Starting a business requires a great deal of planning and execution. Exiting from your small business should entail a similar level of forethought and preparation. Nevertheless, some surveys indicate that nearly half of business owners have no exit strategy.[1]
After years of expanding your business, you may be at the point where the finish line is getting close. Whether you intend to sell the business, liquidate its assets to fund your retirement, or leave the business to family members, you need a plan to achieve your objective.
You cannot run your business without a good team. Help from a team of legal advisors and other professionals is also needed when exiting your business.
The Importance of a Long-Term Exit Strategy
It can be easy to fall into the trap of showing up to work every day and taking care of the tasks at hand while never thinking seriously about the future. Self-employed individuals such as small business owners often have no pension plan that guarantees retirement income. For many entrepreneurs, their only retirement plan is the proceeds from a sale of their business. This is a risky bet that becomes even riskier if there is no exit strategy.
Entrepreneurs often have a mindset of betting on themselves, but self-confidence alone is not enough for entrepreneurial success. Strategic thinking is equally important at all phases, from launch to growth to exit.
A business exit strategy creates a timeline that informs strategic decision-making, enhances business value, and provides a flexible template. Exit planning provides many benefits, including the following:
- Business owners can be better prepared for unforeseen circumstances (e.g., illness, a sudden death, divorce, burnout, or financial failure) that can arise by establishing a backup plan to address any
- An exit strategy provides benchmarks that make progress toward the goal more measurable and day-to-day decisions more strategic.
- In preparing for their exit, business owners are more likely to maximize their market position and asset values to obtain top dollar when they finally step away.
Business owners know that not everything goes according to plan. Fortunately, voluntary and involuntary exit strategies are not very different in practice. To plan for both, owners should take progressive steps to ensure that the business is less dependent on them and more centered on culture, policies, and processes. These strategies can ensure not only that business as usual can continue in the owner’s absence, but also add value to a potential buyer. An owner-centric business has less value to a buyer than a company that can continue operating smoothly after the owner steps away.
Different Exit Scenarios and Strategies
There is no one way to run a business—or exit a business—but both require strategic planning.
Among owners who are planning to exit their businesses, 52 percent said they intended to sell the business, 20 percent planned to leave it to family, and 18 percent planned to close the business. Here are some of the strategies involved with each of these exit scenarios:
- Selling. A business can be sold on the open market in its entirety, including with all of its assets and with or without its existing employees. An owner can also sell their company stake to a partner, co-owner, manager, employee, friend, family member, or associate. In every sale scenario, the business should be appraised so that a fair purchase price can be reached. Another necessity is a formal sales agreement that lists all inventory in the sale. Multi-owner businesses can benefit from buy-sell agreements that enable an orderly transition.[2]
- Passing to family. Family members may be part of an exit strategy that is designed to pass the business on to the next generation. Transferring ownership can be done through gifting or a sale. There will be different tax implications depending on the strategy used.
- Liquidating. Business liquidation entails selling assets for cash value. Although it is often part of an involuntary exit due to financial trouble, liquidation can also be a planned exit strategy. Assets up for liquidation should be inventoried, appraised, and promoted. Typically, business owners work with an auctioneer, dealer, or broker to facilitate liquidation. The Small Business Association notes that sales can take place through negotiations, consignment, a sealed bid, or internet or retail sale.[3]
Are Professional Advisors Part of Your Exit Strategy?
Business owners accept that running a business will take much of their time, but even the most dedicated owner should have an exit strategy. Whether you plan to sell your business, close and liquidate it, or transfer ownership, there will be legal and tax impacts that require an attorney’s assistance. If you are not sure which exit strategy is best for you, our business planning attorneys can help you identify your goals, formulate the appropriate strategy, and assemble the right team to successfully execute it. To start planning your exit today, call or contact us to schedule a consultation.
[1] UBS Investor Watch, Who’s the Boss? (Feb. 8, 2018), https://www.ubs.com/us/en/investor-watch/who-is-the-boss.html.
[2] Hugh H. Lambert & Briana K. Wright, Considerations for Using Buy-Sell Agreements, The CPA Journal (Oct. 2018), https://www.cpajournal.com/2018/10/03/considerations-for-using-buy-sell-agreements/.
[3] US Small Bus. Admin., Close or sell your business, (May 23, 2023), https://www.sba.gov/business-guide/manage-your-business/close-or-sell-your-business#section-header-10.
