Here is a list of common exit strategies for small business owners to consider.
Mergers and Aquisitions
Mergers and acquisitions are a common way to exit for many businesses.
What is it?
Mergers combine two or more businesses into one entity to create a larger, stronger company.
Whereas an acquisition would be the purchase of one company by another to create a new combined entity.
Either way, the businesses will often have some common interests or goals they can achieve together.
This exit strategy is often used to increase market share, expand into new markets, or diversify a product line.
When done correctly, this can be an effective way to create value for both companies.
Pros
- Allows for rapid growth and expansion potential
- It can be used to eliminate competition in the market
Cons
- A complex process that requires a lot of planning and negotiation
- Typically, you’ll lose controlling stake in your company
- This takes several months to negotiate and close
Selling Your Stake to a Partner
Another option is to sell your stake in the company to a partner or investor.
What is it?
This is a common strategy for small and medium-sized businesses.
It involves selling some or all of the business’ shares to an outside investor or business partner.
The idea behind this is to bring in someone with experience and resources that can help take the business to the next level.
Pros
- Allows businesses to remain in the same ownership structure
- Provides capital for expansion or growth
- Can bring in new management and expertise
Cons
- This could lead to a loss of control over the company
- Potential for disagreements between partners
- It can be challenging to find an investor who is a good fit for your business
Family Business Succession
This type of exit strategy is beneficial for family-run businesses.
What is it?
A family business succession involves passing the company on to a family member.
This is often done when the current owner is ready to retire or pass away, ensuring that the business remains in the family.
Pros
- Ensures business continuity
- It helps preserve the family legacy of the business
- It can be more affordable than other options
Cons
- It may not be the most tax-efficient option
- Potential conflict between family members
- It can be challenging to transition ownership without disrupting day-to-day operations
Employee Buyout
This type of exit strategy is also known as an ESOP (Employee Stock Ownership Plan).
What is it?
An employee buyout allows the current owner to transfer business ownership to employees.
This can be done through an Employee Stock Ownership Plan. This type of plan allows employees to purchase shares in the company and become its owners.
Pros
- Allows the current owner to receive a fair market value for their business
- Provides an incentive for employees to continue working hard and be loyal to
Cons
- It can be difficult to manage multiple owners
- Employee ownership can cause problems if there is no clear leadership structure
Initial Public Offering
An initial public offering (IPO) is an exit strategy used by larger companies.
What is it?
Initial public offerings involve going public by selling company shares on a stock exchange.
This is often done to raise money for growth and expansion and give current owners an exit strategy.
Pros
- Allows current owners to receive a fair market value for their company
- Raises capital for expansion and growth
- Provides an incentive to employees
Cons
- It can be a long and complex process
- Requires the company to meet specific standards to list on a stock exchange
Automating Yourself Out of the Business
This exit strategy is becoming increasingly popular among entrepreneurs (and is one of my personal favorites).
What is it?
This is where you automate your business to a point where you’re no longer required to be involved in the day-to-day operations.
You can do this by hiring an experienced team, leveraging technology, and using automation tools.
Once you have automated your business, you can sell the company for a premium or take a backseat and enjoy the passive income.
Pros
- Allows for a smoother transition when changing ownership
- It gives current owners more time to focus on their next venture
- Can save money by eliminating the need for a large staff
Cons
- It may require a significant upfront investment
- It can be difficult to find a new “CEO”
Business Liquidation
This last resort option should only be considered if all other options have been exhausted.
What is it?
Business liquidation involves selling all the company’s assets to repay creditors and other debts.
The proceeds from the sale are then distributed to shareholders. It is usually done when the company can no longer remain profitable or viable.
Pros
- Can provide a quick and easy way to exit the business
- Allows for a clean break from the company
Cons
- Upset investors and creditors
- The proceeds from the liquidation may not be enough to cover all debts
Bankruptcy
Another last resort option is bankruptcy.
What is it?
Bankruptcy is a legal process involving filing for bankruptcy protection to reorganize and pay off debt.
Once the company has gone through bankruptcy, it can be sold to another company.
Pros
- Can provide relief from creditors
- Allows for a clean break from the company
Cons
- Destroys your credit
- It can be difficult to recover financially and emotionally
- It will be harder to borrow money in the future
Types of Bankruptcy
There are two common types of bankruptcy in the United States.
- Chapter 7
- Chapter 7 bankruptcy is the most common type of bankruptcy for businesses. It involves liquidation to pay back creditors.
- Chapter 11
- Chapter 11 bankruptcy is another option. It involves reorganizing and restructuring the business to pay back creditors over time.
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