How to Construct a Successful Exit Strategy for Your Business
Having a well-thought-out exit strategy for your small business may not be the first thing on your mind. You’re too busy managing the day-to-day needs of your employees and customers, right?
You must keep in mind that you are going to want to have as much input and control over this aspect of the life of your business. You don’t get do-overs for this one. How will you construct the process of your exit? How much do you wish to profit from the transaction? You are going to want to think through what plan will put you in the driver’s seat as much as possible.
There are several exit strategies that a small business owner can consider. We’ll discuss a variety here.
Sell to One or Several Employees
You may have some employees and managers that are interested in taking over your company. This could be a positive in that your employees are already familiar with the business and the transition wouldn’t require as much hand-holding as it would with a third-party buyer. It’s also possible that with this arrangement you could if you desired, stay connected in an advisory role of some kind with the business. This sort of transfer of ownership could be done through an Employee Share Ownership Plan (ESOP), a process of acquiring a business through a stock equity plan. The transaction could, however, be as simple as a direct purchase by an employee or employees.
Transfer to a Family Member
It would seem very reasonable for a business owner to want to keep the fruits of his or her sweat and tears within the family. Transferring to a family member is a way to preserve a legacy while providing a living for future generations. This method can work well, especially if the family member or members in mind for succession are already familiar with the business and have worked there. It also means that there may be more agreeability to you maintaining some sort of hand in the business be it as an advisor or part-time worker. There are some possible hiccups, however. There can be disagreements as to the who will take on what responsibility when it comes to multiple family members working together within a business. There could also be a lack of training or ability to perform the tasks of the business as it’s been delivered to customers previously, and this could lead to customer dissatisfaction with the new ownership.
Liquidate (Gradually or Quickly)
Sometimes, particularly when the business is dependent on one person’s performance, closing the doors and selling the remaining assets may be the only option. Liquidation allows for some quick cash, but it has its pitfalls. For one, liquidation reaps the smallest return on investment for the business owner. Funds received during this process come from the sale of assets such as inventory and equipment. Any value from the relationships made during the performing years of the business is likely lost. Also, if there are any creditors, they get paid first from the sale of assets.
A business owner can choose to liquidate slowly over time, withdrawing profits through dividends or large salary payouts. Having access to the cash from your business is certainly a plus for this method since there is no waiting around for the lump sum that comes from a sale. On the flip side, other shareholders may object to this if they aren’t equally paid out. Also, where profits left within a business are taxed at a capital gains rate when a business is sold, funds extracted before are taxed at the rate of personal income, which is something to consider when making your exit plan.
Open Market Sale
Selling your business on the open market to a third party is often advantageous in commanding a higher price for the sale. A profitable business with solid relationships and assets incorporated into the sale can bring a nice price to the seller. This is often the choice of business owners who wish to no longer be involved with the business. A possible challenge to consider is the difficulty of assigning a value to your business and finding a buyer. It can take a long time to find someone with the interest and funds to obtain your business. If you forsee that you will want to sell your business in the near future, take time to assess what measures can be taken to bring a higher value to your business.
There is no one size fits all strategy for exiting your business. It depends on what your business is and what your personal goals are. Regardless of what your specific goals are, taking the time to start planning early will allow you to have the most control over how the process is handled and what you will walk away with. It’s a good idea to discuss your options with your fiduciary financial advisor, so a variety of avenues and outcomes are considered.
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