3 Common Exit Strategies For Small Business Owners

Ready to sell your small business? Planning to pass it on to a member of your family? Maybe a longtime employee wants to buy the business from you when you retire? One thing is certain, eventually, you will exit your small business and there are a number of options to consider.

Exit strategy

Do you Have a Plan in Place?

How and when you will exit may not be top of mind right now. After all, running a small business takes a lot of time and energy. If this describes you, you are not alone. Studies show that between 50% to 85% of small business owners have no formal plan to exit their business. That’s a lot of business owners that employ a lot of people.

A Guidant Financial report shows that Baby Boomers own 45% of small businesses followed by Gen X at 46%. This means well over ten million small business owners have no exit strategy.

A plan can be a simple document that covers important details and steps to take to a comprehensive package that includes a valuation performed by a financial professional and details on business operations. Any plan should include the following: a valuation (what the business is worth), financial statements, typically 3 years of P&L statements and a balance sheet, business formation documents, 3 years tax returns and essential legal agreements such as a lease.

Picking an Exit Strategy for you and your Small Business

Exiting a small business is more than a business transaction. It is an emotional process and often impacts the owner and her family as well as employees. Your strategy may change as to approach the date to sell or even as you move through the process.

Exit strategies for small business owners (infographic)

Here are three common strategies along with the pros and cons.

1. Selling to Family, Employee or Partner

According to an ExitGuide survey, over 50% of small business owners plan to sell to someone they know and are not searching for a buyer. While price is important, typically both seller and buyer want a fair price and to ensure the longevity of the business. If the buyer is already working in the business, they already know what makes the business work and challenges that go with it.

Focusing on a smooth transition is important, being the owner is different than an employee and it may take time to learn new responsibilities such as finance or HR. If you own a business and are considering this option, consider bringing the buyer into performing some of these duties as a trial run before committing 100% to a deal.

Pros:

  • No need to market the business and search for a buyer
  • A trusted person to take over the business
  • New owner already knows the business and can maintain operations

Cons:

  • Not all employees adjust to expanded responsibilities
  • Employees or family may not have liquidity to make a downpayment or obtain a loan
  • Letting go and allowing someone you know run the business

2. Finding a Buyer

There is a saying that most businesses are not bought, they are sold. This means the owner needs to take time to prepare for the sale, do a good job marketing the business, qualifying prospective buyers and managing the due diligence process.

If you work with a business broker then you can offload some, but not all, of the work. Before you put the word out, take time to ensure your finances are up to date. A prospective buyer will want three years of profit and loss statements, a balance sheet and tax returns and you want to be prepared to respond to this request when interest is high and provide accurate and detailed information.

Once you have this information ready, put together a summary of the business that provides an overview of the business that covers revenue, profit, a history of the business and future outlook. Don’t be shy, this is your time to brag a bit and talk about your business and how a new owner can grow the business.

Hiring someone to make the summary look professional with logos, graphs and photos is well worth it.

Pros:

  • Opportunity to get multiple offers & optimize for price
  • Can require buyer is qualified for financing early in the process
  • May be less emotional post close

Cons:

  • Marketing the business can take a year or more to find the right buyer
  • Buyer will seek to negotiate the best deal
  • Due diligence likely to be more thorough and time consuming

3. Selling The Assets

Sometimes selling the assets and closing the doors is the best option, sometimes it is the only option. Selling the assets owned by the business is not the same as selling the business itself.

A buyer pays for the assets without taking ownership in the business. This separates the business  liabilities from the transaction. In some cases, a buyer will purchase multiple assets and the seller will provide an Asset Purchase Agreement (APA). Proceeds from the sale of assets can be used to pay down liabilities and if there is cash leftover, the owner can keep the proceeds.

Pros:

  • A viable option if selling the business is not successful
  • Owner may keep proceeds once liabilities have been paid
  • Often a less complex transaction

Cons:

  • Seller may not get desired value for the assets
  • May not provide employees future employment
  • Must file for dissolution with state agency and close the business

Summary

When and how you exit your small business is a business and personal decision. While most owners want to find a buyer for their business, selling to an employee, business partner or family member is common. Recognizing that this will be an emotional process and finding ways to manage this is critical.

Most of all, put a plan on paper and share with someone you trust that can provide feedback.

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