8 Business Exit Strategies for You to Consider

 

What Is a Business Exit Strategy?

A business exit strategy is a plan for what will happen when you want to leave your business. This strategy describes and outlines the form that the transition will take. Just like you’ve written a business plan to guide your business throughout its life, you should have one that guides it to a conclusion.

Your business exit strategy doesn’t have to mean disaster or failure, or even imminent action—in fact, many business owners start their business with the express purpose of exiting after a certain number of years. It doesn’t mean they are less committed entrepreneurs. It just means they have a plan in place.

This being said, as you think about your business exit strategy, you’ll not only want to consider how you’ll leave, but also other factors that are involved with this process:

• Will you make money when you exit your business? How much money will you make?
• What will happen to your business after you leave? Will it continue under new ownership?
• How long will your exit take? What kind of transition period is involved?

Business Exit Strategies to Consider

Let’s explore some of the different options you have in terms of a business exit strategy. At the end of the day, there isn’t necessarily a wrong or a right way to exit your business, but there are certainly options that may work better for you, depending on your particular situation.

Therefore, let’s take a look at these eight exit strategies—discussing what they might look like and the pros and cons of each option:

1. Continuing the Legacy in the Family

Many entrepreneurs want to keep their business in the family long term, and that means making plans for transitioning the company to a child or another relative at a certain point. This may seem like an attractive business exit strategy because you can groom successors over time—just make sure your family relationships can handle the volatility and stress of business ownership.

Although keeping the business in the family for multiple generations may seem like the best way to preserve your name in the business, it’s important to be practical about who is really the best person for the job of running your business. 

Pros:

• You can choose and prepare the person you want to continue your business when you leave.
• You don’t have to completely separate from your business and may be able to stay on in some sort of transitional or ongoing advisory role.

Cons:

• You may not find a family member who wants to (or is capable) of taking on the business.
• This process may bring a lot of emotional, financial, and general stress to your family.
• Employees, business partners, or investors may not support the individual in your family you choose.

2. Merge or Become Acquired by Another Business

With a merger or acquisition business exit strategy, your company is either purchased by or merges with, a company with similar or aligned goals to your business. Depending on who you merge with or sell your business to, this method could mean flexibility in terms of your involvement, or the freedom to walk away.

Perhaps the best thing about this exit strategy is the ability to negotiate the price of the sell, whereas selling to the public (an IPO) would value your company relative to the industry.

This process can take a long time, however, if it happens at all. BizBuySell estimates that only 20% of businesses listed for sale actually get bought.^[1] If it’s your dream to merge or get acquired, you might want to have a Plan B just in case. 

Pros:

• You’ll be able to have a clean break from your business (if that’s what you want).
• You can negotiate the terms, price, and other details of your merger or acquisition.

Cons:

• This can be a time-consuming, costly, and perhaps even unsuccessful process.
• Your business may cease to exist as it once was—with a range of possible consequences associated with this action.

3. Become Part of an “Acquihire”

Different from a traditional acquisition, this exit strategy business plan is one in which a company buys out your business simply for the sake of acquiring its talented or skilled employees.

Although this means your “legacy” may not endure in name, it will help take care of your employees. In this case, you would need to negotiate terms with your employees’ specific needs in mind: After all, they came to work for you, not another organization. 

Pros:

• You’ll be able to negotiate the terms of this special acquisition, which hopefully means profit for you and a successful future for your employees.
• You’ll have a clean exit from your business and won’t have to worry about lingering responsibilities or obligations.

Cons:

• As we mentioned with typical mergers or acquisitions, this process can be costly, time-consuming, and difficult. Plus, you may not be able to find a buyer interested in an “acquihire.”
• And, once again, you’ll be losing the legacy of your business as you created it.

4. Management or Employee Buyout

Although it may be difficult to plan ahead for many of these methods, it’s possible that when you’re ready to exit your business, people who already work for you may want to buy your company from you. As these individuals know you and know how to manage the organization, this business exit strategy could result in a smoother transition and increase loyalty to your business’s legacy.

Moreover, because these individuals are already part of your business and they likely know you so well, they may allow for flexibility in terms of your involvement—perhaps they’ll want to keep you on as a mentor or advisor.

Pros:

• You can hand off your business to someone who has experience in the organization—and that you hopefully know and trust.
• As you’re still selling the business, you should be able to make some money off the deal.
• If you want to remain involved in some capacity, the employees who are buying your business should be more likely to make something work.
• Your business’s legacy will remain somewhat intact.

Cons:

• You may not be able to find an employee or manager who wants to buy the business from you.
• You may find that these management changes are difficult to implement and may have a negative effect on existing clients.

5. Sell Your Stake to a Partner or Investor

If you aren’t the sole proprietor of your business, it’s possible to sell off just your stake to a business partner or other investor. This can be a relatively “business-as-usual” exit strategy, depending on the buyer.

Pros:

• Your business legacy will remain intact and for the most part, your business should continue to function as usual.
• You can exit your business fully and hopefully earn a profit on the sale of your share.
• You’re dealing with a buyer you already know and work with, meaning the process should be much easier to approach.

Cons:

• You may not find a buyer or investor who is willing to purchase your share.
• It may be more difficult to stay involved in your business in any capacity.
• The process could end up being contentious between you and your partner or investor—leading to a range of potential problems.

6. Take Your Business Public With an IPO

Many entrepreneurs dream of one day selling their business to the public for a large profit. However, in the realm of small business exit strategy planning, this method certainly isn’t for everyone—business conditions need to be just right for this option to be possible.

