Identifying exit strategies for small business is a common theme that arises in discussions with owners/founders. Whilst my advice is always never to start a business without first considering exit strategies, entrepreneurs are highly motivated people. They thrive on the excitement that comes with launching a new business. They love the creative process that occurs when starting a new enterprise and bringing new products or services to the market.
Unfortunately, an entrepreneur’s drive to get a business up-and-running as soon as possible has some downsides. One of the most common mistakes that entrepreneurs often make is failing to consider exit strategies. This can lead to problems later in the business’s life cycle. It may also make it difficult for the entrepreneur to maximise the return from their small business.
The good news is it’s never too late to make a plan. Here are 5 exit strategies for small business to consider when you are ready to exit, retire or move onto your next business venture.
Option One: Run a “Lifestyle Business”
A lifestyle business is structured primarily with the aim of providing the founders with a particular level of income to sustain their ideal lifestyle. You can turn a business into a lifestyle business by continually extracting profits in the form of a large salary, bonuses or dividends.
Enterprises run this way do not reinvest profits back into the business. Instead, the owners/founders find inventive ways to spend the money that the business makes, including:
- business class airfares
- 4-5 star hotels
- expensive company cars
- fancy premises/office
When it is time to leave, you can simply cease trading and be comfortable in the knowledge that you benefited financially throughout the life of the business.
- Take home a large salary and benefits
- Simple to manage — just take out money when you need it
- Walk away from the business when you need to, having already received a significant return on investment.
- You will probably pay more tax on the large profits that extract from the business
- If you do not have a long-term plan in place, you may extract capital that the business needs to continue operation later on
- Using this strategy can be difficult if all partners in the business aren’t on the same page.
Option Two: Liquidate
Most people think that businesses only liquidate when they have become insolvent or the owner has died. However, many successful business owners will liquidate their business simply to extract retained earnings and move onto other opportunities.
Liquidation involves ceasing trading and selling the assets of the business. Once the assets are sold, their proceeds must be used to pay off any remaining debt and creditors before being distributed to the shareholders.
- Simple to do
- There is no transfer of ownership to worry about and no negotiations with other parties
- Sudden liquidation can tarnish your reputation with customers and business partners
- You will obtain less value from the business because you won’t be reimbursed for good will, your customer list, brand value and other less tangible assets
- Other investors in the business may be upset by liquidation because it obtains less value from the enterprise
- Your employees may be very upset about losing their jobs.
Option Three: Sell to Any Buyer
Option three is to find another entrepreneur or business that wants to buy your business. This option is useful for obtaining as much value as possible from your business, as the sale price will include the value of intangible assets including goodwill, intellectual property, brand recognition, and customer loyalty.
Once you have sold your business as a whole, you are free to reinvest, take a long holiday, share some wealth with your children, or whatever else you desire.
The key challenge you will face when selling your business is finding the right buyer. Ideally, you will find a buyer who is interested in your enterprise for strategic reasons as they are more likely to give you a good price. Some entrepreneurs will design their enterprise to be a good strategic fit with other businesses — making it the perfect target for acquisition by businesses seeking synergies. Business brokers can also assist valuing and selling your business – for a commission based on a percentage of the sale price.
- There is potential for much higher profit, particularly if multiple buyers are interested in your business
- You will be free-and-clear from the business and walk away with a decent amount of capital.
- Finding the right buyer can be a challenge
- The buyer may demand that you sign a non-compete clause
- Acquisitions can sometimes damage a business or negatively impact its employees.
Option Four: Sell to a Friendly Buyer
Successful business have loyal customers, good relationships with suppliers and satisfied investors. If your business is widely respected and highly valued, it may be easy to find a “friendly buyer” — someone who values your business and wants to preserve it. Your friendly buyer might be a friend, family member, employee, manager, business partner, or a customer who really likes the business.
- Your business can continue trading and serving its customers
- It is possible to create a positive legacy by passing the business onto friends or family
- Because the buyer knows the business well, it is more likely to continue doing well
- Could save you engaging a business broker if value can be easily ascertained and agreed.
- You might be tempted to sell the business to your friend, employee or family member at a reduced price which means less profit
- If the business is not sound (unpaid taxes or liabilities), you may alienate the buyer.
Option Five: Initial Public Offering (IPO)
If your business has been extremely successful and has grown at a rapid rate, you might be able to gradually make your exit by having an initial public offering (IPO) — offering shares of your company to the public for the first time.
Unfortunately, there are some significant hurdles involved with taking a company public. Aside from the many regulatory barriers that you must cross, you will have to also convince analysts and investors that your business is worth buying into. It can be a very expensive and time-consuming process.
- Your equity in the company could suddenly be worth a LOT more
- Your profile will be much larger within the business community
- It is possible to gradually make a clean exit by gradually selling your shares and placing other people in charge of day-to-day decisions.
- It is very difficult to run a successful IPO
- You must carefully plan the financial, legal and accounting aspects of your business
- Your business’s structure may need to be changed before an IPO
- A significant investment in time and money will be required for the IPO.
Which of these exit strategies for small business is right for you will depend on your expectations, urgency and how you have been operating your business over that past 2-3 years. Generally speaking, businesses are valued on either net worth (assets less liabilities) or turnover/earnings multiples but are influenced by several factors (see NAB’s Valuing a Business). To maximise the exit value of your business start operating/managing your business accordingly at least 3 years before your intended exit date.
Do you have an exit strategy in place and are you operating your business to maximise its exit value?
If not, then your business will benefit from a skilled and experienced accounting professional. To arrange an initial, complimentary discussion click here, email me at firstname.lastname@example.org or call 0418 697 701.