Having an exit strategy is often viewed as irrelevant to business owners who are happy with their business and have no intention of selling or closing up shop any time soon. However, what happens when something unexpected comes up, such as a health issue that forces you to stop working and you can’t run your business any longer? Even if you have a one-person sole proprietorship, you need an exit strategy.
Get Money Back Out In The End
Entrepreneurs live for the struggle of launching their businesses and the eventual success they achieve along the way. But one thing they often forget is that every decision made can have huge implications down the road. You see, it's not enough to build a business that’s worth money; you have to make sure you have an exit strategy. It's a way to get the money back out in the end, after all the hard work is done.
Words of Wisdom
According to business guru Tony Robbins, “Without an exit strategy, there is no business, there is no growth. All you have is a job. An expensive job with a lot of responsibility and a lot of risk. The purpose of a business is to build a system that can make money while you’re not there and build a business you can sell for a multiple.”
Don't Be A Statistic
87% of American businesses never get sold, because the majority of business owners don’t run their business in a way where they can legitimately sell their business. As a result, they have no exit strategy and the business just closes. After all that work to get it up and running, and years of working to get it where it is today, it’s a shame that so many business owners just walk away when they are finished.
Work It Out Your Exit Strategy In Advance
Having an exit strategy worked out in advance helps ensure that you have the chance to get extra money out of your business and it also gives you some control over your small business's future.
Here are some common exit strategies for small business owners to consider:
1) Sell The Business On The Open Market
This is the most popular exit strategy option for small businesses. At a certain point in time, often when a seller is ready to retire, they put the business up for sale for a certain price. The hope is that they walk away with a good amount of money for all of their hard work.
If this is your exit strategy, you should spend some time grooming your business for sale. Make it as attractive as possible to potential buyers. A good business broker can help with this. Ideally, you want to be in touch with your chosen broker at least 3 years before you plan on listing it for sale. That way your broker can help you get everything in tip-top shape.
- A profitable business should be attractive to buyers.
- Assets and discretionary earnings are incorporated when valuing the business for sale, maximizing the return to the owner(s).
- A marginally profitable business can be very difficult to sell. According to BizBuySell, nationally, only about 20% of all businesses listed for sale actually sell. Finding a buyer on the open market can be a long process.
2) Sell To Another Business Via Acquisition
Positioning your small business to be a desirable acquisition can be very profitable. Businesses buy other businesses for all kinds of reasons. They might want to use a new acquisition as a quick path to expansion, realizing synergies from complementary business activities, or simply buying out (and getting rid of) the competition.
- For the above reasons, a competing business may be highly motivated to purchase your business, making for a quick sale and maximum profit.
- If the purchaser's only motivation is to reduce the competition, they may fold your business after purchase. As a result, any existing employees may lose their jobs.
- A competitor may only pretend to be interested in purchasing your business in order to get access to your confidential business information. That’s why listing your business for sale confidentially with a business broker is a smart choice. They will require any inquiries on the business to sign a Non-Disclosure Agreement and they will screen any potential buyers as much as possible before they get any information about your business.
3) Asset Sale
This is the close up shop and sell all the assets in a liquidation exit strategy. For small businesses, especially those that are dependent on the performance of a single individual, liquidation is sometimes the only option as there's really nothing else to sell.
If you're in this position, you may want to spend some time retooling your business so that it could be operated by someone else. Furthermore, making it a business someone might want to buy, could result in more money in the end for you. A qualified business broker will be able to help you with an asset sale or revamping your business so it can be sellable in the future.
- The business can be wound up very quickly (depending on the sale of assets).
- Liquidation has the lowest return on investment to the owner(s). The only money from a liquidation sale is from the disposal of assets, such as land, equipment, or inventory. Any goodwill value from client lists or other business relationships (which may be substantial) is lost.
- Second hand business asset values for items such as machinery and equipment can be very low.
- Creditors (if any) have first claim on funds from asset sales.
4) Keep Your Business In The Family
The dream of many small business owners, keeping your business in the family ensures that your legacy lives on and provides a living for your heirs.
- Can make for a smooth transition by grooming a family successor.
- May allow for you to keep a hand in the business in an advisory (or other) capacity.
- Developing a family succession plan can be enormously difficult. Sometimes it can lead to fighting among family members over ownership and/or participation in the business.
- Family members may not have the skills or interest to take over the business.
A Clear Plan
Having a clear exit strategy in mind will not only help to get you top market value for your business when the time does come to sell it, but you will have a clear plan in place if something should unexpectedly happen that prevents you from continuing to operate the business.
Run Your Business Like You Are Going To Sell It
If you run your business as if you are going to sell it (even if you have no immediate plans to do so), you operate differently. Your books and financials are clean and organized, you run the business more efficiently, your employees are highly trained, your processes and procedures are well-documented, and most importantly, you will have a clear exit strategy. Isn’t this the best way to run a business regardless?
If you have questions about creating an exit strategy for your business, we can help!