As you prepare to exit 2018, I thought I would talk about your business exit strategy. Do you have one? You may be thinking to yourself, my doors aren’t even open yet. Or I am only a couple of years into this. Why on earth would I be thinking about an exit plan.
We’ve all heard it almost ad nauseum, but I have to say it again. Begin with the end in mind. Your exit strategy needs to be clear in your mind because it will dictate how you operate your company.
It’s not enough to build a business worth a fortune; you have to have a way to get the money back out. Here’s a look at some of the available exit strategies for small business owners:
In the word’s of Garth Algar, Live in the Now. Rather than reinvesting money in growing your business keep things small and simply live on the income. Extracting profits on an ongoing basis for personal use is suitable for the owner who wishes to maximize their current lifestyle rather than aggressively expand their business.
As simple as this sounds there are some things to keep in mind.
- You must be careful not to take out too much money. Be sure to have plenty in reserves for the rough times that will inevitably happen.
- If you have investors, be sure to leave some for them. After all, you may not be where you are without them.
- The way you pull the money out may have negative tax implications.
Going Out of Business Sale. Call it quits, close the business doors, and call it a day. Sell everything at market value and use the revenue to pay off any remaining debt. This is a simple approach but it is also likely to reap the least revenue as a business exit strategy.
There are some disadvantages in putting everything up for sale.
- Business owners who choose this exit strategy are usually eager to sell and therefore at a disadvantage when negotiating.
- Any proceeds from the assets must be used to repay creditors. The remainder gets divided among the shareholders
- Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value.
A Buyer May Be Closer Than You Think. I was the third owner of my campground. The second owner was a camper turned business owner. Is there someone near you who might be interested in taking over? Interested parties might include customers, employees, children or other family members.
Sell your business to current employees or managers. Often in this kind of sale, you would finance the sale and let the buyer pay it off over time. This is more lucrative than just closing the doors and it gives someone else the opportunity to follow their entrepreneurial dream.
Another option is to keep it in the family. When done correctly this can lead to a real family dynasty. However, when done incorrectly it can become a tragic disaster. If you decide to go this route, you’ve got a lot of planning to do before getting out.
Other things to consider are:
- If you are too attached to the person buying your business you risk leaving too money on the table.
- Make sure you are honest about the condition of your business from the get go. Imagine the impact your relationship would take if a friend or family member finds they just bought the liability for that decade’s worth of taxes you forgot to pay.
- Make sure the person buying your business is qualified to take it over.
Hello Century 21. Sell your business in the open market. This is the most popular exit strategy option for small businesses. Just like selling a house, when you are ready to retire, decide on a sale price, find a broker, and wait for the right buyer to come calling.
Don’t let the simplicity of it fool you. There are additional considerations when choosing this exit strategy.
- Begin to groom your business three to five years before your targeted retirement date. Make it as attractive as possible to potential buyers. You will not get the price you want if the numbers don’t support it.
- Locating and working with a qualified broker can be time consuming. Even more so if your commercial broker is not familiar with your industry.
- Finding a buyer on the open market can be a long process, especially if you are in a specialized industry. It took a friend of mine 5 years to sell their yarn company. Let’s face it, there are only so many people that get excited about yarn.
The Take Over. Acquisition is one of the most common exit strategies: You find another business that wants to buy yours and sell, sell, sell.
In an acquisition, you negotiate price. This is good because the perceived value is in the eye of the beholder. It also helps the person making the acquisition decision is rarely the owner of the acquiring company, so they don’t feel the pain of acquisition cost. Convince them you’re worth a billion dollars, and they’ll gladly break out their employer’s checkbook.
But acquisition has a dark side.
- If there’s a bad fit between the acquirer and acquiree, the combined companies can self-destruct. The acquired management team can end up locked into working for the combined company, and if things head south, they get to watch their baby implode from within
- Start now considering which companies you would like to merge with and make yourself attractive to those candidates. However, don’t cut off your nose to spite your face. Meaning, don’t go so far as to prevent yourself from being attractive to other acquirers
- Acquisitions can come with noncompete agreements and other strings that can make you rich but make your life unpleasant for a time.
The Time To Do It Right
By beginning with the end in mind, you will have some control over the future of your small business. Eventually you will be faced with answering the question, ‘what’s next’? Having an exit strategy worked out in advance helps ensure that you like the answer to that question.