Exit Strategies for Small Businesses

Whether you’re running a giant conglomerate or a small family operation, your business needs an exit strategy. Two questions can help guide your strategy:

How much money do you want?
How are you going to get paid when you exit your business?

The following are the most popular exit strategies for small businesses:

Liquidation

When you liquidate, you close up and sell your assets. For businesses dependent on a single operator, this may be the only and best option. The advantages include:

Ease and very little planning.
A fast exit.

The disadvantages are myriad, and include:

A very low return on investment.
Low value for secondhand business assets.
Creditors get the first claim on your assets.

So liquidation is really only a wise choice for owners who have no other option, or who must immediately exit.

An alternative to total immediate liquidation is to liquidate over time. With this strategy, you extract profits over time, rather than reinvesting them. You might take out a very large salary or dividends for many years, slowly removing value. You then sell what’s left at the end. This approach can maximize your earnings. But it will make it virtually impossible to sell your business if you change your mind, because it virtually eliminates growth potential. Moreover, your salary will be taxed as personal income.

Transfer the Business to a Family Member

Many entrepreneurs dream of making their business a family undertaking that is passed down the generations. This provides a meaningful legacy and can bring family members close together. It can also be a source of immense stress, and does not always guarantee that the most qualified person runs the company.

The advantages include:

A smooth transition that you control.
A chance to create a legacy.
The opportunity to boost the career prospects of family members while remaining involved in an advisory capacity.

The drawbacks include:

Family infighting over the succession plan.
Concerns about whether family members have the necessary skills to run the business.
Disapproval from clients who may not like the new owner or new direction.

Selling to Employees or Managers

The people who know the most about you business—your managers and employees—already have a lot invested in your company. So selling to them may be a natural transition.

The benefits include:

Transferring the business to people who are already enthusiastic and knowledgeable about what you do.
Building motivation and loyalty if you structure the deal as a long-term buyout.
The chance to maintain a share of the business, allowing you some ongoing control.

The difficulties include:

Ensuring that employees are qualified to run the business.
Clients may not approve of the transition plan.
Structuring the transition plan can be difficult.

Sell the Business

This is the most popular exit option for most small businesses, but it’s also the most time-consuming. The advantages include:

A chance to walk away with a sizable profit.
If the business is profitable and the market is favorable, you may sell quickly.
You can incorporate assets and goodwill when selling the business.

The disadvantages include:

Selling it an intensive process that requires lots of paperwork and planning.
Valuing your business can be difficult, and you may end up with a lower selling price than you hoped for.
Marginally profitable businesses are challenging to sell. Only about 20% of businesses listed for sale actually sell, though there are many reasons for this—including owners changing their minds about the sale.

Two additional sale options may be appealing, depending on your business.

You can sell to another business. Your company may prove to be a desirable component of another company’s portfolio, making it an attractive acquisition.
You can do an Initial Public Offering (IPO) and take your company public. This is an especially attractive and viable option for successful startups with lots of goodwill and brand recognition.

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