Exit Strategy: How to Create One for Your Small Business
- Find out why every business should have an exit strategy.
- Learn about liquidation as an exit strategy.
- Discover the pros and cons of selling to someone familiar.
- Learn about the benefits of selling your business on the open market.
- Discover reasons to sell your business to an industry insider.
- Find out why you should consider going public.
Owning your own small business is a dream that few are fortunate enough to realize. However, even those new to entrepreneurship need to spend time thinking about how you’re going to eventually leave the business. No matter how far off it may seem, the best way to ensure that your time in your business ends up meeting your personal goals and expectations is to prepare an exit strategy now.
Feel like crafting an exit strategy long before you plan to leave is like starting a meal with dessert? We understand, but there are plenty of benefits to doing so. It helps you understand all your options and what the potential outcomes of each may be. Fiducial takes a closer look at your options below.
Why an Exit Strategy is Necessary for a Small Business
Do you think an exit strategy is only suitable for big corporations or partnerships? Let us change your thinking. Every business should have one. With a plan, ownership transfer can occur without stress and negotiations. The more planning you do ahead of time, the less aggravation you are likely to encounter when the time comes. If you’re just starting to think about your exit strategy, make sure that you think about the following:
- What are the expectations of your business in the long term?
- What are your financial needs now, and what they are likely to be in the future?
- How long do you want to be involved with the business?
- Who else has been involved in the business, what are their needs will, and how you will meet those needs?
Those are the key issues that an exit strategy takes into consideration. Keeping them in mind will help you ensure that you’ve addressed everything you need to in a strategic and organized way. Even if the particulars involving these individual elements change, having a rudimentary exit strategy in place will make modifications easier.
Exit Strategy Examples for Small Businesses
There are several different ways to leave a small business, but the five shown below represent the most commonly used:
This is the straightforward process of selling a business’ assets. You can liquidate assets in two different ways.
- Close and sell assets quickly – Business owners who do this often find themselves unable to leverage goodwill, client lists, and other non-tangible assets. They only monetize assets that they sell and end up losing value. Though this has the advantage of being a simple and quick process, it often leaves you with less than you could realize if you take your time. Also, it only allows you to take advantage of tangible assets like equipment or inventory. It also leaves you in the position of having to pay off creditors immediately with the proceeds.
- Liquidating over an extended period – This option represents a move from reinvesting funds into the business to paying yourself with the business’ revenues. Small business owners who choose this “lifestyle business” option run their business until they are no longer earning money and able to maintain their lifestyle. Then, they close. Though many prefer this option, it has a deleterious impact on the business’ growth potential. It can also affect your ability to sell it for a profit. It may work well for sole proprietors, but it is not a good option for businesses that have investors who want to earn a profit or get paid. Choosing this option also requires consultation with a tax professional.
Small business owners considering liquidation need to consult with experts. Experts can advise them on the right approach to asset sales, addressing liabilities, how to handle existing employees, and more. This will ensure that all their commitments and obligations have been legally and responsibly addressed.
Selling the Business to Someone Familiar Such as a Family Member, Friend, Employee, or Customer
In most cases, this involves a process formalized by a seller financing agreement that outlines a gradual purchase that provides income to the seller and avoids a large initial investment for the buyer. Many times, these agreements involve either formal or informal mentoring as the business transfers hands to allow a smooth transition.
Though tempting, you should quell the urge to arrange a sale to a friend informally. With the help of an attorney and accountant, you can ensure that valuation and other issues such as estate planning and family succession can be addressed if appropriate.
There are many advantages and disadvantages to this type of arrangement. By having an exit strategy in place that makes current employees into eventual owners, you create more goodwill and loyalty and inspire greater productivity and creativity. It also allows you continued involvement and ensures a smoother transition of business operations.
However, this type of plan can also create jealousy and competition between family members or employees. It may also lead to your undervaluing your own business as you attempt to help those you care about.
Selling the Business on the Open Market
There are many entrepreneurs looking for established, successful small businesses to purchase, as it avoids much of the hard work and risk that is initially involved. Entrepreneurs will find it easier to secure financing for a business that has a known revenue stream, goodwill, cash flow, and systems in place.
To make yourself as attractive as possible to this type of buyer long before putting your business on the market, make sure that all of your records and financial papers are in order. Also, check out the helpful information from the Small Business Administration to make sure that you are leveraging all of the features that you have already worked so hard to establish.
Selling your business on the open market is a great exit strategy for those whose businesses have a solid financial foundation and well-established clientele and reputation. However, the process can be drawn out and disappointing. This is especially true if the offers you receive are lower than your valuation expectation.
Selling to an Industry Insider
Competitor businesses may believe that your small business is a good acquisition, whether to add to their portfolio or to eliminate competition. Similarly, employees in a related industry may be interested in ownership of a company that is already well established. In this way, they can leverage their experience without having to start from scratch. This can be a particularly good option if you wish to remain in the business but as a consultant with fewer responsibilities.
However, many previous owners find themselves disappointed with their new role or the changes in the business culture or approach, or the disposition of long-tenured employees. This type of scenario requires extensive involvement with an attorney to ensure that all aspects of the acquisition agreement are clear and that the valuation is appropriate.
Initial Public Offering (IPO)
This approach involves selling shares of the company to the public to raise capital. Though the process takes time and is expensive, it goes a long way to earn a company's public recognition and brand awareness. It can also be very profitable. Going public also involves a significant amount of documentation and regulatory compliance surrounding reporting and being open to the opinions and desires of shareholders in how the company is operated.
Before you make any large decisions or moves regarding your business, call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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