Owning your own small business is a dream that few are fortunate enough to realize, but even those new to the joys of entrepreneurial self-determination need to spend time thinking about how you’re going to eventually leave the business. No matter how far off it may seem, the best way to ensure that your time in your business ends up meeting your personal goals and expectations is to prepare an exit strategy now.
Crafting an exit strategy long before you plan to leave may feel a bit like starting a meal with dessert, but there are plenty of benefits to doing so. It helps you understand all your options and what the potential outcomes of each may be. Let’s take a closer look.
Why an Exit Strategy is Necessary for a Small Business
Though you may think of an exit strategy as only suitable for big corporations or partnerships, every business should have one so that ownership can be transferred without being hampered by negotiations or stress. As with so many things in life, the more planning you do ahead of time, the less aggravation you are likely to encounter when the time comes. If you’re just starting to think about what your exit strategy should encompass, make sure that you think about the following:
In most cases this involves a process formalized by a seller financing agreement that outlines a gradual purchase that provides income to the seller and avoids a large initial investment for the buyer. Many times, these agreements involve either formal or informal mentoring as the business transfers hands to allow a smooth transition. Though it may be tempting to arrange a sale to a friend informally, it is important that everything be done with the help of an attorney and accountant to ensure that valuation and other issues such as estate planning and family succession can be addressed if appropriate.
There are many advantages and disadvantages to this type of arrangement. By having an exit strategy in place that makes current employees into eventual owners, you create more goodwill and loyalty and inspire greater productivity and creativity. It also allows you to continue being involved and ensures a smoother transition of business operations.
However, this type of plan can also create jealousies and competition between family members or employees, and may lead to your undervaluing your own business as you attempt to help those you care about.
Selling the business on the open market
There are many entrepreneurs who are looking for established, successful small businesses to purchase, as it avoids much of the hard work and risk that is initially involved. Entrepreneurs will find it easier to secure financing for a business that has a known revenue stream, goodwill, cash flow, and systems in place. To make yourself as attractive as possible to this type of buyer long before putting your business on the market, make sure that all of your records and financial papers are in order, and check out helpful information like this from the Small Business Administration to make sure that you are leveraging all of the features that you have already worked so hard to establish.
Selling your business on the open market is a great exit strategy for those whose businesses have a solid financial foundation and well-established clientele and reputation. However, the process can be drawn out and disappointing, especially if the offers you receive are lower than your valuation expectation.
Selling to an industry insider
Competitor businesses may believe that your small business is a good acquisition, whether to add to their portfolio or to eliminate competition. Similarly, employees in a related industry may be interested in ownership of a company that is already well established so that they can leverage their experience without having to start from scratch. This can be a particularly good option if you wish to remain in the business but in a consulting role with fewer responsibilities. However, many previous owners find themselves disappointed with their new role or the changes in the business’ culture or approach or the disposition of long-tenured employees. This type of scenario requires extensive involvement with an attorney to ensure that all aspects of the acquisition agreement are clear, and that the valuation is appropriate.
Initial Public Offering (IPO)
This approach involves selling shares of the company to the public to raise capital. Though the process takes time and is expensive, it goes a long way to earn a company public recognition and brand awareness and can be very profitable. Going public also involves a significant amount of documentation and regulatory compliance surrounding reporting and being open to the opinions and desires of shareholders in how the company is operated.
Before you make any large decisions or moves regarding your business, be sure to consult with our office.
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