public comes with new obligations like filing SEC reports and providing information about business operations, finances, and management
- Shareholders get to have a say over the company’s direction, which could cause you to lose some flexibility in managing the business