Being a business owner involves preparing for a number of different scenarios, including leaving your own operation. If you just started your business, you may not be thinking about an exit strategy yet, but having a plan for your eventual departure can help you avoid problems down the road.
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What is an exit strategy and why does it matter?
An exit strategy is a plan that explains how you’ll leave or sell your share of your business. You can develop a comprehensive written exit strategy, or add a brief exit strategy section to the financial component of your business plan.
The purpose of creating an exit strategy is to determine how you’ll transition out of owning your business, while minimizing your losses and maximizing profits. Despite what you might think, you don’t have to be close to retirement to get your plan in order. An exit strategy can inform the decisions you make about day-to-day operations and long-term company growth, so it’s helpful to get started as early as possible.
Here are some reasons to create an exit strategy:
- You’re just starting your business and want to be prepared for the future.
- You’re getting ready to retire.
- Your business is struggling and you’re planning for worst-case scenarios.
- You’re looking for business financing.
- You’re bringing on investors.
- Your business is a partnership.
- You’re contemplating an offer to sell your business.
- Your business has changed over the years, and you need to update your initial exit strategy.
5 common exit strategies
There’s no one-size-fits-all exit strategy that works for every business. The one you choose depends on your goals as a business owner, your resources, and your business’s overall financial health. Here are five common options to consider:
1. Merger or acquisition
If you want to put your business in the hands of another company, you may want to explore a merger or acquisition.
A merger is when two existing businesses agree to become one. You could merge with a business that has similar or complementary offerings to yours, reaches the same customer demographic, or aligns with your mission. Mergers have the potential to help you:
- Expand your customer base
- Offer new products or services to customers
- Increase revenue or sales
- Reduce operations expenses
- Reduce competition
- Increase company value for shareholders
An acquisition, on the other hand, is when an existing company buys 50% or more of your business in order to gain control of it. As with a merger, another company might want to purchase your business to enter a new market, increase their offerings, reduce competition, or set themselves up for rapid growth.
An initial public offering (IPO) is when a private company opens its stock to the public for sale. As a business owner, this means you’ll sell part or all of your company ownership in order to offer shares to public investors. If your company is successful enough to generate significant interest from an IPO, you stand to gain a lot of money on your way out.
However, the process of qualifying and preparing for an IPO is challenging. Not only do you have to meet rigid requirements from the Securities and Exchange Commission, you also have to undergo valuations and financial audits, work with an investment bank to set the price of your stock, and assemble a marketing team to promote your impending IPO.
That’s why most companies—especially small and medium-size businesses—don’t have the right qualifications or resources to make an IPO work.
One of the most popular exit strategies is selling your business to someone you know personally or professionally. If you own a family-run business, for example, you may want to sell your operation to your child or a relative. You could also sell your business to an employee or local entrepreneur who’s expressed interest in taking it over.
Depending on your relationship with the potential buyer, the process of selling your business could be smooth and friendly or difficult and contentious. Either way, you’ll have to work with a lawyer to prepare an agreement and negotiate the price and conditions of the sale.
4. Partner buyout
Another way to leave your business is to sell your share of the company to one of your business partners. A partner buyout is a good option if you want out of your responsibilities, but still want to see your business continue under the same general leadership.
As with any business sale, you’ll have to hire a business attorney to draw up a contract, discuss the financial terms with your accountant, and maintain a record of your agreements and conversations with your partner.
Liquidation is the process of selling or redistributing your business assets to creditors and investors. Liquidation essentially dissolves your business, which is why it tends to be a last resort for many business owners.
What to evaluate when choosing an exit strategy
Exiting your business is rarely straightforward. There are advantages and disadvantages to every exit strategy, so it’s critical to weigh your options carefully before making a decision. Here are four key factors to evaluate:
1. Your business structure, competition, and market potential
Certain exit strategies are more favorable for certain types of businesses. For example, partner buyouts can work well for partnerships and multiple-member LLCs, while IPOs work best for C Corps. Other factors, like the state of your industry, your current competition, and your customer demographic all play a role in how desirable and potentially profitable your business is to a prospective buyer.
2. Your vision for the future of your business
How do you envision your business operating after you leave? Do you want to stay involved to some extent, or remove yourself completely? If you want to keep your business’s legacy intact, for example, you should aim to sell it to someone who shares your same goals. On the other hand, if you don’t care what happens to your business, you have more flexibility to explore different opportunities.
3. Your business and personal finances
It’s important to consider your business’s overall financial health as well as your personal financial goals. Think about whether or not your business has debts, whether or not you’re personally liable for those debts, what your retirement plan looks like, and what type of profit you stand to make from selling your business.
4. Your time and resources
Some exit strategies require more time and money than others—not just during the negotiation period, but during the actual transition as well. Mergers, acquisitions, and IPOs can take months to prepare for, while partner buyouts and sales can happen relatively quickly.
How to prepare for an exit
Whether you want to leave your company today or 30 years down the line, it’s smart to stay prepared with certain practices. Here are a handful to maintain:
- Document your business process and systems: Staying organized doesn’t just make your business more desirable to potential buyers; it also helps ease the transition between ownership. In addition to creating an employee guidebook and updating your vendor contracts, make sure you outline your processes for tracking inventory, capturing leads, managing customer relationships, and maintaining internal records.
- Organize your financials: Work with your business accountant and financial team to streamline payroll, organize tax documents, track invoices, and generate regular financial reports.
- Get outside opinions: Every few years, consider bringing in a financial auditor to conduct a valuation of your business. You may also want to hire a business consultant to assess your company’s operations and hiring procedures to ensure you’re running the business in a sustainable, efficient, and inclusive way.
- Take inventory of your physical assets: Maintain a record of your business’s assets, including equipment, machinery, and property.
- Maintain compliance: Make sure your business is up to date with insurance plans, business permits, and special licenses.
- Keep an eye out for opportunities: Beyond regularly networking, take note of interesting companies and like-minded entrepreneurs for merger or sale opportunities.
Update your exit plan: Creating an exit strategy isn’t a one-time task. Take the time to review your exit plan every five to 10 years to assess its viability and consider new possibilities.