The Top Exit Strategies for Small Business Owners
Your exit strategy for your small business is a lot like a will: it’s critical but often overlooked.
No one likes to start by thinking about the end. It’s so far away and takes so much planning for the least interesting part of the whole endeavour. But, whether you’re a serial entrepreneur, or simply looking to grab control of your own future, an exit strategy is integral to good business planning.
That means, from the moment you’re registering the name of your new business, you should be thinking about where it’s going, and how you intend to make your eventual exit from it.
To help you plan for your best future, we’re going to go over four exit strategies that help small business owners find success. But, just in case you aren’t quite sold on sitting down and mapping out your exit strategy, we’re going to go over why you should take this process seriously.
A positive view of your exit
The end can seem so depressing. You’re giving up all you’ve worked to create for so many years and dwelling on it, on your exit from the business you so lovingly created, before you have to can feel disheartening.
But, the reality is just because you’re exiting the company doesn’t mean it’s the end. Instead of looking at it as a death, try looking at it as a journey. This way, your exit strategy is your destination. But, if you don’t know where your destination is, you may be travelling aimlessly for quite some time before you happen to stumble upon it, or worse, simply give up along the way.
By deciding on a destination when starting your journey, you can get their sooner and enjoy the journey.
What do you want from your business?
The first question you should ask yourself before you even register your business is:
What do I want from this business?
Your answers might include:
Financial stability
Continuing wealth for your family
Freedom in controlling your own job
An honest answer to your question will help you narrow down the top exit strategy for your business.
The top exit strategies for small business owners
Once you know what you want from your business (aka, your end goal), you can determine the exit strategy that will get you there. Then, you can map your way toward it and prevent yourself from getting blown off course by the winds of life.
1. The Friendly Buyout
Selling your business to a family member or employee is one of the cleanest exit strategies available, as long as they want to buy. For business owners who want to maintain the wealth of their family, this exit strategy gives them the ability to retire without getting rid of a successful business.
A friendly buyout can be done two ways:
A one-time purchase
Through an Employee Share Ownership Plan (ESOP).
The first option is simple, while the second allows an employee (whether family or not) to buy stock over time to eventually attain ownership of the company.
The best part of a friendly buyout is that the buyer should know the company well, and both the buyer and seller know each other well. However, just because everyone is friendly doesn’t mean you should relax while doing the deal. To make sure everything goes well, and relationships stay intact, it’s in your best interest to hire a professional to ensure a smooth sale.
2. The Acquisition or Merger
If a friendly buyout is not an option, business owners can look to sell their business to outside interests.
An acquisition is when another business decides to buy yours, while a merger involves combining your business with another.
The best strategy for business owners who are looking to be acquired or engage in a merger is to make your business attractive to other business owners. That may include looking to businesses that can benefit from the experience, skill, or technology in your company or your direct competition.
Businesses built on you, and your skills primarily, are much more difficult to sell because you will be moving on, leaving the business without its most important asset. Instead, to entice buyers, a business should have strong strategies and systems in place to ensure it can run without you at the helm. This will help make the transition from owner to seller much more smooth.
3. Liquidate and Shutdown
Simply liquidating or shutting down your business can feel like a failure. But for freelancers, consultants and other business owners who rely primarily on their own skillset, liquidating assets and shutting down makes the most sense in most cases.
The biggest advantage of planning for liquidation is that it’s the simplest exit strategy of all. It takes very little planning to liquidate and shut down, but the drawback is it offers little in the way of monetary value.
Because it’s often hard to get a good price for assets like used equipment, especially if it’s specialty equipment, you probably won’t walk away from your business with much more money in your pocket. So, if liquidating and shutting down is your exit strategy, it’s important to plan a separate way to fund your retirement, or have a new job or business waiting in the wings.
4. Draining the company (or liquidating over time)
Essentially this means the owner pulls profits from the company until nothing is left and the company itself is completely liquidated. Although it might sound vampiric, slowly draining a business can be the right choice for a certain type of business.
If your business generates cash flow without constant attention, like rental properties, this may be your preferred exit strategy. This exit strategy works especially well for retirees who are looking for a long-term, stable payout.
Although this is a suitable exit strategy for some, it will reduce the growth potential of the business. So while it’s not a sustainable means of income, it works well as a short-term means of cash flow.