Even if your business is booming, your industry may not appeal to the public in a way that gets stock buyers excited, thus devaluing your company. Not to mention the fact that IPOs are very rare: Whereas domestic public companies in the U.S. reached about 8,000 (out of millions) in the late 90s, the number has fallen to around 3,600 in recent years.^[2]

This being said, however, if it’s possible for you and the conditions are right, an IPO can be very lucrative.

Pros:

• Out of all of the business exit strategies out there, this is probably the one that’s most likely to earn you a substantial profit.

Cons:

• This is probably one of the most difficult exit strategies, requiring certain conditions and significant time, effort, and money.
• Going public also means intense scrutiny from stockholders and analysts, as well as a number of requirements (like business valuation) that must be met and processes that must be completed.
• IPO success is very difficult and rare—especially for many small to medium-sized businesses.

7. Liquidate Your Business

As an exit strategy business plan goes, this one is the most final. If you liquidate, you’ll be closing your business and selling your assets. This being said, however, liquidation doesn’t have to mean defeat—just an ending to a chapter.

If you decide this is what you want to do, just remember that you’ll need to use the cash you earn through the process to pay off any debts and payout any shareholders. You’ll also want to remember how this option may affect employees, as well as clients or customers who rely on your service.

Pros:

• You’ll never have to worry about the business again, free of the chains involved in trying to preserve a legacy.
• Compared to some other business exit strategies, this can be one of the simplest and quickest methods.

Cons:

• You likely won’t get the biggest return on investment with this option.
• This strategy means possibly severing relationships with employees, partners, clients, customers, and anyone else involved with the day-to-day or general operations of your business.

8. Declare Bankruptcy

As far as small business exit strategy planning goes, this last method is the option that you can’t really plan for. Ultimately, no one wants to file for bankruptcy, however, this could be your last resort if something goes wrong (or you never managed to plan ahead with any of the other exit strategies listed above).

In fact, sometimes the necessity for a bankruptcy filing comes before you’re ready—but in the lifecycle of businesses, it’s not the end of the world. Although you may have assets seized and troublesome credit that will need to be rebuilt, you’ll be relieved of debts and the burden of the business if things get really bad. 

Unfortunately, the possibility of bankruptcy is one of the many risks involved with starting and owning a business. Therefore, if the option of bankruptcy does become a reality for you, you’ll want to be sure to understand exactly what happens when you file business bankruptcy for Chapter 7, 11, or 13.

Pros:

• This official step will relieve you of the responsibilities and debts of your business.
• You’ll be able to move on from your business and start to rebuild your credit.

Cons:

• You may not be able to relieve all of your debts when filing bankruptcy.
• A bankruptcy filing will likely affect your ability to borrow credit in the future.
• This process will likely mean the untimely end of relationships with anyone involved with running your business, as well as clients and customers.

Important Questions to Ask for Your Business Exit Strategy

So, where do you begin when it comes to small business exit strategy planning? Although much of what’s ultimately involved with your exit strategy will be unique to your business, there are a few questions you can ask yourself to get started in your exit plan development:

Do you want to stay involved in the business forever?

When you’re just starting your business, this question might seem almost counterintuitive. Yet, even at an early stage in your endeavor, it’s important to be realistic—and this means thinking far into the future and considering your business exit strategy plan. Even if you spend your entire career owning the same business, most people eventually plan to retire at a certain age. Have you set up your business to make that a possibility down the line?

Maybe you know that you can only withstand business ownership for up to 10 years. In your eyes, what would you ideally like to happen at that point? Would you still want to be involved in the business even if you weren’t the owner?

These are important questions to answer for yourself in order to make the appropriate plans. It might even be a good idea to revisit how you feel about these questions year over year, as your life and plans evolve.

What are your financial goals?

This, of course, is different for everyone. As much as you might love the concept of your business or the good it’s doing the world, almost every entrepreneur has financial needs and goals playing into their business plans (unfortunately, almost 70% of entrepreneurs don’t regularly save for retirement).^[3] Whatever your goals may be, this question will greatly play into your exit strategy outcome.

How do you actually plan for an exit?

Many business owners work with consultants or professionals to help them make the best decisions, such as an accountant or business attorney. This being said, once you’ve asked yourself the first two questions, you might work with a professional for help developing an exit strategy as part of your business plan.

At that point, you’ll need to attend to “the executable items, such as taxes, deal structure,” and so on. You also need to understand the full value of your company to understand what your options might be.

In short, the exit strategy planning process is all about crystallizing your personal and business goals to make the best decision for your business at the appropriate time of exit.

This being said, if your exit is in the immediate future, you need to choose one plan and stick with it. But, if you have the time to plan ahead (and as we’ve mentioned, you should be thinking about this from the beginning), it’s a good idea to set yourself up for multiple options. Fortunately, you’ve got numerous exit strategy options to choose from when thinking about the future of your business.

The Bottom Line

At the end of the day, as is the case with many parts of running a business, there is no one-size-fits-all business exit strategy. Ultimately, the exit strategy that’s right for you and your business will depend on a number of different factors and may change or develop as you progress through the lifecycle of your business.

This being said, however, the best thing you can do with regard to an exit strategy business plan is to actually plan ahead. Even when you start your business, you should consider possibilities with regard to leaving your business, if and when the time comes. If you’re proactive in thinking about this process—what it might look like, how it might be executed, and what the consequences will be—you’re more likely to have success when it’s time to part ways.

Article Sources:

1. BizBuySell.com. “Resources for Business Buyers“
2. Bloomberg.com. “Where Have All the Public Companies Gone?“
3. CPAPracticeAdvisor.com. “Self-Employed Less Likely to Save Enough for Retirement“