Exit Strategies for Small Businesses

8 Methods for Exiting a Business

1. Transfer ownership to a family member.
2. Consider merging with another company or getting acquired.
3. Explore the possibility of an “acquihire,” where your business is acquired primarily for its talent.
4. Allow existing managers to buy your ownership stake.
5. Sell your share of the business to a partner or investor.
6. Plan for an initial public offering (IPO) to take your company public.
7. Liquidate the business by selling its assets.
8. As a last resort, file for bankruptcy.

What Is a Business Exit Strategy?

A business exit strategy is a well-thought-out plan for when you decide to leave your business. This plan outlines how the transition will happen and specifically defines the financial benefits of your exit from the business. Just as you create a business plan to guide your company’s operations, it’s important to have one for guiding your departure.  No business plan is complete without a financially sound exit strategy in place.

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Having a business exit strategy is smart business. In fact, some business owners start their business with the intention of exiting it after a certain number of years. This doesn’t mean they lack dedication; it means they have a clear plan in mind.

When considering your exit strategy, it is important to think not only about how you’ll leave but also how to make that process smooth and profitable for all involved:

• Will you profit from your business exit, and how much?
• What will become of your business after your departure? Will it continue under new ownership?
• How long will the exit process take, and what kind of transition period is needed?
• How will the exit be financed and what will it cost?

Business Exit Strategies to Explore

Let’s consider the various options for your business exit strategy. 

Passing Down the Business Legacy to Family

Many business owners aspire to keep their business within the family. This involves planning to transfer the company to a child or another relative at a certain point. This can be a great exit strategy and will depend on whether your family dynamics can handle the challenges of business ownership.  It will also depend on who in the family is the most qualified person to run the business after you make your exit.

Pros:

• You can select and prepare a successor to continue your business when you step down.
• You may not have to completely detach yourself from your business, potentially maintaining an advisory role during the transition.

Cons:

• Finding a family member willing and capable of taking over the business.
• There could be emotional, financial, and general stress placed upon the family.
• Employees, business partners, or investors may not support the family member of your choosing.

Merging or Being Acquired by Another Company

In a merger or acquisition exit strategy, your company is either bought by or combined with another company, preferably one that is similar or has aligned values as you and your business. 

One advantage of this exit strategy is the ability to negotiate the selling price. In contrast, going public through an IPO would determine your company’s value relative to the industry.

The risk with this option is that only about 20% of businesses listed for sale actually find a buyer. If merging or being acquired is your preferred route, it’s wise to have a backup plan in case a buyer never materializes.

Pros:

• You can achieve a clean break from your business.
• Negotiation is possible for the terms, price, and other aspects of the merger or acquisition.

Cons:

• This can be a lengthy, expensive, and potentially unsuccessful process.
• Your business may undergo significant changes or even cease to exist.
• You may never find a buyer.

Embracing an “Acquihire” Approach

Unlike a traditional acquisition, this business exit plan involves another company purchasing your business primarily to gain access to its talented and skilled employees.

While this may mean that your business name won’t carry on, it does provide security for your employees. In this scenario, it’s essential to negotiate terms considering your employees’ specific needs. 

Pros:

• You can negotiate the terms of this unique acquisition, which can lead to profits for you and a promising future for your employees.
• You can exit your business cleanly, free from lingering responsibilities or obligations.

Cons:

• As with conventional mergers or acquisitions, this process can be expensive, time-consuming, and challenging. Finding a buyer interested in an “acquihire” can also be  difficult if not impossible.

Management or Employee Takeover

It is important to plan for any of these exit strategies in advance, as there’s a high probability that when you’re ready to leave your business, you may not be able to.  Selling your business to management or an existing employee(s) maybe an option that is available for you.  Already familiar with the inner workings of your business, they might be able to make a smoother transition and provide continued loyalty to your employees, clients and customers.

Furthermore, since your employees are already familiar with your business, and likely know you, more flexible financial arrangements may be possible during the transition.

Pros:

• You can pass your business on to someone you personally know, who has the necessary experience and values.
• Allows you to benefit financially.
• Your business’s legacy has a greater chance of surviving.

Cons:

• Finding an employee or manager interested and financially capable of purchasing the business.
• Implementing the management changes necessary without disrupting existing employees negatively.

Sell Your Share to a Partner or Investor

If you’re not the sole owner of your business, it’s possible to sell your portion to a business partner or another investor. This can serve as a relatively straightforward exit strategy, depending on the buyer’s intentions and financial capability.

Pros:

• The business will largely remain intact, and should continue to operate normally.
• You can fully exit your business profitably.

Cons:

• Finding a willing partner(s) or investor to purchase your share who is financially capable.
• Could potentially become contentious with your partner(s) or investor(s).
• Capital may be unavailable or not liquid enough to fund the buy/sell agreement.

Take Your Business Public Through an IPO

Many entrepreneurs dream of eventually offering shares of their business to the public, aiming for substantial profits. In the context of small business exit planning, this option isn’t suitable for everyone as several factors must align for this choice to be viable.

