BY STEVEN GALLO, CFP©
An exit strategy is something that every small business should have in mind, even one-person sole proprietorships. Your exit strategy could influence key business decisions, from type of legal structure to which revenue models to adopt, impacting decisions on how to balance the tradeoffs between long versus short-term investments in growth, down to the types of investors you should seek. Even if your exit is due to burnout, boredom, or business failure, it still pays to plan in advance. Below is a list of the most common exit strategies we discuss with our business owner clients.
Liquidation and Close: This is the close-up shop and sells all the assets exit strategy. For a lot of small businesses, liquidation is sometimes the only option. Especially when the business is totally dependent on the performance of one individual. If you’re in this position, you may want to build assets outside of your business and work towards building a more sustainable business model. Thus, making it much more attractive for someone else to buy.
Make it Your Cash Cow: In this scenario, the owner extracts most or all the profits out of the business over time, rather than reinvesting for future growth. This is typically done by taking out large salary draws or dividends over several years before eventually winding down the business. This exit strategy is best suited for the owner who wishes to maximize their current lifestyle rather than aggressively expand the business.
Sell to a Friendly Individual: This is a great way to “cash out” so you can pay investors, pay yourself, take some time off, and get ready for your next endeavor. Your ideal buyer may be a family member, friend, or the managers and employees currently working for the company. Selling to someone you know and trust should translate into a smoother transition with a shorter due diligence period. The key is to be sure the buyer has the skills to continue the operation.
Merger & Acquisition (M&A): This normally means merging with a similar company or being bought by a larger one. This strategy works best when the companies have complementary skills and can save resources by combining. For some bigger companies, it is easier to increase revenue growth through acquisition than organically creating new products and services. The trick to success with this exit strategy is to target your potential acquirer in advance and position your company accordingly.
Your exit strategy should be formulated as part of your overall business plan. By exiting wisely, you could maximize the financial return for you and your investors, and leave your venture in the hands of people that you trust. This will give you the financial means and the peace of mind to move onto the next phase of your life.