Exiting or Selling a Business
What is a successful business exit strategy?
A business exit strategy is an entrepreneur's strategic plan to sell his or her ownership in a company to investors or another company.
It’s never too early (or too late) to start planning your exit strategy. By not proactively planning an exit strategy, business owners, their heirs or their successors may find that future options are limited. The fact of the matter is that no one person or business last forever. Entrepreneurs without an exit strategy will, at some point, exit from their businesses unprepared. Death, disability, family circumstances, and divorce from partners sometimes lead to an early exit.
To plan a proper exit strategy, consider the following steps:
- Determine the company's financial value and stability. Prepare an accurate account of the businesses and your finances. Consider the legal points, tax implications and protection of assets. Consult with professionals. Large or small, professional fees will be in proportion to the size of your business.
- Choose the timing of the sale and Plan for your future after the sale.
- Market the sale and speak with investors (there are companies who can assist you in this process). Approach your partners, investors and stakeholders, if any, to share your intent to exit the business. Create a strategy that advises the partners and investors on how they will be repaid.
- Structure the deal. In a typical small business seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because
- The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
- The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
- The transition for your employees and customers will be a smooth one, since the buyer likely already has a stake in the business.
There are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace. The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and The transition for your employees and customers will be a smooth one, since the buyer likely already has a stake in the business. Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target. The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.
- Choose new leadership (when applicable). Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans.
- Tell your employees. When your succession plans are in place, share the news with your employees and be prepared to answer their questions.
- Inform your customers. Once you have a buyer, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.
- Liquidate and Close the business. It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money. There are two main ways to liquidate your business:
1- Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry, and then closing up shop. The benefit to this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.
2- Close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.
- Bankruptcy. Seek professional help.
- Top 4 Considerations When Selling or Closing a Business (download transcript / Register for Webinar)
- Asset-Based Valuation and Market Value Approach: What’s the Difference Between These Valuation Methods?