Owning a small business is extremely rewarding. You make your own decisions, set your own hours, and choose your employees and coworkers. You can create your legacy through the business, and if you’re successful, make a lot of money doing it.
But regardless of how your business performs or why you started it, you need an exit strategy in place. There are many methods for exiting your business, each with their own strengths and weaknesses.
Why You Need to Pick an Exit Strategy
If your business is just getting started, the “exit” phase may seem so far off that it’s not worth considering. And if you’re enjoying running the business, you may not particularly want to exit—you may want to keep running the business until you physically can’t anymore.
Even in these situations, it’s important to pick an exit strategy and begin planning for it.
Why?
- Helping others prepare. Your managers and employees want to know about the future of the business, so they can feel secure in their jobs.
- Giving you a way out. You may want to leave the business for a number of reasons: retirement, burn out, or a medical emergency that leaves you unable to run the business. No matter what you’re facing, an exit strategy will give you a planned path out.
- Allowing you to better plan your business. When you have an exit strategy, you’ll be better able to direct the business. You’ll have more time to prepare for the end.
If you’re not sure how you want to exit the business, don’t worry—there are many potential exit strategies to choose from, each of which have their own merits.
Close and Liquidation
First, you could consider liquidating the business. In this approach, you’ll close the business and begin selling the assets. If you’re a sole proprietor and you’re responsible for doing most of the work within the business, this may be the only realistic option when you’re preparing for retirement.
There are several advantages to this approach. For starters, it’s simple. There aren’t complicated laws to follow or variables to think through—you simply close up and sell whatever you have left. Depending on the nature of the deal, this also tends to be a very fast exit strategy.
However, there are some downsides. Notably, liquidation tends to have a very low return on investment for the owner. Because you’ll be selling your assets in a hurry, and sometimes to a number of different buyers, you’ll be attracting low prices. You’ll also be losing value on less tangible things—like the goodwill from clients you’ve built up over the years. On top of that, creditors often have first claim on the funds you generate from asset sales, so if you owe significant money, this may not be ideal.
Gradual Liquidation
In a similar strategy, you could try liquidating the business gradually, extracting as much value out of the business as possible as you move toward closing. In this model, the owner will typically withdraw dividends or salary while winding down business operations over a period of months to years.
This has many of the same advantages as a close and liquidation, since it’s very simple and entirely within your control. It also gives you better lifestyle benefits, since you’ll be able to keep running the business, gradually tweaking things and selling things to close the business gradually.
Of course, there are some drawbacks. For starters, extracting profits from your business will hinder its growth for as long as you continue gradually liquidating it. Your other partners and shareholders may need to agree on this approach if they’re going to go along with it.
Mergers and Acquisitions
Next, you could consider pursuing a merger or acquisition (M&A) deal. Most business owners looking for an exit strategy attempt to be acquired by another company, hoping to close out the business in the process. The idea here is to position your business in a way that’s attractive to potential buyers, and start shopping around for a potential acquiring company. Depending on the nature of the deal, this company could buy out your business for a fixed cash price.
There are some strong reasons to choose this exit strategy, especially if your business is thriving or particularly attractive to buyers. If you position your business well, you could attract a significant sum of money—potentially more than enough to retire on. If you’re motivated to sell and you’re not picky about terms, you could also close this deal quickly.
However, the advantages of an M&A deal are contingent upon the ability to close the deal quickly and simply—and this doesn’t always happen. You may enter a fierce series of negotiations about price or the terms of the deal, which can protract the situation and add more stress.
Additionally, there’s no guarantee that your business will sell for your target price; you may end up with far less money than you initially expected. Also, you should be wary of acquiring companies that want to buy your business to reduce competition. If this is the case, they may shut your business down after acquiring it, leaving your employees without a job.
Transitioning to a Family Member
If you like the idea of preserving your legacy or keeping the business “in the family,” you could consider transitioning ownership to a family member. Through sale or a transition of leadership, you’ll appoint someone else in your family to take over.
The main advantage here is that you get to see your business continue to thrive in the hands of people you trust. You may also be able to continue serving an advisory role, which is ideal if you deeply care about this business. Additionally, if you know you’re going to leave the company in the hands of a family member, you can gradually groom your successor over a period of years leading up to your exit.
However, making a family succession plan can often be complicated and contentious—especially if you have many relatives who feel like they have an equal claim to the business. If you don’t have a family member who’s interested or skilled enough to take over the job, this could also be problematic. Additionally, a family-based transition may be seen as nepotism, and it may not sit well with investors and shareholders.
Selling to Managers and Employees
Alternatively, you could sell the business to your current managers and employees, allowing them to continue running the business as they see fit. If you trust and love the people on your team, this could be the best option—it preserves the business as is, while still securing you a decent payout and allowing you to continue serving an advisory role (if you want it).
The main advantage here is that your workforce is protected. Everyone keeps their job, and they can continue running the business as they have (or making changes as they see fit). This is also good for the business, since employees who have an ownership stake in the business will be even more motivated to ensure it succeeds.
Of course, there’s no guarantee that your managers and employees are adequately prepared to run the business. If they don’t have the training, experience, or guidance, they could struggle to keep the business afloat after you leave. Investors and shareholders may also look upon this type of deal unfavorably.
The IPO
You may also consider taking your company public with an initial public offering (IPO). This is a much more complicated exit strategy, and it isn’t right for every business.
The advantage here is profitability. If your company is successful and attractive to investors, you could make a lot of money this way.
However, IPOs tend to be time-consuming, expensive, and complicated. Taking your company public requires months to years of planning, and the help of skilled lawyers to guide the process. Depending on the nature of your IPO, you may also have difficulty getting access to your capital right away.
How to Choose the Right Exit Strategy
We’ve covered a number of possible exit strategies in this guide, but which one is right for you?
The decision can be difficult, so consider:
- What are your biggest priorities? This is the biggest question. What are you hoping to achieve most. Would you rather keep things simple, even if it means losing some money, or are you willing to go a complex route if it means maximizing profitability? Are you concerned with protecting your employees and managers?
- What is your business currently like? Is it big or small? Flush with cash or rife with debt? Simple or complicated? The answers to these questions should help guide your decision.
- How much time do you have? Some exit strategies are more favorable for gradual, long-term changes, while others are better if you’re trying to get out quickly.
There isn’t a single “right” exit strategy, so consider your options carefully. Talk with your employees, partners, investors, and advisors to find the option that will serve you best.
