Answer: Most small business owners don’t have a business plan, marketing plan, strategic plan or a plan for exiting their business when the time comes. This is not unusual. Many entrepreneurs come to SCORE to learn how to start a business but rarely do business owners consider mentoring as they plan their exit. Sooner or later business owners will confront the question of, “what do I do with my business?” Do I sell my business? Have my children or relatives taken over the business to keep it a functioning enterprise? Or prepare an employee to take over the day-to-day with an ultimate sale? Or do I just liquidate?
Part of the planning process in starting a business is creating an exit strategy. When planning the possibilities up front, the final decision, and the act becomes a more manageable condition. At launch it seems difficult to consider “exit,” but considering the options early, forces a business owner to think through the various alternatives that will cover short and long term goals, asset protection, the age of exit, tax, and legal consequences.
Here are seven strategies for exiting your business:
Shutting down / liquidation “We hate this business” or “we’ve got to get out of this place.” You hate the rat race and have no succession plan. You may be losing money and using your retirement savings to keep the enterprise afloat. The quickest exit strategy is to liquidate to get the most out of the business’ assets. It may not be the most profitable way to depart, but it is the fastest.
Sell to a 3rd party – To get the best return, selling your business to a third party is an option to consider, however, it may take time. From the time you decide to take this option, it may take several years to close the deal. A third party may be a financial investor rather than one that will run the business. This may entail continued connection with the business for 2-3 years.
Sell to your partner – With this option, you have someone who is familiar with the business which is good and bad news since they know the business issues and condition as well as you which may reduce your final financial reward.
Sell to a competitor – Competitors are familiar with the industry and what it will take to assimilate your business into theirs. They will understand economies of scale. But remember, if the sale is not closed, you have exposed your business and all of its issues to a competitor.
Sell to your employees – Some employees have the financial capacity to undertake a purchase or you can make the terms work for this option to become a possibility. They know the business, the customers, and the industry. They know how to make it a continuing entity.
Sell to a family member – If there is someone in your family that has an interest in the business, train them early on to learn everything about the business. This will ensure an orderly transition from one generation to another. Having a conversation early on to assess if they are interested, if they plan to stay in business for the long run is important. Do you need money from them or treat it as an annuity where you get your funds over a longer term? The BIG question: Are you willing to transition the business and step away allowing the next generation to run the business?
You might think about preparing your business for sale by:
Preparing a confidentiality agreement, so you feel more comfortable sharing sensitive business data. This is commonly termed an NDA, Non-Disclosure Agreement
Have the business valued by your CPA, Business brokerage or a CPA that specializes in business valuation, so you have a specific selling price.
Create a PowerPoint presentation describing the industry, competition, nature of the business, key customers
Generate accurate and historical financials (restated, if necessary to reflect the business without owner benefits, such as leased cars, life insurance, etc.to show the true profitability of the firm.
Three years of tax returns
Written policies and procedures so that an outsider can see how the business functions.
One rule of thumb is to keep the process confidential within your organization to reduce the risk of losing key employees for fear of the unknown in the sale of the business.
Part of the planning process for any business is an “exit” strategy to assure that you preserve the value of your business through the life of the business.