Exit strategies are something that every investor in a business looks for. But even if you are running a one person sole proprietorship, you need an exit strategy. For you, as for any investor in a business, the questions are the same when it's time to move on. How are you going to get your money out of the business? And how much money are you going to get?
Having an exit strategy worked out in advance helps ensure that you like the answers to those questions and gives you some control over your small business's future. Here are six exit strategies for small businesses to choose from:
1) Liquidation
This is the close up shop and sell all the assets exit strategy. To make any money with such an exit strategy, your business has to have valuable assets to sell, such as land or expensive equipment. And profits from selling assets have to go to pay creditors first.
Still, it is an option. And for small businesses, especially those that are dependent on the performance of a single individual, liquidation is sometimes the only option, as there's really nothing else to sell. If you're in this position, you may want to spend some time retooling your business so that it could be operated by someone else – making it a business someone might want to buy.
2) Keep your business in the family
The dream of many small business owners, keeping your business in the family ensures that your legacy lives on. As an exit strategy, it can also give you the opportunity to groom your own successor and even perhaps give you some continued say in the business.
On the downside, developing a family succession plan can be enormously difficult because of the emotions and issues involved. (For more on these issues and tips for successfully passing your business on to family, see Family Business Succession Planning.)
3) Sell your business to employees
Current employees and/or managers may be interested in buying your business. Arranging an employee buyout can be a win-win situation as they get an established business they know a great deal about already and you get enthusiastic buyers that want to see your business continue to thrive.
One way of setting up this exit strategy is through an Employee Share Ownership Plan (ESOP), a stock equity plan for employees that lets them acquire ownership in a company.
An employee buyout doesn't have to involve a stock equity plan though. It might be as simple as having one of your current employees take over the business.
4) Sell the business in the open market
This is the most popular exit strategy for small businesses. At a certain point in time, often when he or she is ready to retire, the small business owner puts the business up for sale for a certain price - and hopefully walks away with the amount of money she wanted to get for it.
If this is your exit strategy, you should spend some time grooming your business for sale, making it as attractive as possible to potential buyers. See 5 Tips for Selling a Business for more details.
5) Sell to another business.
Positioning your small business to be a desirable acquisition can be a very profitable exit strategy. Businesses buy other businesses for all kinds of reasons, from using a new acquisition as a quick path to expansion through buying out (and getting rid of) the competition.
The trick to success with this exit strategy is to target your potential acquirer(s) in advance and position your company accordingly. And of course, convincing your acquirer that your small business is worth what you want for it.
6) The IPO (Initial Public Offering)
While not suitable for all small businesses, the IPO can be a viable exit strategy. Taking your company public can be extremely profitable. However, depending on how the IPO is structured, you may or may not be able to withdraw any of your capital at the time as new shareholders may want to see all the money raised by the IPO be used to expand the business.
If an IPO as an exit strategy interests you, Industry Canada's Exit Strategies and Exit Values tells how to calculate the residual value of the company at the time of the offering.
The Best Exit Strategy
The best exit strategy is the one that best fits your small business and your personal goals. Decide first what you want to walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then an exit strategy such as family succession or selling to employees might be best for you.
Whichever exit strategy you choose, you need to start working on it. Planning your exit strategy in advance gives you the time to do it right – and maximize your returns.
