Having an exit strategy early on in your business helps you maximize how much money you will get out of your business and is essential to attract potential investors.
This is an important step for any business owner who is interested in getting significant investor funding in the future or simply wants to eventually enjoy the fruits of their labor.
An effective exit strategy provides a detailed plan that describes and outlines what will happen when you want to leave your business. Even if you plan on operating your business for the rest of your life this plan will come into play in the unforeseen event that you are no longer capable of doing so or you change your mind as the business evolves.
Ideally, an exit strategy is there at the outset of your business and included in your formal business plan. If that’s not the circumstance, then it’s something that you should put together now.
You should have an idea of what some of the most common available options are:
- Merger and Acquisition – When hoping to sell to another company that plans on merging your services with their own offerings, it’s important to understand how to build value in the strategic alignment. If you build your business with this in mind and make sure there is strategic alignment with potential future buyers and you may be able to sell for much more than the actual value of the business.
- Liquidations – The sale of all assets for cash. Often the simplest exit but offers the lowest return on investment. This can often become the only viable option if an effective exit strategy isn’t planned ahead of time.
- Liquidations Over Time – The owner takes money out of the business in the form of a large salary or dividends over time instead of investing back into the business. This is a tempting option for some small business owners but greatly reduces the growth potential and therefore the potential sale value of their business. Additionally, salary is taxed as personal income instead of capital gains in the case of income from selling the business.
- Sell to Family or Employee – This may be an attractive option for business owners because it seems like a simple handoff but there are some potential pitfalls in assuming that the relative or employee will be interested in operating the business in the future or even be competent enough to do so. There are ways to successfully plan for this while putting in place contingencies.
- Sell on the Open Market – This is common for small business owners who are nearing retirement or experiencing unexpected health problems. Unfortunately, BizBuySell estimates that only 20% of businesses listed are sold, and many are sold for much lower than expected. Developing an exit strategy will help prepare the business for the maximum return on investment with ideal buyers already in mind.
- IPO – The Initial Public Offering is rare but can be extremely profitable. It’s a long and expensive process that will require strict reporting and compliance standards. This is by far the most difficult exit to attain so it would be wise to put together a strategy early on and plan accordingly.
Whether you know exactly which option suits your needs or it all seems so far off to make up your mind, you should connect with a business advisor to get help putting an exit strategy together for your business. You’ll be happy you didn’t put it off until later!