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5 Business Exit Strategies: Which One Is Best For You?

Although every entrepreneur dreams of the day when his or her business will become a success, the reality remains that there will also come a moment when it is time to step away. Unfortunately, the checklist for selling a business can be quite daunting, leaving business owners feeling a bit trapped as to how they can move on. While selling your business is definitely a viable option, there are other means of taking a full or partial step away from your business. Keep reading to find out more details about the top 5 business exit strategies and which one is best for you.

1. Family Succession

Sometimes referred to as a legacy exit, this is the idea that a profitable business is passed on to a family member, keeping the company “in the family.”

This is a great option for business owners who want to move on, but don’t really want to move on. After all, many small businesses are started from the ground up and are the result of countless hours of blood, sweat, and tears. The business has likely become synonymous with the owner’s name. So rather than completely washing their hands of the business, potentially causing people to forget about the legacy that was built, the owner may choose to simply pass the business along to an heir.

This can be one of the most seamless exit strategies available to the owner. There is a strong likelihood that the heir has worked for the company and ate, drank, and slept the business for most of their life, so business operations can sometimes continue with minimal interruption for the employees, customers, and investors. 

On the flip side, it is important to remember that no matter how familiar the family member is with the business, there is still a transition, and it is important that the right person is chosen so that the company continues to prosper. You don’t want to find yourself in the classic “Tommy Boy” scenario, in which the employees, customers, and reputation of the company suffer as the result of passing the business on to an unqualified heir.

Pros

  • Keeping the business in the family usually means passing it on to someone intimately familiar with the industry, keeping the company well-positioned for future success.
  • The owner has a better chance of seeing the legacy he or she built continue throughout the generations.
  • This strategy will usually result in minimal disruption for employees, customers, and investors.

Cons

  • It can be easy to forget that this is still an exit strategy, and some owners may get lazy or negligent in following through with the necessary legal paperwork.
  • The seller may be tempted to lurch in the background and keep their finger on important business decisions.
  • Choosing an heir can lead to bias that results in an unqualified successor. 

2. Merger and Acquisition (M&A)

If capturing a profit from your entrepreneurial efforts is at the forefront of your motivation to sell, then an M&A is a particularly attractive option.

In this strategy, the owner will sell the business to another company that wants to try and create some type of synergy from joining forces. This may be to expand into new product lines or extend geographic reach.

Because of the possible synergies, you can likely sell your company for a premium as a result of an M&A. The acquiring company will see the potential for the whole to be greater than the sum of the parts and may be anxious to make you an offer to ensure that a competitor does not scoop up your business. 

On the downside, selling as part of an M&A not only erases your personal legacy, but it will likely eliminate the company name altogether, as it is absorbed by the parent company. Furthermore, few buying companies can successfully pull off an effective M&A, so despite the upside, it may be hard to find a buyer willing to adopt this approach.

Pros

  • May result in a premium profit for the seller.
  • Offers a clean break from the business for those sellers desiring retirement. 
  • Great for startup businesses and companies in emerging fields.

Cons

  • Carries major risk for the buyer, so it may be difficult to locate an acquiring party.
  • Not an option for businesses in certain industries.
  • Can be a long, drawn-out negotiating process (many parent companies want to use stock to acquire smaller companies).
  • Likely to be disruptive to your employees, customers, and investors.

3. Traditional Sale

Rather than selling to an entity that is looking to absorb your company amid expanding operations, there is always the option of selling your business to another party who will continue operating your company in a similar manner to you.

The appeal of this approach is that the business will likely continue with minimal disruption. For those entrepreneurs who like creating value for their communities and job opportunities for people, this is an important consideration. What you have worked hard to create will continue.

business-discussion

In an ideal scenario, you will be able to sell to a “friendly buyer.” This may be a co-founder, investor, or employee who has a vested interest in what you have created and wants to expand their role in the company. In this type of “friendly sale,” you stand the best chance of ensuring continuity and transferring power to a competent successor. 

The reality, though, is that finding a friendly buyer is not always possible, and you have to hit the market to find a buyer. This can be difficult, as many entrepreneurs are unfamiliar with how to value a business and can struggle to achieve fair value for what they have worked so hard to create. As a result, it is important to perform extensive research and consult with an experienced business broker prior to listing your company.

Pros

  • Can help ensure continuity for employees, customers, and investors.
  • You should be able to achieve a profit for what you have created.
  • The buyer will be just as motivated as you to keep your business successful.

Cons

  • Difficult to arrive at a fair asking price for your business, and negotiations may be fierce.
  • Costs of selling a business are high, and your business may be on the market for many months.
  • If selling to a “friendly buyer,” the sale process may create friction that leads to hard feelings. 

4. Go Public With an IPO

It is the dream for many entrepreneurs: to have their pet business grow so big and successful that it becomes a publicly traded company. 

However, while selling shares of the company to the public can result in enormous profits, the chances of completing a successful IPO are becoming increasingly slim, with the number of publicly traded companies shrinking from around 8,000 in the late 1990’s to about 3,600 today. 

The upside to an IPO is that anyone can buy shares in your company, and if enough of the public buys into the hype, you can see your business valuation multiply many times over in a short period.

The downside, however, is just as real. When a market scare strikes, your company can erode value in a heartbeat, and there is really nothing you can do but sit back and watch.

For these reasons, unless you have a strong plan for going public and are confident in the future of your company’s market, an IPO should take a back seat to the other exit strategies listed.

Pros

  • Profit potential can be unlimited.
  • Can be viewed as a badge of success for owners that value being able to say they took their company public.

Cons

  • Public markets are notoriously fickle, making it a risky venture.
  • High regulatory costs.
  • Extreme scrutiny from shareholders and analysts takes control away from owners.

5. Business Liquidation

Finally, if you are truly ready to be done with your business and cash a check for your efforts, liquidation may be an attractive option. Although many business owners don’t prefer this method, as it means eliminating jobs and value their company created, closing the book on their dream in the process, there are times when it is truly the best option.

Think of liquidating your business as turning your business into cash. You will sell all company assets, pay off all debts, and meet any unfulfilled obligations to employees and shareholders, keeping any cash that is left over. 

Liquidation can typically be the quickest way to wash your hands of the business, and will likely break you from ever having to worry about any ongoing concerns. These are attractive considerations for business owners who have become worn and jaded from years of hustling.

The drawback is obviously the sense of finality that comes with liquidation. There is no chance for a brighter tomorrow or another day to put a smile on a customer’s face. In addition, as one of the key drivers of business valuation is the ability to produce ongoing revenue, liquidation removes this element from the equation, and it’s likely that you sell your assets at a discount as a result. 

Pros

  • A sense of freedom after years of hard work.
  • Turning your assets into cash is always an enticing option.

Cons

  • May have to sell assets at a discount.
  • Could result in strained relationships with business partners, employees, customers, and stakeholders.

Moving on from Your Business: 5 Viable Exit Strategies

Stepping away from the business that you have worked hard to build is never going to be easy. Fortunately, there are a number of exit strategies that can help make your transition as smooth as possible. With this in mind, family succession, M&A, a traditional sale, a public IPO, and business liquidation are all viable exit strategies for you to consider when it is time to move on.

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