7 Exit Strategies For Small Business Owners and Entrepreneurs

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7 Exit Strategies For Small Business Owners and Entrepreneurs

This is something which is crucial for anyone who invests in a small business. And even if you just have a sole proprietorship, you too should have an exit strategy in place. So just as with any business investor, when it is time to move on, the questions are identical.

  • How would you be able to take your money out from the business? And
  • How much money would you be able to retrieve?

If you have a pre-planned strategy, then this will help guarantee that you are happy with the answers to these two pertinent questions. Moreover, it will enable you to have some command over the future of your small business. So let us now put the spotlight on 7 different exit strategies that can be adopted by small businesses:

Number 1: Liquidation

This strategy refers to selling all your assets and shutting up shop. In some cases, this is the only option on the table for small businesses, particularly in cases where the business is reliant on a single person, and there is no longer anything remaining to sell. If you find yourself in this predicament, in order to make the business salable, you may consider devoting some of your time to re-tooling it so that someone else could run it.

 Pros

  • It is simple
  • It will not take long to wrap the business up (subject to the sale of company assets).

 Cons

  • Liquidating the company’s assets means that the owner/s will only receive the lowest returns on their investment. The only funds they can derive from this strategy is disposing of various assets including inventory, equipment, and land. Another problem is that any goodwill value from business relationships such as client lists is forfeited, and this could mean a significant loss.
  • Even if the market is not depressed, the value of second-hand business assets for things such as equipment and machinery, may be extremely low.
  • If there are any creditors, they are entitled to be first in line for claiming money from asset sales.

Number 2. Liquidation Over Time

With this option, the owner/s take either all or most of the business’s profits over time – this is prior to ultimately closing or selling the business, as opposed to reinvesting the profits for enlarging the company. In most cases, this is achieved by facilitating large dividends or salary draw-downs over a number of years prior to ultimately winding down the business. Moreover, in  the case of owner/s who prefer to forgo an aggressive expansion of their business  in favour of maximising their current lifestyle, this is the best choice.

 Pros

  • Lifestyle – maximising regular cash withdrawals for personal use as opposed to having to wait for a lump sum after selling the company

Cons

  • If the profits are drawn out, then the businesses’ ultimate sale value and growth potential will be reduced.
  • If there are any other shareholders, unless they are compensated in a similar way, they may well object.
  • Profits that remain in the company increase the businesses’ value, and when the business is sold, will be taxed as capital gains. By contrast, salaries are taxed as personal income.

Number 3: Keep your business in the family

A lot of small business owners go the route of setting up a limited company, with intentions of keeping said company in the family. If the business is successful, this guarantees that the owner’s legacy continues on, and supplies a living for their heirs..

Pros

  • Preparing a family successor can result in an easy transition.
  • This may enable you to still be involved in the business in a capacity of an adviser etc.

Cons

  • It can be extremely difficult to develop a family succession plan, and can result in infighting amongst relations in regard to their participation in the business or/and ownership.
  • Family members may not be interested in, or possess the relevant skills to take on the business.
  • Customers might not approve the direction the company is taking, and may not like the new management.

Number 4: Sell the Business to Employees and/or Managers

Your manager/s or employees could be enthusiastic about acquiring your company.

Pros

  • The company can do extremely well because managers/employees will be taking on an established business which they are acquainted with.
  • Offering a buyout over the long-term can generate more loyalty among employees, and they can become extremely motivated to work hard to ensure the business is successful.
  • You may be able to keep a share in the company, and remain on in the capacity of an adviser etc. 

Cons

  • Managers/employees may not have the suitable skills to take over the company.
  • Customers might not approve the direction the company is taking, and may not like the new management.

An Employee Share Ownership Plan is a popular way of organising this exit strategy. This is done via a stock equity employee plan for employees that enables them to take up ownership in a company.

An employee buyout does not however, necessitate arranging a stock equity plan. On the contrary, it could be as easy as organising a straight purchase from one of the employees.

 Number 5: Sell the Company on the Open Market

 For small businesses, this is the most popular choice. When the owner is ready – for example, at retirement age, they advertise the business for sale at a price they think they can achieve, and if they are lucky, they receive the amount they want.

Pros 

  • A company that is profitable should attract buyers and sell promptly.
  • In order to maximise the return to the owner/s, when evaluating the business for sale, goodwill and assets can be integrated.

Cons

  • A business which is only marginally profitable, can be extremely difficult to sell – and research indicates that just 20% of all listed businesses up for sale are actually purchased. Therefore, this process can be very long, and may not be successful.
  • It can be difficult to value a business, and the selling price could be far lower than anticipated. 

To that end, if you are making this your exit strategy, it is wise to devote time to preparing to sell your business, so that it is an attractive proposition for potential buyers.

Number 6:  Sell to Another Company

It may prove profitable to position your small business as a desirable acquisition. Companies purchase other businesses for various purposes such as using a newly acquired business to fast-track expansion, adding complementary business activities that can generate synergies, and removing  the competition.

Pros 

  • A business competitor may be extremely motivated to buy your company for the reasons just stated, thereby giving you maximum profit and a speedy sale.

Cons

  • If the person who buys your company only acquired it to mimimise the competition, once they have purchased it, they may close it, thus making any staff unemployed.
  • A prospective purchaser, whose sole interest is putting an end to the competition from your business, may just be contacting you to gain access to your financial data and client list, and may not genuinely want to buy the company.

With this exit strategy, the route to success is to target any possible purchasers beforehand, and position the business accordingly. Further, you need to be sure that the prospective purchaser is confident that the price you are asking for the business is appropriate. 

Number 7: An Initial Public Offering

 An Initial Public Offering (IPO) may be a viable exit option, depending on the type of business you have. 

Pros

It could be very profitable to make your company public. 

Cons

  • It is an expensive and long procedure to conduct an IPO.
  • According to the structure of the IPO, there is no guarantee that you can enjoy the capital acquired right away. This is because new shareholders may insist that the funds which have come in via the IPO are utilised to grow the business.
  • Public companies are obliged to commit to much higher reporting and compliance standards. Being an owner, if you have any former “irregularities” in your accounting, or failures in disclosure, you could be made personally liable, or open to prosecution.

In summary, in order to determine the best exit strategy, you must have a good look through all the options, weigh up the pros and cons, and see which is the best fit for your personal and small business goals. First of all, deliberate on what you want to take away form the business.

If the answer is only money, the best options are selling to another company, or putting the business on the open market. Conversely, if you really want your company to continue on, and have a legacy, then selling out to employees/managers, or arranging family succession, could be the best picks. Whatever way you go, it is important to get working on it as soon as possible – if you plan in advance, then you will have sufficient time to do it correctly so you can maximize your returns.

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