Does your business have an exit plan? If not, you need one.
Exiting your business can be overwhelming and intimidating, but with my help as your guide, it doesn’t have to be.
My name is AJ, and I recently exited my business for several million dollars.
When I started my business less than a decade ago, I knew I would eventually exit and had an exit plan in place from the start.
I am here to guide you through the steps and processes of exiting a business so that you can maximize your return.
Let’s dive in!
Key Takeaways
- Your business's best exit strategy might differ from your neighbor's. It's important to consider all your options and create a plan that works best for your goals and objectives.
- If you plan to exit your business in the future, all of your decisions today must be taken with that in mind.
- Start planning for your exit as soon as possible. This will help ensure a smoother transition when you leave and a successful future.
What is a Business Exit Strategy?
A business exit strategy is a plan of action used by small and medium-sized businesses (SMBs) when transitioning from one owner or business entity to another.
Think about it as a long-term goal. Small business owners need to plan their exit strategies early to have plenty of time to consider all options and plan accordingly.
Exit strategies vary by the type of business and the owner’s individual circumstances.
Still, a strong plan will help ensure that all parties involved are protected and that your transfer of ownership goes as smoothly as possible.
Why Have a Business Exit Strategy?
As a business owner, you need to think ahead and plan for an eventual change in ownership. You want to start with the exit of your business in mind.
It helps you plan and prepare for the future – no matter what.
With an exit strategy, you can anticipate potential roadblocks, minimize risk, maximize profits, and make the best decisions for your business.
An exit strategy can also help ensure that your business remains successful as ownership changes hands. I know that it did for me!
Benefits of an Exit Strategy
There are several potential benefits to having an exit strategy.
Here are a few of the most important.
Exit Strategies Create a Long-Term Goal
When you have a clear exit strategy, it creates a long-term goal for your business.
From there, you base every decision on your long-term exit strategy, which will help guide you along the way.
This will also help keep you motivated and focused on the end goal.
Your Exit Strategy Creates Better Decision Making
An exit strategy helps you plan out any potential changes in ownership or management before they occur.
You can think through various scenarios and make better decisions for the future of your business.
Should you get a new swanky office? Should you buy the new equipment for your staff? Should you hire an assistant? Understanding how these decisions affect your exit will make you choose more wisely.
Every decision I made for my business was made with my eventual exit in mind.
An Exit Strategy Makes Your Business More Attractive
Having an exit strategy makes your business more attractive to potential buyers.
It shows that you have taken the time to plan and are prepared for any changes in the future.
This will make potential buyers feel more secure and confident that your business will remain successful even after a change of ownership.
For my business, I made sure to have everything in place before negotiating with potential buyers and made it clear that I was prepared to exit with a plan in place.
Plus, you’ll get a better price for your business if you are well-prepared.
Exit Strategies Guarantee a Smooth Transition
An exit strategy can guarantee a smooth transition when it comes time to change ownership.
It is designed to ensure that all parties are protected and their interests are served during the process.
SMB owners must plan ahead to have plenty of time to consider and prepare for potential changes.
By considering all your options for an exit strategy early on, you’ll set yourself up for a successful transition.
As I said earlier, with my business, I had an exit plan in place from the start, which allowed me to leave and move on to new ventures without any problems.
Types of Business Exit Strategies
Here is a list of common exit strategies for small business owners to consider.
Mergers and Aquisitions
Mergers and acquisitions are a common way to exit for many businesses.
What is it?
Mergers combine two or more businesses into one entity to create a larger, stronger company.
Whereas an acquisition would be the purchase of one company by another to create a new combined entity.
Either way, the businesses will often have some common interests or goals they can achieve together.
This exit strategy is often used to increase market share, expand into new markets, or diversify a product line.
When done correctly, this can be an effective way to create value for both companies.
Pros
- Allows for rapid growth and expansion potential
- It can be used to eliminate competition in the market
Cons
- A complex process that requires a lot of planning and negotiation
- Typically, you’ll lose controlling stake in your company
- This takes several months to negotiate and close
Selling Your Stake to a Partner
Another option is to sell your stake in the company to a partner or investor.
What is it?
This is a common strategy for small and medium-sized businesses.
It involves selling some or all of the business’ shares to an outside investor or business partner.
The idea behind this is to bring in someone with experience and resources that can help take the business to the next level.
Pros
- Allows businesses to remain in the same ownership structure
- Provides capital for expansion or growth
- Can bring in new management and expertise
Cons
- This could lead to a loss of control over the company
- Potential for disagreements between partners
- It can be challenging to find an investor who is a good fit for your business
Family Business Succession
This type of exit strategy is beneficial for family-run businesses.
What is it?
A family business succession involves passing the company on to a family member.
