Exit Strategies for Small Businesses
Thinking about an exit strategy is not usually at the top of a business owner’s list. But, inevitably, one way or the other, an exit strategy needs to be considered, devised and ultimately implemented. Perhaps the reluctance to search for an exit strategy is based on recognizing our own mortality!
Susan Ward, writer @ The Balance, points out that “An exit strategy is something that every investor in a small business looks for. Even if you are running a one-person sole proprietorship, you need an exit strategy. For you, as for any investor in a business, the questions are the same when it’s time to move on: (1) How are you going to get your money out of the business? (2) How much money are you going to get? Having an exit strategy worked out in advance helps ensure that you like the answers to those questions and gives you some control over your small business’s future.”
It doesn’t matter where you are in the development of your business, beginning, middle, or end; it is important to consider your exit-strategy options. EntrepreneurandInvestor.com made suggestions in their article 5 Exit Strategies for Small Business Owners as follows:
1. Friendly buy-out. Selling to a family member or employee may be one of the easiest exit strategies if your business is prepared for this. Employees who know they have the option to buy you out eventually will work harder to make a success of the business. The future of the business is also more secure because the new owners know it inside out and can simply continue as before if they want to. Selling to a family member or employee certainly has its advantages. You’re dealing with familiar faces who you know have the interest of the business at heart. However, don’t be blind to the possible pitfalls in such a scenario. A sale remains a sale, no matter who the buyer is. Be careful not to lose objectivity and not to let your guard down during negotiations. Even if it feels unnecessary, it’s best to hire a professional to assist with the sale through a transfer-of-business-ownership agreement.
2. Acquisition or merger. A merger involves the combining of your business with a similar company, while an acquisition means your business is bought by another company. A key factor if you plan on an acquisition or merger as your exit strategy is to make your business as attractive as possible for potential buyers. It’s not always that easy to sell a small business, especially on the open market. There might be interest but at far lower prices than what you were expecting. A competing business may be easier to sell to. It’s a good idea to identify a potential buyer or buyers in advance and groom your business for sale accordingly. This includes having all systems in place and information at hand to convince them your business is worth the asking price.
3. Liquidation and shut-down. Shutting down and liquidating your business can be an effective exit strategy, especially for a very small business that depends on a single individual. Sometimes there isn’t much to sell, so liquidation is the only option. The one big advantage of liquidating and shutting down a business is that the process is relatively simple. It involves an asset sale if there are some, and that’s it. In some instances it may include the selling of the business name for someone else to use however they like or with whatever restrictions you put on it. The name of a business that has been around for a very long time can be a valuable asset. Liquidation is not the best option for companies with a loyal customer base and employees who depend on its continued existence. In this case, selling the business is a better exit strategy.
4. Initial public offering. An initial public offering (IPO) is the first sale of stock issued to the public by a company. While not applicable to most small businesses, it can be very profitable if you fall into the minority. In fact, this used to be the preferred exit strategy to “get rich quick”. The IPO process is lengthy and costly, it could require an upfront investment of tens of thousands of dollars. An IPO is labor-intensive and requires high standards of reporting and compliance. Public companies must produce detailed financial, operations, staff, management and marketing reports. You may not be allowed to withdraw your capital at the time of the IPO because it may be required by shareholders for the expansion of the business.
5. Liquidation over time. This exit strategy is to be considered when a business generates a lot of cash flow without the owner’s constant attention. He or she withdraws all or most of the profit over time, either in the form of a large salary or dividends. Basically, the business serves as a cash cow until the owner decides to sell or liquidate it.
In conclusion, you must feel comfortable with what you want to accomplish both professionally and personally as you exit your business. Make a list outlining the pros and cons to thoroughly review your options. If money is your primary objective, then selling to another business or on the open market makes sense. If preserving your family business is the goal, then selling to staff or family members is the way to go. Most importantly, do not wait until you are in an undesirable position to start thinking of an exit strategy. Lay the groundwork now so that when the time comes, you have plans for all the various options available and are in a better place to attain the best financial gain.