In this 9-minute read:
- Top business exit strategies to consider
- Pros and cons of common exit strategies
From the time you start planning your small business, you should have some idea of the type of exit strategy you’ll use. This is particularly important if you are seeking out investors. But even sole proprietors and mom-and-pop shops should start planning their exit strategies or business succession early.
This process can be lengthy, so it’s a good idea to know how you plan to leave your business years, and sometimes even decades before it’s time to go.
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Best exit strategy options for small businesses
We’ll walk through several common business exit strategies along with the pros and cons of each one so that you can narrow down the best solution for your business.
Selling your business or legally transitioning the ownership to a family member may be a good option for you if you have someone who is familiar with the business and how it operates. This is a great way to preserve the family name and legacy and to help set your business and family up for success.
There can be drawbacks to this method too, so don’t just plan on passing your business on to any family member.
A few tips for success in family succession:
Plan early. You’ll want to start planning this several years in advance so that you can make sure you are passing the business on to the right person. This will give you the opportunity to train someone to take over or to see if you need to look at different options.
Involve your family. If you plan to pass your business on to a family member, they should be involved in the discussion. You want to know if they are even interested and willing to put in the work it takes to become the next owner. And this is a good way to feel out if other family members might be interested.
Set realistic expectations. As much as you may want one of your children to take on the family business, they might not have the business skills or interest to run a successful business. Be open to changing your plan or considering extended family members.
Train the next owner. Don’t just write up the papers and be done with it (the process is never that simple anyway). Take the time to train the next owner and ensure their success, particularly if you’re not selling the business to them outright and have a financing plan with them.
Now let’s discuss some of the advantages and disadvantages of this exit strategy.
Pros of family succession
- Allows for a smooth transition by training a family member
- You can keep a hand in the business as an advisor or other agreed-upon role
- Preserve the family name/legacy
Cons of family succession
- It can lead to contention among family members if there are disagreements about who should take over or what portion of the shares they will have
- You may not have a family member who is interested or willing to take on this role
A management buyout is when you offer your business to a manager or senior employee. This can be a great alternative to family succession if you don’t have an interested family member, and it’s a great way to keep the same company culture alive and ensure continued success.
Depending on your business structure, there may be a couple of different ways to handle a management buyout. As a sole proprietor or single owner of an LLC you could sell your business or its assets to one of your employees. If you have a private corporation with shares, you can offer multiple employees ownership of shares and start grooming your next leadership team (also known as Employee Stock Ownership Plan or ESOP).
Tips for management buyout:
Plan ahead. This is helpful for any exit strategy, but particularly if you are looking for an employee that will do a good job of taking over the business. You’ll need to start training someone early on every aspect of the business.
Observe your employees. This goes along with planning ahead. Watch your employees to see who has that management and ownership potential. Not every employee will be a viable candidate. You may not have a single employee who is, so this is an important step.
Involve your employees. If you are considering management buyout as your exit strategy, you need to talk to your employees about it–or at least those who have the potential to take over. This will help you determine who has interest and is willing to put in the work.
As with every exit strategy, there are pros and cons to consider in a management buyout.
Pros of selling to employees
- They are familiar with the business and its customers
- Allows for a smooth transition because of their familiarity with the industry, customers, and company culture
- The sale can be quicker because you won’t have to train a new owner on all of the ins and outs of the company
Cons of selling to employees
- An employee may not have the capital to buy your business outright or the credit to get a loan, so you may need to finance the business over time or find another buyer
- You may not have any employees who are interested
- You may not have any employees who are qualified
Liquidation is the process of valuing out your assets and selling them. This is often the solution for sole proprietors and sole owners of small businesses. You take the time to value out each of your assets and sell them individually or as a package deal to an interested party.
Assets that you can sell as part of the liquidation process:
- Land or property
- Your brand assets (logo, print materials, swag, website, etc.)
- Customer lists
Tips for liquidation:
Start planning now. You’ll want to build up your assets (tangible and intangible) so that you have something worth selling when you plan to make your exit.
Seek assistance in valuing assets. It can be difficult to value the intangibles like trademarks, customer lists, and the goodwill that your company has developed. Seek out a professional who can help you value these items.
What are the pros and cons of liquidation?
Pros of liquidation
- Quicker process
- Simplicity of not having to transfer ownership
Cons of liquidation
- It can be difficult to negotiate the value of intangible assets, often leading to a smaller return on investment than other exit strategies
- Second-hand equipment loses a significant amount of value, again leading to a lower return on investment
- If you are in debt, creditors get the first claim on any funds from asset sales
An acquisition, frequently referred to as “merger and acquisition,” is when your business is purchased by another business. The buying business often absorbs your business into their own so they can increase their offerings or eliminate you as a competitor.
Tips for acquisition:
Plan ahead. Set your business up to be appealing to other businesses in your industry. Unique offerings and a good reputation can go a long way in getting a good buyer.
Start looking at candidates. You don’t want to put all of your eggs in one basket by setting your business up for a specific company to purchase, but it’s a good idea to start looking at potential candidates and test the waters for if that’s something they’d be interested.
An acquisition strategy does have its advantages and disadvantages.
Pros of acquisition
- A competitor may be highly motivated to buy your business for their own advantage, leading to a quick sale and high profits
Cons of acquisition
- There may not be any interested parties, particularly if your offerings are too niche
- Your current employees may lose their jobs in the merger
- Competitors could pretend to be interested to get their hands on confidential information
Initial public offering (IPO)
IPO generally starts as a funding strategy to help startups gain the capital they need to become large corporations or franchises. IPO is the process of offering your shares for purchase by the public. This can turn into your exit strategy when you decide to sell your individual shares of the company.
This isn’t a great strategy for truly small businesses, but for those that become large corporations with some healthy public interest. This is a common strategy for partnerships and private corporations that have multiple shareholders.
Tips for IPO:
Start early. This is a strategy that should be implemented from the start of your business. You’ll need investors and the momentum to grow your business so that it gains value in the eyes of the public.
Be prepared. You are going to talk to several investors if you plan to set up an IPO for your company. You’ll need to provide detailed information about your business and why the public would want to invest in you before this strategy can take off. You need to prove your business’s worth.
Find trusted advisors. Find advisors that are experienced with IPOs to help you in your preparation and execution of this strategy.
IPOs do have some pros and cons to consider.
Pros of IPO
- Going public with your company can bring in large profits, setting you up for a good retirement
- Your company gains more publicity, which in turn can lead to a larger customer base and increased profits
Cons of IPO
- It’s a lengthy and complex process
- Public companies are held to a higher standard when it comes to compliance and accounting reports
- You may lose some control in how your business is run because you’ll need to tailor large decisions towards what investors believe will be profitable
Clearly, there’s a lot to consider when you are planning your exit strategy. We encourage you to start as early as possible so that you can find a successful solution for your business.
Womply can help your business find success
In order to have a profitable exit, it’s important to build a successful business. Womply’s business solutions can help.
Our solutions help small businesses around the country gain the knowledge and resources they need to grow their customer base, improve their online visibility, and stand out against their competitors.