Every business owner will eventually exit their business. Reasons for exiting a business include decreasing profits, increasing competition, changes in health or life goals, retirement, passing it on to family members, or cashing in on your goodwill and success. You may even decide to exit your business because it is growing too quickly. Some owners exit their business voluntarily, while others may have no choice.
You need to prepare for exiting your business, as it can be a lengthy process involving various financial, legal and operational obligations. The idea is to have your business in the best possible shape before you exit.
The following are the most common ways of exiting a business:
(i) Succession Planning
If you have spent many years developing and growing your business, the idea of selling your business on the open market may not be as appealing as passing it on to someone you know and trust. This type of exit strategy is known as succession planning. The dream of many small business owners, keeping your business in the family ensures that your legacy lives on. As an exit strategy, it can also give you the opportunity to groom your own successor and even perhaps give you some continued say in the business. On the downside, developing a family succession plan can be enormously difficult because of the emotions and issues involved. This requires a lot of planning. A formal succession plan should define exactly who will take over the business, when they will take over the business and how they will take over the business.
If you decide to leave your business to a family member consider the legal obligations, as well as the impact on family relationships. Consider involving a lawyer or business adviser in discussions with family members to avoid disputes relating to inheritance, ownership or management.
(ii) Closing your business
If your business is failing it may be difficult to sell. In this case you may decide to close it down. Closing a business involves selling off business assets, paying off your debts and keeping whatever money is left. In extreme situations, closing a business may involve an official declaration of insolvency (e.g. bankruptcy). There are a range of legal requirements involved in closing a business, as well as financial and emotional costs. These costs will affect you, your employees, and other stakeholders in your business.
(iii) Sell your business to employees
Current employees and/or managers may be interested in buying your business.
Arranging an employee buyout can be a win-win situation as they get an established business they know a great deal about already and you get enthusiastic buyers that want to see your business continue to thrive.
One way of setting up this exit strategy is through an Employee Share Ownership Plan (ESOP), a stock equity plan for employees that lets them acquire ownership in a company.
An employee buyout doesn't have to involve a stock equity plan though. It might be as simple as having one of your current employees take over the business.
(iv) Sell the business in the open market
This is the most popular option for small businesses. At a certain point in time, often when he or she is ready to retire, the small business owner puts the business up for sale for a certain price - and hopefully walks away with the amount of money she wanted to get for it.
If this is your exit strategy, you should spend some time grooming your business for sale, making it as attractive as possible to potential buyers.
(v) Sell to another business
Positioning your small business to be a desirable acquisition can be very profitable. Businesses buy other businesses for all kinds of reasons, from using a new acquisition as a quick path to expansion through buying out (and getting rid of) the competition. The trick to success with this exit strategy is to target your potential acquirer(s) in advance and position your company accordingly. And of course, convincing your acquirer that your small business is worth what you want for it.
The Best Exit Strategy
The best exit strategy is the one that best fits your small business and your personal goals. Decide first what you want to walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then family succession or selling to employees might be best for you.
Whichever exit strategy you choose, you need to start working on it. Planning in advance gives you the time to do it right – and maximize your returns.