It may seem very strange to you to be thinking about leaving your business when you put so much effort into starting it up and growing it. But there will come a time when you will want to move on, and the earlier you plan for that eventuality, the better off you will be. Even if you plan on working until you drop, you will indeed drop someday and you need to have planned out what happens to the business then.
Many exit strategies require months or years to implement, so it makes sense of map out the strategy that’s best for you as early as possible.
Your personal goals
Ask yourself: What do you want to do after running your business?
The answers to that question are as unique as each entrepreneur. You may decide that there’s nothing more appealing than lying on a faraway beach sipping margaritas. You may want to start another business, perhaps in a different industry. You may choose to mentor young entrepreneurs as they face the same pitfalls you have over the years. It’s important to define your goals because they will affect how you will transfer your business and how you will structure payments.
Heading for the exits
There are many ways to transfer your business to others. Let’s look at the most common.
Pass the business on to your children
This is also known as succession planning. Many small business owners want to keep the business empire that they have created in the family to provide their children (or grandchildren) with a secure source of income. However, this form of selling the business can be the most difficult.
The first decision that has to be made is whether your children are truly interested in owning the business. Many small business owners get quite the shock to find out that their kids really don’t want all the hassles of running a business. Even if they do want to take over the reigns, they must go through the same decision process as you did when you started your business: defining business and personal goals, outlining a vision, and setting a growth plan.
A decision that you as the business owner must make is to define what is acceptable to you in how the business is run in the future. What if your children have a very different vision of the business and make substantial changes? Will you be comfortable with that? The more thought put into this type of succession up front, the more likely the transition will be successful.
Selling the business to an outside party
If you don’t have a family member who wants to take on the business, you may choose to sell your business to someone outside your family. It might be an employee, a competitor, or someone who wishes to purchase an existing business rather than start one from scratch.
It is more difficult to sell a business than you might think. That’s why it’s critical to plan ahead so that you can make sure that your business looks great on paper, is growing consistently, and will be attractive to potential buyers.
Brokers are frequently used in this type of sale. A broker’s job is to match up buyers and sellers of businesses, much like a real estate broker’s job is to match up buyers and sellers of houses. A broker may bring potential purchasers to the table whom you may not have otherwise met.
When selling to an outside buyer, timing is important. Ideally, you will want to sell your business when the economy is hot, your business’s performance looks outstanding, and its reputation is stellar. The worst thing that you can do as a small business owner is to run your business until you can’t stand it for another five minutes and then try to dump it for whatever you can get. You’ll maximize the business’s value (and price tag) if you sell when things are looking up rather than down.
If you have built a business that is completely dependent upon you and have not systematized your operations, liquidation of the business is probably your only option. Liquidation involves selling off the assets of the business and using those funds to pay the liabilities. This will only work if there are more assets in the business than liabilities. If the situation is reversed (i.e., there are more liabilities than assets), you may have to declare bankruptcy in order to get out of your business, otherwise you will have to continue to run it until the liabilities are paid.
The benefit of liquidation is that it tends to be easier than selling a business as a going concern. There are more potential buyers for individual assets than for an entire operation. The downside (and it’s a big one!) is that you will almost always end up with less cash in your pocket at the end of the day by liquidating. There are two reasons for this:
1) Equipment and other assets are generally valued higher if they are part of a continuing business.
2) It is impossible to sell the goodwill of your business if you are liquidating.
Generally, this is the least favorable option for you to pursue.
These are some of the issues that you will need to contemplate before selling your business.