Many small business owners experience the thrill of a new business idea yet few consider the type of exit strategy they will use after their business has run its full course. For many, a small business exit is out of the question because they intend to leave the business behind as part of their personal legacy.
That’s not the case with everyone. Some investors started small businesses that leveraged temporary market conditions with an exit strategy built into their business plan. Others found that the economic environment was no longer suited to making their business thrive. Whatever the case, having a good exit strategy – and timing – is important, so that profit potential upon exit is maximized.
7 Common Exit Strategies for Small Businesses
The following list contains seven popular ways to exit a small business. Each has its positive and negative points that should be carefully considered, along with market timing and your position in the economic cycle.
1. Leaving the business to a family member
Some small business owners are passionate about what they do, and the thought of exiting their business or selling the company does not cross their minds. Rather than consider selling their business, these types of owners intend to transfer business ownership to family members as part of an overall succession plan.
2. Merge with another business
Business owners wishing to retire or cease operations may find the idea of merging their business with a similar or complementary business to be a viable option.
This often works best when the owners of both companies believe that their merged company will be stronger when combined.
Besides ensuring business continuity, mergers benefit existing clients by preventing the disruption of products or services.
3. Acquisition vs acquihire
The acquisition of one business by another is typically done when the acquiring company believes it can leverage the strengths of the acquired company. In contrast, acquihire is the process of taking over a business with the sole purpose of recruiting its employees.
The circumstances for acquisition vs. acquihire are fairly different. The former is usually preferred when a business idea is strong. Conversely, the latter is the preferred choice in industries requiring specialized skills that are in high demand by recruiters.
4. Manager/employee buyout
Often when business owners are faced with selling the business they can find qualified potential buyers among their management and employees.
This is an ideal choice for owners that would like to see their business survive – and even thrive – in the future. Structuring a buyout with their employees can be a mutually beneficial transaction that benefits parties on all sides.
5. Sell a stake
If the business is a public company, an owner can sell shares to pay down debt, fund expansion in another business, or simply divest in the business while on the road to retirement.
Depending on the circumstances, owners can make a partial sale of ownership to employees or private investors. Another way of selling a stake in a business is through incorporation and via an initial public offering (IPO).
Among many options for an exit strategy is a plan to liquidate the assets of a business. This option works well when an owner wishes to divest completely of a business while moving on to another venture or pursuing retirement.
7. Declare bankruptcy
When debts are high and all possible options have been exhausted, bankruptcy is a final resort. The bankruptcy process requires surrendering property that is then sold to a trustee, with proceeds being distributed among creditors.
Consider personal goals prior to choosing an exit strategy
Not every exit strategy is suitable for all business owners, nor for all types of businesses. A successful exit strategy can be as simple as someone buying your business, however, the reality is that other options can be more suitable when financial or personal goals are taken into consideration.
Small business owners that want to maintain a legacy often prefer leaving their business to family members, selling it to employees, or selling a stake to investors. These options ensure the continuity of the business.
Other owners that started the business for the sole purpose of making money will likely not have an issue with merging the business, selling it off, liquidating it, or even declaring bankruptcy in the case of a high debt load.
Timing your exit strategy makes a big difference
Rarely do people plan their exit strategy during the initial business planning stages; however, in some cases, it is a good idea. Individuals wishing to earn a maximum return on their investment typically benefit from planning the exit strategy as soon as possible.
The right accounting firm can help you strengthen the financial fundamentals of your small business in the present, so you can maximize the potential profit at the exit. Contact us for a free consultation.