Even if your business is thriving, your industry might not attract public interest, which could negatively impact your company’s value. Moreover, IPOs are relatively rare occurrences. In the late 1990s, there were around 8,000 domestic public companies in the U.S. (out of millions), but in recent years, this number has dwindled to approximately 3,600.

Nevertheless, if the right conditions exist, an IPO can be highly lucrative.

Pros:

• Potentially could produce substantial profits.

Cons:

• This is one of the most challenging exit strategies, requiring specific conditions and significant time, effort, and financial resources.
• Going public entails intense scrutiny from shareholders and analysts, along with various requirements (such as business valuation) and processes to navigate.
• IPO success is exceedingly rare, especially for many small to medium-sized businesses.

Liquidate Your Business

Among various exit strategies for businesses, liquidation is the most definitive and most disheartening option. Opting for liquidation means closing down your business and selling off its assets. Liquidation would result in the conclusion of your business.

If you choose this path, keep in mind that you’ll need to use the cash generated from selling assets to settle any debts and compensate shareholders. Additionally, consider how this decision may impact employees, as well as clients or customers who rely on your services.

Pros:

• You can bid farewell to the business, freeing yourself from the responsibilities involved with it.
• Liquidation can be one of the simplest and quickest methods depending on what type of business you own.

Cons:

• Most likely won’t provide the highest return on your investment.
• Liquidation may involve severing relationships with employees, partners, clients, customers, which can be an emotional strain.

Declare Bankruptcy

Regarding small business exit planning, bankruptcy is something nobody necessarily plans for.  But, without a planned exit strategy in place the likelihood of bankruptcy becomes significantly more probable.  

The necessity for bankruptcy typically arises unexpectedly. The bankruptcy process may legally liquidate your assets while destroying your credit.  Your debts might be relieved, but not necessarily, and it will take time to rebuild your credit and reputation.  

Regrettably, 9 out of 10 startup businesses fail.  Bankruptcy then is one of the risks associated with starting and owning a business. It is crucial to understand the implications of filing for business bankruptcy under Chapter 7, 11, or 13.

Pros:

• This formal step has the potential to release you from the responsibilities of some if not all of your business debts.

Cons:

• Filing bankruptcy may not discharge all of your debts.
• Your future credit will be impacted negatively.
• It potentially could disrupt relationships with employees, partners, vendors, clients, customers and others associated with your business.

Key Questions for Your Business Exit Plan

Where should you start when it comes to planning your small business exit strategy? While the specifics of your exit plan will be unique to your business, there are some fundamental questions to consider as you begin crafting your strategy:

Do you intend to remain involved in the business indefinitely?

When you’re just launching your business, this question may seem premature. However, even in the early stages, it’s essential to think ahead and contemplate your long-term business exit strategy. Even if you anticipate a lifelong commitment to your business, it’s wise to plan for retirement or a future transition. Have you structured your business to allow for this possibility down the road?

Perhaps you realize that your tolerance for business ownership is limited. What is your ideal scenario for when this time arrives? Would you still want a role in the business even if you no longer own it?

Answering these questions is crucial for making the right plans. It may also be beneficial to revisit your thoughts on these matters periodically as your life and aspirations change.

What are your financial objectives?

Financial goals vary from person to person. Despite your passion for your business or its positive impact on the world, nearly every entrepreneur has financial needs and objectives intertwined with their business plans (sadly, nearly 70% of entrepreneurs don’t consistently save for retirement). Whatever your financial aspirations may be, they will significantly influence the outcome of your exit strategy.

How Do You Prepare for a Business Exit?

Planning for your business exit is a crucial process that requires careful consideration. Many business owners seek guidance from professionals such as accountants, business attorneys and life insurance agents to make well-informed decisions. Once you’ve addressed the initial questions, you need to develop an exit strategy for your business plan to be complete.

During this phase, you’ll need to focus on actionable tasks, including tax planning, finances and ensuring the money will be available and liquid when you exercise your exit strategy. Understanding your company’s true value is also essential as this value defines your options.

In essence, the exit strategy planning process revolves around clarifying your personal and business objectives to make the best decision when the time comes to exit your business.

It’s wise to create a framework that allows for a well designed exit strategy to work. There are numerous exit strategies available for you to consider when envisioning the future of your business.  Making sure the money necessary to successfully utilize the exit strategy you have planned for yourself from your business is essential.

Guidance From McFie Insurance

No universal business exit strategy fits all scenarios. The right exit strategy for you and your business will depend on various factors.  The common thread with all exit strategies is, they all involve financing to be profitable. 

The most prudent approach to  planning a business exit strategy is to be proactive. Even when launching your business, it’s essential to contemplate potential exit scenarios for the future. By actively considering the process, its execution, and its consequences, you will increase your likelihood of success and profitability when the time arrives for you to part ways with your business.

At McFie Insurance, we help people plan for success. We believe you should have control of your own capital and financial future.  To achieve this kind of financial success requires planning ahead. Contact McFie Insurance today to get the guidance you need on the best business exit strategy for you and your business.

Ben T. McFie

There's a lot of confusion around finance; there's so much to know and it's frustrating when you don't know enough to make the best financial decisions. I like to bring clarity to financial matters so people can make good financial decisions that will help them live wealthier more fulfilling lives.