Common Exit Strategies for Small Businesses

1.    Passing the Business on to Family Members

This is the dream of many small business owners and the best way to ensure that your legacy lives on. It gives you the opportunity to groom your own successor and gives you the opportunity to have some continued stay in the business. The only problem here is that creating a family succession plan can be difficult because of the emotions and family issues that could be involved.

Ask yourself the following questions to see if this exit strategy would be best for you:

  • Do you want to retain control after your retirement?
  • Are your family members even interested in the business?
  • Do you want to work part-time before the new leader gets settled in?
  • Should family members start at the bottom of the business?

2.    Selling the Business to Employees

These are the people that been with your business for the good times and the bad. It would be either a person in management or an employee who already knows a great deal about the business and wants to continue to see it thrive. The main problem encountered with this strategy is that your potential buyers may not have the finances or personal net worth to buy you out immediately.

These are some questions to ask when selling your business to partners or employees:

  • Will the purchase be through future profits or the employees’ own capital?
  • Do employees/partners have the skills and financial resources to complete the purchase?
  • If you have to finance the purchase price, can the purchaser run the business well enough that your payments will be secure?
  • Should you consider selling your business through an Employee Share Ownership Plan (ESOP)?

3.    Selling to a Third Party

There are two types of third party buyers: financial and strategic buyers. If you choose this strategy you must protect your business against management distractions from the sale preparations and protect yourself from potential lawsuits or alleged fraud during the sale of a business to a third party.

  • Financial Buyers are those seeking high return on investments. They want to see strong financial statements, strong assets and often prefer if the current management stay on for a while.
  • Strategic Buyers are often competitors who are looking to diversify product lines, market segments or geographical reach.

4.    Liquidation

When you want to close up shop and sell your assets, this is the exit strategy for you. To make money, your business needs to have valuable assets to sell, such as land or expensive equipment and even then, profits from selling assets have to go to pay creditors first.

5.    Winding Down the Business

Although you can simply stop taking sales, have a closing out sale or pass on your clients to other service providers, you can’t suddenly cease your obligations to the governments or tax department. To wind your business down legally with the most money in your pocket, keep the corporation alive and consult your legal, tax and accounting experts as you dispose of inventory, assets and property.