In all the excitement and passion of creating a new business it may seem illogical, if not downright gloomy, to be thinking about the end of the business. After all, isn’t optimism a key characteristic of entrepreneurs?
The fact is planning ahead is a smart business strategy. Planning an exit strategy in business is a lot like preparing an estate plan in life. Refusing to plan for your death doesn’t mean you won’t die –it just means that when you do die others will make your decisions for you. A succession plan, or exit strategy, for your business is just as important. The earlier you begin to think through how you want to exit your business, the more likely you will be to have some control of the situation.
So, how do you leave a business anyway? There are several common options that fit into the ‘how’ category. Which strategy will work best for you depends on a number of factors including the type of business, where the business is located, your financial needs, and the timeframe you have to implement the transfer.
Strategies for business exit
1. Close the door and walk away. This is certainly the easiest solution but it will not get you any return on your investment. While it is not the most financially responsible way to dissolve a business it is quick and easy. For many of the micro and home-based businesses in this country it is the default strategy.
2. Give it away. It is possible that you might choose to pass the dream of business ownership along to someone else. In some cases this might be to an individual (see #3) but it could also be to an entity. It is possible that you could transfer ownership to a non-profit organization that would run the business as a fund-raising strategy for its non-profit mission. This could net you some tax benefits but it would require some legal expertise, time and careful planning.
3. Transfer the business to a family member. There are a number of ways that you can do this. If you have a family member or close friend that wants the business there are ways that you can transfer the business assets over time. If you have the time and resources to do this it can make the transfer a lot more attractive to the buyer. It will allow them to acquire equity in the business over time which can be attractive to potential lenders.
4. Sell to someone close to you—maybe a customer! Unlike the transfer option, this is an outright sale but the buyer is someone that you know. It avoids the time and energy required to hunt for a potential buyer.
5. Sell to your employees. This is becoming a more common occurrence with the rise of Employee Stock Option Plans (ESOP). There are some tax advantages to this strategy but it is clearly more complicated than some of the other choices.
6. Sell to a competitor. Who better to really understand the benefits of your business than someone that has been competing with you for years? Of course this means that your buyer will be aware of both the strengths and weaknesses of your business. It may require a bit more negotiation to get to an agreeable price.
7. Sell it to the highest bidder. This strategy is similar to the way you might sell a piece of real estate. Find a broker and let them handle finding a buyer.
8. Break up the business and sell the pieces. This strategy will work best for businesses that have clear and separate profit centers.
Before you start planning for your business exit it would be beneficial to spend some time thinking about the nature of your business.
How unique is your business? If your business relies on a specific skill or personality trait then it might be difficult for you to transfer the business to someone else.
What are the assets of the business? If the business has a lot of assets then it will certainly be in your best interests financially to liquidate at least some of those assets. You’ll have to decide if that means selling everything to a single buyer or breaking the business up and selling off assets piece by piece.
How diverse is your customer base? Are your customers spread out or local? Do they support your business because of loyalty to you or are they just crazy about the product? How much competition do you have?
Prepared by Mary Peabody, UVM Extension
