Growing Your Business
GUIDE: GROWING YOUR BUSINESS > PART SIX
Exit Strategies for Your Business
When will you leave your business?
Ideally, people start businesses with the end in mind. But in the real world, priorities change, situations shift and business owners may need to separate from their ventures unexpectedly.
No matter your situation or schedule, it’s a good idea to think about how you might exit your business before that time actually comes.
“Think of an exit strategy as a long-term plan for your company,” says Chanté Keller, Network Navigator at KCSourceLink. “What do you want your company to achieve? Do you plan on being a part of your company for your whole life? Do you want to grow fast and exit? Do you want your company to be around for your customers when you’re gone? Answers to these questions should drive your strategic plan.”
Leaving your company can be a positive experience that opens new doors. Perhaps you retire, or you exit to start a new venture. Or maybe you close up shop with valuable experience that will drive the next phase of your career. No matter what lies ahead, you need a plan.
What does an exit strategy do?
Every stage of business ownership requires a strategy. For many entrepreneurs, it’s obvious that they need a plan to start or grow a business. But many overlook that they need a strategy to exit the business, too.
Having an exit strategy in place can:
- ensure a smooth transition for your employees/stakeholders
- provide income for you if you retire or become disabled
- protect you, your estate or your family from excess tax burden
- enhance the future worth of your business
- make your business attractive to prospective buyers
- create a direction for the next phase of the business’s growth
In order to have the most effective exit strategy, you need to keep it in mind and update it as necessary throughout the life of your venture. Some steps to increase the value of your business — and therefore warrant a higher sale price — can take years to execute. The legal structure of your business can impact the tax implications of an exit. And risk management has to be part of the picture as well.
An exit strategy will also keep you prepared for the great unknown. If you need to leave for family reasons or you receive an unexpected offer to buy the business, it pays to be ready.
Business exit options
According to Jack Harwell, a business adviser with the Kansas Small Business Development Center at Johnson County Community College, there are four basic strategies to exit a business.
“The owner’s objectives for the exit dictate which strategy is best for the circumstances,” Jack says. “There are considerations for whom or what the owner wants the transition to benefit and how he or she wants to be involved in the business going forward, if at all.
“Also, the tax implications of each exit strategy are different and usually one of the biggest drives for choosing which strategy would be best.”
Here are the four strategies and the pros and cons of each.
Sell to a new owner
When you think of exiting your business, this is probably the option that pops into your mind. Someone approaches you with a large bag of money, you shake hands and the deal is done. It’s actually a little more involved.
With a merger or acquisition, you’ll sell your business to another company. Perhaps they are looking for a new investment, or maybe they’re already in your industry and want to increase their market share, eliminate competition or gain new technology or talent.
The benefit is that as a seller, you control pricing and negotiations. Multiple bids may even drive up the price. However, these deals are generally time consuming and often fail. If you’re going this route, it’s a good idea to work with a business broker.
Transfer ownership to family
Keeping the business in the family is more than just handing over a set of keys. This type of exit takes just as much planning as other options. While it can be appealing to think of family continuing your legacy, it’s important that they are up for the job.
Family members can already have a thorough understanding of the business, and a solid strategy can transition them into leadership roles years ahead of your exit. You get to maintain a relationship with the business, whether it’s in an official consulting capacity or as an informal advisor. However, mixing business and personal relationships can cause financial and emotional stress for all involved.
Sometimes the best buyer is right down the hall. Many entrepreneurs find that selling to people who already work for the business provides peace of mind and an easy transition.
Selling to management often means a simpler transaction than selling to an external buyer. However, there may not be a current team member (or small group of employees) interested or able to step up.
Employee ownership is growing in popularity and offers a unique twist on the internal sale exit strategy. In this model, employees collectively own a percentage of the business, either through employee stock ownership plans (ESOPs) or worker cooperatives. Because workers have a personal stake, businesses prosper. There can be tax savings as well. The Missouri Center for Employee Ownership provides information and expert guidance on all things employee ownership.
Liquidate and close
For struggling businesses, this is a common exit plan. You sell off all inventory and assets and close up shop. Any cash is used to pay off debts and shareholders.
This is about as final as an exit strategy can get. After this process, the business is gone. It’s quicker and simpler than other exit plans, but liquidation generally doesn’t net you a big profit. Plus, it can damage relationships with customers, employees and partners.
If you close your business, you’ll need to officially dissolve it with the state and cancel registrations, permits, licenses and business names. You’ll also need to comply with employment and labor laws and maintain tax and employment records. This guide from the Small Business Administration provides more detail, and the IRS has a helpful checklist.
How to develop the best exit strategy
An effective exit strategy is a team effort. You are an expert in your business, but you probably aren’t an expert in selling a business. Plus, there are only so many hours in the day.
To create the best exit strategy, most entrepreneurs need support from professionals experienced in business transactions. These include an attorney, CPA, financial planner, banker and insurance broker. You might also want to work with a Certified Exit Planning Advisor (CEPA®), who can act as a general contractor or quarterback, coordinating all of the providers and pieces of the plan.
The best exit strategies start with clear objectives. You should be able to answer these questions:
- Whom do you want the transition to benefit? For example, do you want to retire with a tidy sum? Do you want the business to grow and serve new customers? Or is your priority creating opportunities for family or employees?
- How do you want to be involved with the business moving forward? Are you looking for partners? Do you want to slowly ease out of the business? Or are you ready to walk away completely?
- What do you need to leave the business? Is there a dollar amount you need in order to fund your future plans? Do you need to make sure certain leadership is retained? Or do you have debt that must be addressed?
Work with your team to consider your options and choose a path forward. Detail all actions necessary for the exit. Let the experts help you determine the true value of the business. Prepare your finances for close scrutiny. And get all of your paperwork in order.
This video provides an overview of how to create an exit strategy. Joel Barrett of the Missouri Small Business Development Center at UMKC has a conversation with two entrepreneurs: former retail owner and current business coach Jill Hathaway and former high-end franchisee Henry Graham. Learn what they know now that they didn’t know then and what advice they have for other entrepreneurs.
Exit strategy resources
You don’t have to create an exit strategy alone — and you shouldn’t. This is definitely an area where working with specialists will pay off in the long run, for both your wallet and your sanity.
If you’re wondering how to get started with your exit strategy, a KCSourceLink Network Navigator can provide a free, personalized checklist of next steps. Or a business development specialist at the Small Business Development Centers at UMKC or JCCC can help you figure out what strategy best meets your goals. These mentors will work with you for free and even help you develop creative ideas for staying in your business if that’s what you’d like to do.
Here are some of our favorite resources for figuring out what exit strategy is right for you and how to make it happen:
- Checklists to Close Or Sell Your Business — Small Business Administration
- Business Succession Readiness Assessment — University of Missouri Extension
- Exit Strategies Overview — Missouri SBDC at UMKC
- Selling Your KC Business? 5 Expert Tips to Help You Get the Most Money from the Sale — KCSourceLink
- Exit/Buy/Sell — Kansas Small Business Development Center at JCCC
- Why All Entrepreneurs Need an Exit Strategy (and How to Plan Yours) — Kauffman FastTrac
- Value Opportunity Profile — Kansas Small Business Development Center at JCCC
- How to Create an Exit Plan for Your Business —S. Chamber of Commerce
- All KC Small Business Owners Need an Exit Plan; Here’s How You Can Craft One Now — KCSourceLink
- Putting a Value on Your Business: Why and How — SCORE
- Ownership Transition Initiative
- When Should Business Owners Start Developing an Exit Plan? Here’s What You Need to Know — Entrepreneur