This is often done when the current owner is ready to retire or pass away, ensuring that the business remains in the family.
Pros
- Ensures business continuity
- It helps preserve the family legacy of the business
- It can be more affordable than other options
Cons
- It may not be the most tax-efficient option
- Potential conflict between family members
- It can be challenging to transition ownership without disrupting day-to-day operations
Employee Buyout
This type of exit strategy is also known as an ESOP (Employee Stock Ownership Plan).
What is it?
An employee buyout allows the current owner to transfer business ownership to employees.
This can be done through an Employee Stock Ownership Plan. This type of plan allows employees to purchase shares in the company and become its owners.
Pros
- Allows the current owner to receive a fair market value for their business
- Provides an incentive for employees to continue working hard and be loyal to
Cons
- It can be difficult to manage multiple owners
- Employee ownership can cause problems if there is no clear leadership structure
Initial Public Offering
An initial public offering (IPO) is an exit strategy used by larger companies.
What is it?
Initial public offerings involve going public by selling company shares on a stock exchange.
This is often done to raise money for growth and expansion and give current owners an exit strategy.
Pros
- Allows current owners to receive a fair market value for their company
- Raises capital for expansion and growth
- Provides an incentive to employees
Cons
- It can be a long and complex process
- Requires the company to meet specific standards to list on a stock exchange
Automating Yourself Out of the Business
This exit strategy is becoming increasingly popular among entrepreneurs (and is one of my personal favorites).
What is it?
This is where you automate your business to a point where you’re no longer required to be involved in the day-to-day operations.
You can do this by hiring an experienced team, leveraging technology, and using automation tools.
Once you have automated your business, you can sell the company for a premium or take a backseat and enjoy the passive income.
Pros
- Allows for a smoother transition when changing ownership
- It gives current owners more time to focus on their next venture
- Can save money by eliminating the need for a large staff
Cons
- It may require a significant upfront investment
- It can be difficult to find a new “CEO”
Business Liquidation
This last resort option should only be considered if all other options have been exhausted.
What is it?
Business liquidation involves selling all the company’s assets to repay creditors and other debts.
The proceeds from the sale are then distributed to shareholders. It is usually done when the company can no longer remain profitable or viable.
Pros
- Can provide a quick and easy way to exit the business
- Allows for a clean break from the company
Cons
- Upset investors and creditors
- The proceeds from the liquidation may not be enough to cover all debts
Bankruptcy
Another last resort option is bankruptcy.
What is it?
Bankruptcy is a legal process involving filing for bankruptcy protection to reorganize and pay off debt.
Once the company has gone through bankruptcy, it can be sold to another company.
Pros
- Can provide relief from creditors
- Allows for a clean break from the company
Cons
- Destroys your credit
- It can be difficult to recover financially and emotionally
- It will be harder to borrow money in the future
Types of Bankruptcy
There are two common types of bankruptcy in the United States.
- Chapter 7
- Chapter 7 bankruptcy is the most common type of bankruptcy for businesses. It involves liquidation to pay back creditors.
- Chapter 11
- Chapter 11 bankruptcy is another option. It involves reorganizing and restructuring the business to pay back creditors over time.
Steps to Develop an Exit Plan
No matter what type of exit strategy you choose, it’s essential to have a plan in place to make a substantial profit when you exit your business.
Step 1: Start as Early As Possible
The earlier you start, the more time you’ll have to plan and prepare for your exit.
Use this as your long-term goal and start planning for it right away.
Step 2: Consider Your Options
Think about the different types of exit strategies available to you.
Consider your goals and objectives and the benefits and drawbacks of each option.
Step 3: Create an Exit Plan
Create an exit strategy business plan outlining your goals and objectives and a timeline for achieving them.
Exit strategy planning should also involve looking at the financial, legal, and tax implications of each option.
Step 4: Choose New Leadership
Choosing the right people to take over leadership roles is important when you leave.
Choose someone who can help carry out your vision and ensure the business is successful in your absence.
Step 5: Tell Your Employees
Let your employees know of your plans to exit the company.
This will help ensure everyone is on the same page and can prepare for the transition. You don’t want your employees to be caught off guard.
Step 6: Tell Your Customers (If Applicable)
If you’re selling the business, let your customers know.
Communicate with them throughout the process and explain how they can benefit from the transition.
They will need reassurance that their service will continue uninterrupted and appreciate the transparency.
Conclusion
Exit strategies for a business can be complex and overwhelming, but they don’t have to be.
By taking the time to plan and consider all of your options, you can find the right exit strategy for your business.
Just remember different business exit strategies have various advantages and drawbacks. Choose the one that best fits your plan for the future of your business.
This will help ensure the transition is successful and allow you to move on to your next venture.
Did we miss anything? Please let us know in the comments below.
Good luck!