Exit Strategy

Exit Strategy & Succession Planning

Having an exit strategy for your business is different from succession planning, but they do go hand in hand. Your exit strategy is the specific way that you choose to divest your business. Succession planning ensures that your business continues to run smoothly after your business's key personnel move on to new opportunities, retire or pass away. Having an exit strategy and a succession plan worked out in advance is essential to smoothly transitioning your business.

Do you have an exit strategy for your business?

An exit strategy is something that every investor or lender in a small business looks for because they want to be assured that their money is protected.  Even if you’re running a one person sole proprietorship, you still need an exit strategy to insure that you have an out if you want to retire, leave, or if your business fails.  In order to determine the appropriate exit strategy for the business, the business owner should consider a number of factors including:

  • The role the business owner would like to play in the company in the future.
  • How much money the business owner will need when he or she leaves the business.
  • The future potential of the company.
  • Market conditions.

There are several options that are available to small business owners when it comes to exiting the business, and New England Small Business Consultants can help you make sense of which option is right for you.

Liquidation and close

Even lifetime entrepreneurs can decide that enough is enough.  One often-overlooked exit strategy is simply to shutdown, close the business doors, and liquidate.  Typically, businesses that are struggling to survive may choose to liquidate their assets.  Additionally, many small businesses, particularly those that are dependent on the performance of a single individual, choose liquidation simply because there's really nothing else to sell.  If you're in this position, New England Small Business Consultants can help you to retool your business so that it could be operated by someone else – giving you the additional option of selling your business should you choose not to liquidate.

While choosing liquidation allows a business to be wound up very quickly, liquidation has the lowest return on investment to the owner(s) - the only money from a liquidation sale is from the disposal of assets, such as land, equipment, or inventory - any goodwill value from client lists or other business relationships (which may be substantial) is lost.

Liquidation over time (Lifestyle Business)

In this scenario, the intent of the owner is to make as much money as possible without planning for future expansion.  The owner(s) extracts most or all of the profits out of the business over time instead of reinvesting profits back into the business to help it grow.  Expenses are typically kept to the bare minimum.  These businesses tend to be private and small in scale, and the owner dissolves the operation when it no longer is profitable or the owner wants to move on to a new opportunity.  Lifestyle businesses are suitable for owner(s) who wish to maximize their current lifestyle rather than aggressively expand their business.

Sell or transfer the business to a family member

The dream of many small business owners, keeping your business in the family ensures that your legacy lives on and provides a living for your heirs.  If you are considering passing your business on to your children or to other family members, there are a number of things worth thinking about and planning for, including ensuring that whoever is set to take over the business has the relevant skill set, is competent, and is committed to the future and success of the business.  If you intend to leave a profitable business to your heirs, it is a good idea to transfer ownership to them in an orderly way that will minimize your tax liabilities.

For more on these issues and tips for successfully passing your business on to family, see Succession Planning.

Sell to employees or friendly individuals

Current employees or friendly individuals may be interested in buying your business.  The fact that the buyers are close to you makes this both easier and more difficult to complete.  Easier because you have a much better knowledge of the buyer; more difficult because you tend to be less objective about a buyer that you know and are more likely to let your guard down in negotiations and planning.  Arranging a long-term buyout by employees can increase loyalty and greatly motivate your staff to make your business succeed.  The ideal prospect is someone who has more skills and interest in the operational side of the business and can scale it.

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.  However, an employee buyout doesn't have to involve a stock equity plan - it might be as simple as having one or more of your current employees take over the business with a straight purchase.

Sell the business in the open market

This is the most popular option and probably the simplest way to exit a business.  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.  This approach makes sense when an owner’s family members have no interest in taking over the business or when the owner can’t figure out how to take the company to the next level or meet new challenges that may have arisen.

Financially, the best time to sell your business is when sales and profits are increasing.  The market will then put a higher value on your business and motivate potential buyers.  The more potential buyers for your business, the better, since then you can then establish a fair market price.

If this is your exit strategy, New England Small Business Consultants can assist you in grooming your business for sale, making it as attractive as possible to potential buyers.

Merger & Acquisition (M&A)

Normally this means merging with a similar company, or being bought by a larger company and can be very profitable for all parties.  Businesses buy other businesses for all kinds of reasons, such as using a new acquisition to fast-track expansion, leverage synergies from complementary business activities, or simply buying out (and getting rid of) the competition.  This strategy is often employed by an owner who wants to leave the business gradually without selling it outright.  The down side of merger or acquisition is that the business owner may feel powerless in the face of business decisions made by the new management.

The key to success with this exit strategy is to target your potential acquirer(s) in advance and position your company accordingly.

Initial Public Offering (IPO)

While not suitable for all small businesses, the IPO can be a viable exit strategy.  In an IPO, you sell a portion of your company in the public markets.  You and your management team typically remain in place for a period of years, your investors and managers may be able to sell some stock, and your company continues to operate much as it has in the past.

While taking your company public can be extremely profitable, the IPO process is both costly and labor intensive, and usually requires an upfront investment of well over one hundred thousand dollars.  Public companies have much higher compliance standards and have to produce detailed reports on their financials, staffing, marketing, operations, management, etc..

Your New England Small Business Consultants business advisor will work with you to evaluate the following considerations while developing your exit strategy:

  • Consider your future role in the business.
  • Evaluate your liquidity needs.
  • Think about your company's future potential.
  • Consider the impacts of taking your company public.
  • Assess market conditions.
  • Consider a dual-track approach to capitalize on the most attractive opportunity.

The larger and more dynamic your company is the more intentional and deliberate you must be in your exit planning.  New England Small Business Consultants helps senior executives and business owners to map out an exit strategy that will create the least disruption to the culture or to the successful operations of the business.  Then, at the appropriate time, your New England Small Business Consultants business advisor will guide you as you implement your exit plan.

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