Tags: ,

Exit Strategy: Choosing an Exit Strategy for Your Small Business

2021-01-05

Stephanie Mladenoski

Small business owners are often advised to focus on crafting an extensive business plan before launching a company or project. Doing so not only helps owners anticipate and navigate challenges associated with running and regulating the business, but it can also be required when obtaining financing for your operation. A good business plan outlines the operational procedures and expenses of a new business, offers a glimpse into possible marketing and growth opportunities, and provides a solid estimate of the expected revenues and path forward for a new business venture. 

An essential part of starting a business, and one that is too often overlooked by new entrepreneurs, is coordinating a plan for your exit from the company: In other words, an exit strategy. Whether you plan to manage your business until retirement and pass the company onto children, sell your small company to a larger firm, or simply sell your business assets, you should have an idea of when and how you’ll move forward well before you do so. Like a business plan can make or break your company’s performance, an exit strategy can determine whether selling or staying onboard is the right choice for your business and career. 

What is an Exit Strategy?

An exit strategy is a plan created by a business owner to pass on ownership or liquidate a company through a predetermined, mutually beneficial process. There are a number of common paths that business owners follow on their way out, but the most common involve either passing on at least partial control of the company or selling business assets for profit. Depending on the nature of your business, a number of exit strategies might be right for you. Below, we highlight some of the most common exit plans for small business owners.. 

Common Exit Strategies

Liquidate

One of the most common exit strategies for small business owners is to liquidate their assets, or to sell off all business assets for profit. Although liquidation is a fairly straightforward process, in which business owners sell company properties, vehicles, and machinery and use the proceeds to close up shop and move on, there are a couple of drawbacks to liquidation. 

One disadvantage of selling your assets and moving on is that by selling off your business possessions and dissolving your company, you simultaneously lose valuable non-monetary assets such as brand-recognition and industry connections along with your business. And because it’s difficult to liquidate non-monetary assets, it is not always the best option if you’re looking to cash in on the full value of your business. Selling the business as a whole can provide more value to your acquirers, and thus, put more money into your pocket.

Another important fact about liquidation is that it is often a last resort for small business owners that have failed to properly prepare for their exit. This is because the process is straightforward and accessible for all owners of business assets, but also because most other planning-intensive exit strategies will yield more personal benefit for owners that can execute them successfully.

Establish a Family Business

Either out of principle or to protect future earnings, many small business owners also opt to establish a family business and pass control of the company on to a family member. Doing so can allow your business to live on even after your retirement, not only serving your original vision but providing for your family for years to come. By arranging for a family member to take on control, you can ensure that your business keeps up after your exit, and that your ideas are not lost. 

There are two important things to consider when organizing a family business. The first thing to understand when entering business with loved ones is that it can seriously disrupt relationships as managerial, economic, and philosophical differences arise in the family. Before entering into an agreement, make sure that your family affairs are stable enough to accommodate added responsibilities and obligations. 

The second critical consideration is ensuring that the family member whom you plan to pass the business on to is truly interested in and capable of running the company. Otherwise, they may opt-out after a couple of months or years, liquidate or sell the business, and negate any financial benefit done by establishing the family business in the first place. As with settling family affairs, it’s important to carefully consider and deliberately choose a relative to give the business.

Sell to Employees or Management Team

Another exit option that allows you to maintain at least a bit of influence over your business is to sell the company to employees or your management team. Planning well in advance, you may be able to coordinate with trusted employees or associates to pass the company on when you retire. Long-standing employees or partners may buy out your stake in the company by group effort, or you might arrange a sale of the business to an individual within its ranks. 

As the family business option, selling your brand to your management team or employees is a good way to ensure that your initial vision is not lost in the acquisition and that you can continue to monitor your business through trusted sources within the company. This option can be difficult, however, because employees may not be able or willing or able to raise the money needed to purchase the company, and oftentimes will not have the skills to do so. The viability of this plan depends on your industry, your experience, and your relationship with the people working for you. 

Put the Business up for Sale

If your goal is to maximize your payout, you might want to consider selling your business in its entirety on the open market. This differs from liquidation in that, when liquidating your business you are selling your assets piecemeal and deconstructing your business, while listing your business on the market keeps the entire business in-tact. This can be desirable because, rather than selling off assets and taking earnings from those sales alone, business owners can use intangible assets like client-lists, data, experienced employees, and brand recognition to negotiate a higher purchasing price for their company. 

With a solid foundation and considerable upside for new owners, you may be able to get top dollar for the sale of your business by leveraging both your monetary and non-monetary assets. It’s important to note, however, that close to 80% of businesses listed for sale fail to be purchased, so this option is only a good fit if your operation is profitable and healthy.

Position Your Business for Acquisition

Somewhat similar to listing your business on the open market, you might want to exit your business by arranging for its acquisition. While this exit strategy can help you net a large payout, owners should consider that it typically requires years of planning for and arranging an acquisition. 

Acquirers typically look for companies that add value through complementary goods or services to expand their offering and customer base, or in competitive industries in hopes of weeding out the competition. For example, a company like Wal-Mart may look to acquire a pharmacy and convenience store chain to be integrated into their supply chain, in turn, growing the customer base and adding additional products and services. Alternatively, Facebook purchased Instagram in order to maintain more control over the social media market, which happens in competitive industries with businesses of all sizes. 

While setting your business up for acquisition allows you to field numerous offers and negotiate your own selling price, it is by no means a good option if your primary concern is maintaining the integrity of the business after your exit. Many businesses that are purchased with the intent of reducing competition will be simply liquidated, not only dissolving the business’s brand but releasing company employees along with it. Similarly, a larger company may totally reshape your business and its values, erasing the company you thought you had built. These are all possibilities once you’ve put your business up for acquisition, and they should be considered before going down this path. 

An IPO (Initial Public Offering)

Perhaps the most profitable option for small business owners hoping to exit the business is to pursue an Initial Public Offering (IPO) for their firm, making ownership of the company available via the stock market. An IPO is the first sale of stock for a company, and can provide a massive cash infusion; in this case, it funds both your exit and maintaining operations in your absence. However, it is not a viable option for many small business owners, as not every brand is marketable on a wide public scale, and in order to achieve an IPO you must first be able to cover the cost of audits, paperwork, and investor meetings.

It’s important to note that your business is subject to extraordinary scrutiny once offered on the public market. Not only will all shareholders have a say in your company’s function, but government regulators and tax officials will routinely examine your finances to ensure that the public is not being misled. If your finances are not in order, even in the years before your IPO, you may be held responsible as the previous owner. 

How to Choose an Exit Plan

Each of the options listed above presents certain advantages and disadvantages for your business. The simple takeaway is that the right exit strategy is the one that best meets your personal and professional needs. If you care most about providing for your family going forward, it may be wise to pass the company on to a loved one. If you’re hoping to get out of the industry and invest elsewhere, you might negotiate for sale more thoroughly. Regardless of how you choose to exit the business, having an idea of your exit strategy at an early stage can ensure that you’re at peace when it’s time to pass the reins.

 

Author Bio

Jeffrey Bumbales
Director, Marketing & Strategic Partnerships