Small Business Exit Strategy
A business exit strategy is simply a plan for what will happen when you are ready to leave your business. Just like you have a clearly defined business plan to guide your business through the course of its life, you should have a plan for exiting.
There are several reasons why an exit strategy is necessary for your small business. First and foremost, an exit plan plays a key role in determining the strategic direction of your company. Having an exit strategy also gives you peace of mind in the case of retirement, health issues, change of interest, economic recessions, unexpected offers, and wanting to spend more time with family or care for a loved one. By not proactively planning your exit strategy, business owners or their heirs/successors limit their options in the future.
The type of strategy you choose will depend on your financial, strategic, and personal goals. Carefully evaluate your business plan, strategy and vision to determine what a successful exit looks like for you and your business. Here are a few common types of business exit strategies to consider.
Liquidation is one of the easiest ways to exit your business. Realize that at some point everything comes to an end. It is simple, you close the business doors, sell the assets and call it a day. There are no negotiations and no need to worry about the transfer of control. The assets sold must be used to repay creditors and the remainder can be kept or divided among shareholders if there are any. While this is a relatively easy exit strategy you often get the lowest return of your investment. Any goodwill value – things like client lists, your reputation, and business relationships may be very valuable, but the value is not recognized in liquidation.
2. Interested Buyer in the Private Marketplace
The most popular strategy is to sell your small business in the open market. The business owner puts the business up for sale at a certain price and hopefully finds a willing buyer. An often-overlooked piece of this process is obtaining a business valuation to get a range of values that your business is worth. Both assets and goodwill can be incorporated into the value of your business, maximizing the return to the owner. Many business owners leave money on the table by not adequately doing their due diligence on determining the value of their company. Finding a willing buyer may be a long process and the selling price may be lower than anticipated. If this is your exit strategy, you should spend time grooming your business today to be as attractive as possible to future investors.
3. Sell to a Friendly Buyer
If you have become attached to what you have built passing ownership on to a trusted buyer will preserve the legacy you have built. Interested buyers may include customers, employees, children or other family members. You can also sell your business to current managers or employees. Often with this kind of exit, the seller finances the sale and lets the buyer pay it off over time. These individuals typically have a commitment to the business and will preserve what is important to you. As you know them, and they know you, less due diligence may be needed. However, the same level of due diligence should be performed by both parties to ensure that the purchase price is fair and the intentions are honest.
4. Family Succession
The most common friendly buyout occurs when the business is passed down to the family. This ensures that your legacy lives on and can provide your heirs with a living. Keep in mind that many families may have disagreements over who makes decisions, receives ownership, etc., which can often tear the company and family apart. Family members may also not have the skills or interest to keep the business running. If you choose this route, make sure to have the planning in place and clear details on how you wish the business to be run.
5. Merger & Acquisition (M&A)
An acquisition is one of the most common exit strategies. This type of exit strategy typically means merging with a similar company or being bought by a larger company. This can be a win-win situation when both companies have complementary skills, can utilize shared resources, create synergy and potentially buy out competitors. For larger companies, it is a more efficient and faster way to grow rather than creating new products or services organically.
The first step is finding a business that wants to buy yours and then negotiating a selling price. Because the private market values you relative to your industry, there is a greater potential for your perceived value with a merger or acquisition. If you add strategic value to an acquirer, they may pay far more than what you are worth. The key is choosing a business that has a good strategic fit. The acquirer who purchases your business will want to invest in you as a way to expand into new markets, offer new products to their existing customers, or obtain current customer and supplier relationships.
Acquisitions and mergers can be messy and often difficult when cultures and systems clash. That being said, sometimes there is a bad fit between the acquirer and the acquire which can lead to the self-destruction of the new company. Not to mention, unifying the management team in the strategic direction moving forward takes time and effort. Non-compete agreements and other contracts can also make things complicated and be a legal hassle.
6. Initial Public Offering (IPO)
This used to be the preferred method, but since the Internet bubble burst in the year 2000, the number of IPOs has declined each year. In 2018, there were only 190 IPOs in the United States, almost half of what it was in the early 2000s. Of the millions of companies in the U.S., only about 7,000 of those are public. While an IPO has the ability to raise billions of dollars for a firm, it brings with its increased regulation and liability, disclosure requirements and demanding shareholders. During the process of going public, you may spend a significant amount of time and money pitching to investors and working with investment bankers. However, once your shares are publicly listed, your shares are subject to lockout periods. While this may be an option, only a select few small businesses go through the process on an IPO.
7. Cash Cow
Lastly, if you are in a stable and secure market, with a business that has a steady revenue stream consider making it a cash cow. Pay off your investors and then find someone you trust to run it for you. This will free up your time for other pursuits while allowing you to retain ownership and enjoy the annuity. This method may still need some management to stay healthy.
Exiting your business at the right time can often be the best decision for not only your business but also for yourself in the long run. The best exit strategy is one that best fits your small business and your personal goals. Planning an exit strategy in advance will give you time to get it right and help you maximize your return.
A key aspect of your business exit strategy is business valuation. We at Peak Business valuation have specialists that can help business owners and buyers examine a business to determine a fair value and assist in developing an exit strategy. We welcome any questions you may have. Feel free to reach out by email or through a phone call.
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