Creating an Exit Strategy for Your Small Business

When starting a business, many entrepreneurs plan to run the business for a long period of time without having the thought or the plan to actually leave their enterprise. For the majority, leaving a business one is working hard to build is the last thing to think about. 

However, at some point, you will need an exit strategy for your business and it’s important to have one in place before that time comes. A business exit strategy is a plan for when you want to leave the business and contains information on what will happen to the business after you have left. 

If your business is not sole proprietorship, having an exit strategy would mean ownership transfer when one of the business owners decides to retire. 

When you decide years later to leave your business and move on, an existing exit strategy would save you stress, time and money. 

Why you need an exit strategy

Business gurus say that a business exit strategy is as important as a business plan. Apart from saving you from stress and helping you exit the business profitably, an exit strategy will help you;

• Protect the value of the business you have created.
• Develop a strategic plan for the expansion of the business.
• Create a possible source of income in case of retirement or other unavoidable circumstances.
• Make the change/transition for your management team and other stakeholders as smooth as possible. 
• Increase the value of your business in the future.

Things to consider when creating an exit strategy 

An exit strategy is not something you just wake up and draft. Creating an exit strategy earlier gives you the tie to smoothen things out and to help you make decisions and put things in place that will support your ultimate exit.

Your exit strategy needs to serve your personal, business and financial needs. To create an effective strategy, there are a few things you need to put into consideration. 

• The amount of time you want to be in your business or do you want to be involved in the business as long as it exists. 
• Your current financial state and goals.
• Any investors or creditors who must be paid, the process and the time needed to do that. 

Types of exit strategies

When it comes to exit strategies, you have several options you could choose from. There is no right or wrong way to leave your business. All you need to do is to figure out the best option for you. 

1.Liquidation

With liquidation, you close your business and sell or redistribute the business’ assets to shareholders or creditors. You could use the money you get from selling your assets to settle your debt and payout your shareholders. 

There are two ways to go about liquidation. One, closing and selling asset as soon as possible. You would need to bring an expert on board to ensure you are selling you assets the right way, paying off all your debts and finalizing other legal and financial commitments. This option is a pretty simple and depending on the assets, you can close sales quickly. The drawbacks of liquidating as soon as possible is you can only benefit from the asset you can sell such as equipment, inventory, etc. additionally, if you have creditors, you must pay them first from any money you make 

Two, you could liquidate your assets over time. With this liquidation option, you pay yourself until your business has no more funds then close your business- run your business finances dry by paying yourself. Therefore, instead of reinvesting your revenue into the business, you take funds out over time. The main advantage of liquidating over time is you end up having cash flow to maintain your lifestyle after closure. 

2.Selling the business to someone you know – friend, family member, etc.

Selling your business to someone you know is another way to exit your business. This can be a family member, a friend, a current or former business partner, an employee, or a client. 

The buyer is always willing to pay off the business steadily under a seller financing deal. This allows the seller to continue earning money as the buyer takes over management of the business without having to make a huge upfront investment. 

When selling to a family member or someone else you know can be complicated. You need legal and financial guidance in preparing the transfer.   

When selling to someone you know, there could be less disruption to the business if the person you sell to familiar with the business. You could also remain involved in the business if you want to. However, this option can put a strain on family relationships or friendships. Additionally, you might be tempted to sell your business at a discounted price and this will be a loss since you won’t recoup the full value of your business. 

3.Selling the business in an open market

Purchasing an existing business may be an appealing choice for entrepreneurs who want to have a business but don’t want to start a new business. This is because it’s less expensive than starting a new business 

Buyers benefit from the business’s current operations, revenue stream and cash flow. This also includes the business’s established customer base and recognition. 

If you plan to sell your business in an open market, it’s important to plan ahead of time to make sure your business is as appealing as possible in order to attract potential buyers. If your business is in a good financial shape, buyers would be attracted to your business. 

Finding a buyer for your business in the open market can however be a long process. It can also be difficult to value a business and you might end up selling for a lower price than you wanted.

4. Initial Public Offering (IPO)

With IPO, you decide to sell your shares to the public. This can help you raise additional funds but the process can be very lengthy and costly. However, becoming a public company can be very profitable. It can also help boost publicity, reputation and brand awareness. 

On the other hand, going public involves additional responsibilities such as filing reports and disclosing details about the business finances, operations and management. Additionally, the business shareholders have a say in how the business is run and this can limit your ability to manage the business. 

5.Selling to another business

Other businesses can be interested in buying off your business. This might be a competitor or a similar business and your business might be the perfect match for them. 

When you sell your business, the buyer often incorporates or merges the company’s services into their own offerings. In most cases, as the business owner, you are given a position in the new company after acquisition.

The buyer can be willing to pay a high price for your business.

Selling to another business can be a challenge especially when the cultures and systems of the two businesses differ.  

Final Thoughts…

Many entrepreneurs hire consultants to help them in making the right decisions.  You could consider consulting an expert for assistance in creating an exit strategy for your business. 

If you have time to plan for your exit strategy you should take time to evaluate all the options you have. Remember to choose a strategy that fits with your goals.