When you start a business, the last thing on your mind is how you’re going to leave it. Yet, this is one of the most common mistakes a business owner can make. Thinking of which business exit strategies you’d care to take early on is crucial in ensuring your exit from the business is a smooth one.
It’s important to ask yourself what you want to achieve with your exit. Do you want to leave with as much money as possible? Do you intend on exiting quickly? (Generally, business owners get a big payout or a quick exit - not both) Or do you want to bide your time and groom your successor to the best of their abilities to ensure a long and lasting legacy?
Regardless of how you see yourself handing over the reins, it’s important you adequately prepare yourself before this milestone.
Here are 8 important business exit strategies to consider:
1. Maintaining the family legacy
This path is the dream for many small business owners who want to pass on the buck to their daughters or sons. It’s an attractive strategy as you have the ability to groom your successor over long periods of time as well as leave with a firm legacy in place.
Advantages
Rather than a stranger taking over, you can rest assured the business is with someone you trust. Just make sure this person knows early on and there is enough time to adequately train them. This intimate transition could also allow for your continued involvement down the line should you choose to consult or sit on the board.
Disadvantages
With only about 30% of family businesses survive into the second generation, these types of business exit strategies pose a higher risk. Coupled with the messy politics that can accompany family-run businesses, it’s important to ensure that everyone is on the same page, your successor actually wants to take over the business, and that your team is on board with your legacy hire.
2. Mergers and acquisitions
The bread and butter of the business world, this is the most popular exit strategy for business owners. Depending on the conditions of the merge or sale, this could give you the opportunity to stay in the picture, or walk away scot-free. One of the most appealing aspects of this type of sale is the ability to negotiate for what you believe the business is worth. Just make sure you do your due diligence first.
Advantages
If your business is profitable and has the ability to scale, then you should have no problem attracting a buyer. Once you get them to the negotiation table, you’ll be able to lay out terms, price, and any other important details - including whether you’re looking for a clean break.
Disadvantages
One thing to be aware of is the timeframe. Only 20% of businesses for sale are actually bought, so if you think your business is worth the acquisition, be prepared to wait. Finally, it can be hard to come to terms if you’ve built your business from the ground up, knowing you’re not in control of its future.
3. Selling to a business Partner or key stakeholder
A lot of business exit strategies revolve around selling to pre-existing business partners. Out of all of the exit models, this one is the most ‘business-as-usual’ for suppliers, employees, and customers.
Advantages
You can rest assured your business would continue its operations as normal, protecting your employees and your legacy. The transition period should be relatively simple, considering your business partner should be well-versed in both the numbers and industry expectations.
Disadvantages
Depending on your business partner, this could lead to infighting over the price of sale. Perhaps this partner doesn’t want to buy you out at all. Regardless, it is not usually an option to stay involved once you hand over the business. .
4. Selling to your management team or employees
If your business partner is not interested in taking over your share, or you’re the sole proprietor - there lies an opportunity to sell to current team members. In fact, employee takeover has proven to be a profitable endeavour in the past. You can set up an Employee Share Ownership Plan (ESOP)) which is essentially a stock equity plan that allows employees to slowly take over control.
Advantages
If interested, you could likely stay on as an advisor after handing off the business to someone you know and have mentored in the past. This will cause little disruption to current processes and could very well empower remaining employees, boosting loyalty and commitment to business success.
Disadvantages
This scenario will only play out well if there is an employee who is qualified to step up to the challenge. Otherwise, you could find resistance among your employees or even your current client base who may be apprehensive about the takeover.
5. Go Public with an IPO
To see your business trade publically is a dream for many business owners. The total number of IPO’s was 240 in Australia in 2021, and while that was one of the strongest years for IPO’s, if your business is on the small to medium side, an IPO becomes an unlikely option.
Advantages
While rare, and difficult to do, this is the most lucrative of the business exit strategies.
Disadvantages
This is a lengthy process with no guarantee of success. You’re likely to dedicate hours, money, and effort to meeting the hefty compliance standards without the ability to withdraw any capital. This is on top of added scrutiny from stockholders, analysts, and shareholders.
6. Undergo an acquihire
This differs from a traditional acquisition as the company buying your business is looking to acquire highly skilled or talented employees. While many business owners squirm at the thought (you tend to lose your legacy), the added bonus is you’re helping to take care of your employees.
Advantages
You’re in the hot seat and can lead negotiations as well as walk away with a clean exit.
Disadvantages
As with other mergers or acquisitions, this can be a costly and time-consuling route.
7. Liquidate the business
As business exit strategies go, this one carries a strong note of finality. This is a close-up, sell-off, and never look back exit strategy which may impact your desire for a legacy or goodwill among your employees. For some though, this could be the only option. Try not to think of it as defeat though. You could work at priming it to be a business someone wants to buy.
Advantages
This is well and truly a quick exit. However, keep in mind some of the cash made liquidating will need to go towards paying off any outstanding debts or payouts.
Disadvantages
As mentioned above, this can have serious consequences for your staff, who may find themselves jobless. It also will yield the smallest ROI as the only financials you’re receiving are from the sale of everything your business owned and nothing more for growth or future potential.
8. File For bankruptcy
You should never plan to file for bankruptcy, although sadly, it is sometimes unavoidable. It is an unavoidable risk if you decide to own and sell businesses. But you can mitigate much of that risk by planning ahead and thinking of which business exit strategies to take early on.
Advantages
This will swiftly relieve you of any business debts and obligations and you’ll be able to move on and close this chapter.
Disadvantages
This will negatively affect your credit, especially if the bankruptcy filing doesn’t absolve all of your debts. It also is a fairly certain end to the relationships you had built with both customers and suppliers.
The Best Exit Strategy
At the end of the day, the best exit strategy is the one that aligns most with your personal and business long term goals. And if you’re not sure about those goals, speak with an adviser. They’ll be able to help bring some clarity to what is often a murky situation.
Whichever exit strategy you’re leaning towards, just make sure you start planning ahead of time in order to maximise your return at the end of the line.
