A business exit strategy is a plan for what will happen when you want to leave your business. This strategy describes and outlines the form that the transition will take. Just like you’ve written a business plan to guide your business throughout its life, you should have one that guides it to a conclusion.
Your business exit strategy doesn’t have to mean disaster or failure, or even imminent action—in fact, many business owners start their business with the express purpose of exiting after a certain number of years. It doesn’t mean they are less committed entrepreneurs. It just means they have a plan in place.
This being said, as you think about your business exit strategy, you’ll not only want to consider how you’ll leave, but also other factors that are involved with this process:
Let’s explore some of the different options you have in terms of a business exit strategy. At the end of the day, there isn’t necessarily a wrong or a right way to exit your business, but there are certainly options that may work better for you, depending on your particular situation.
Therefore, let’s take a look at these eight exit strategies—discussing what they might look like and the pros and cons of each option:
Many entrepreneurs want to keep their business in the family long term, and that means making plans for transitioning the company to a child or another relative at a certain point. This may seem like an attractive business exit strategy because you can groom successors over time—just make sure your family relationships can handle the volatility and stress of business ownership.
Although keeping the business in the family for multiple generations may seem like the best way to preserve your name in the business, it’s important to be practical about who is really the best person for the job of running your business.
With a merger or acquisition business exit strategy, your company is either purchased by or merges with, a company with similar or aligned goals to your business. Depending on who you merge with or sell your business to, this method could mean flexibility in terms of your involvement, or the freedom to walk away.
Perhaps the best thing about this exit strategy is the ability to negotiate the price of the sell, whereas selling to the public (an IPO) would value your company relative to the industry.
This process can take a long time, however, if it happens at all. BizBuySell estimates that only 20% of businesses listed for sale actually get bought. If it’s your dream to merge or get acquired, you might want to have a Plan B just in case.
Different from a traditional acquisition, this exit strategy business plan is one in which a company buys out your business simply for the sake of acquiring its talented or skilled employees.
Although this means your “legacy” may not endure in name, it will help take care of your employees. In this case, you would need to negotiate terms with your employees’ specific needs in mind: After all, they came to work for you, not another organization.
Although it may be difficult to plan ahead for many of these methods, it’s possible that when you’re ready to exit your business, people who already work for you may want to buy your company from you. As these individuals know you and know how to manage the organization, this business exit strategy could result in a smoother transition and increase loyalty to your business’s legacy.
Moreover, because these individuals are already part of your business and they likely know you so well, they may allow for flexibility in terms of your involvement—perhaps they’ll want to keep you on as a mentor or advisor.
If you aren’t the sole proprietor of your business, it’s possible to sell off just your stake to a business partner or other investor. This can be a relatively “business-as-usual” exit strategy, depending on the buyer.
Many entrepreneurs dream of one day selling their business to the public for a large profit. However, in the realm of small business exit strategy planning, this method certainly isn’t for everyone—business conditions need to be just right for this option to be possible.
Even if your business is booming, your industry may not appeal to the public in a way that gets stock buyers excited, thus devaluing your company. Not to mention the fact that IPOs are very rare: Whereas domestic public companies in the U.S. reached about 8,000 (out of millions) in the late 90s, the number has fallen to around 3,600 in recent years.
This being said, however, if it’s possible for you and the conditions are right, an IPO can be very lucrative.
As an exit strategy business plan goes, this one is the most final. If you liquidate, you’ll be closing your business and selling your assets. This being said, however, liquidation doesn’t have to mean defeat—just an ending to a chapter.
If you decide this is what you want to do, just remember that you’ll need to use the cash you earn through the process to pay off any debts and payout any shareholders. You’ll also want to remember how this option may affect employees, as well as clients or customers who rely on your service.
As far as small business exit strategy planning goes, this last method is the option that you can’t really plan for. Ultimately, no one wants to file for bankruptcy, however, this could be your last resort if something goes wrong (or you never managed to plan ahead with any of the other exit strategies listed above).
In fact, sometimes the necessity for a bankruptcy filing comes before you’re ready—but in the lifecycle of businesses, it’s not the end of the world. Although you may have assets seized and troublesome credit that will need to be rebuilt, you’ll be relieved of debts and the burden of the business if things get really bad.
Unfortunately, the possibility of bankruptcy is one of the many risks involved with starting and owning a business. Therefore, if the option of bankruptcy does become a reality for you, you’ll want to be sure to understand exactly what happens when you file business bankruptcy for Chapter 7, 11, or 13.
So, where do you begin when it comes to small business exit strategy planning? Although much of what’s ultimately involved with your exit strategy will be unique to your business, there are a few questions you can ask yourself to get started in your exit plan development:
When you’re just starting your business, this question might seem almost counterintuitive. Yet, even at an early stage in your endeavor, it’s important to be realistic—and this means thinking far into the future and considering your business exit strategy plan. Even if you spend your entire career owning the same business, most people eventually plan to retire at a certain age. Have you set up your business to make that a possibility down the line?
Maybe you know that you can only withstand business ownership for up to 10 years. In your eyes, what would you ideally like to happen at that point? Would you still want to be involved in the business even if you weren’t the owner?
These are important questions to answer for yourself in order to make the appropriate plans. It might even be a good idea to revisit how you feel about these questions year over year, as your life and plans evolve.
This, of course, is different for everyone. As much as you might love the concept of your business or the good it’s doing the world, almost every entrepreneur has financial needs and goals playing into their business plans (unfortunately, almost 70% of entrepreneurs don’t regularly save for retirement). Whatever your goals may be, this question will greatly play into your exit strategy outcome.
Many business owners work with consultants or professionals to help them make the best decisions, such as an accountant or business attorney. This being said, once you’ve asked yourself the first two questions, you might work with a professional for help developing an exit strategy as part of your business plan.
At that point, you’ll need to attend to “the executable items, such as taxes, deal structure,” and so on. You also need to understand the full value of your company to understand what your options might be.
In short, the exit strategy planning process is all about crystallizing your personal and business goals to make the best decision for your business at the appropriate time of exit.
This being said, if your exit is in the immediate future, you need to choose one plan and stick with it. But, if you have the time to plan ahead (and as we’ve mentioned, you should be thinking about this from the beginning), it’s a good idea to set yourself up for multiple options. Fortunately, you’ve got numerous exit strategy options to choose from when thinking about the future of your business.
At the end of the day, as is the case with many parts of running a business, there is no one-size-fits-all business exit strategy. Ultimately, the exit strategy that’s right for you and your business will depend on a number of different factors and may change or develop as you progress through the lifecycle of your business.
This being said, however, the best thing you can do with regard to an exit strategy business plan is to actually plan ahead. Even when you start your business, you should consider possibilities with regard to leaving your business, if and when the time comes. If you’re proactive in thinking about this process—what it might look like, how it might be executed, and what the consequences will be—you’re more likely to have success when it’s time to part ways.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.