I know that running a business is a tough endeavor, and sometimes, it doesn’t always work out the way you want, so you need to exit. On the flipside, there’s a chance that it does great, and you still want to exit.
Through my years of running several businesses, I’ve had to exit some, so I had to employ various exit strategies.
My goal in this article is to point out and walk you through the several exit strategies for small business owners. I’d also be detailing it so you know which to employ at any time.
Exit Strategies for Small Business Owners
A business exit strategy is a detailed plan that outlines how a business owner intends to leave, sell, or transition out of their business. It serves as a roadmap for the owner, ensuring that they can maximize the value of their business and achieve their personal and financial goals while leaving.
Conducting thorough due diligence is essential. Owners must ensure that all legal aspects of their operations are in order, including contracts, intellectual property rights, and compliance with local, state, and federal regulations.
There are various exit strategies suitable for small business owners, and the best choice for you depends on factors such as your business size and nature, and market conditions. The United States has specific tax regulations related to capital gains, and owners should work with tax professionals to optimize their financial outcomes and comply with tax laws.
A merger occurs when two businesses combine to form a new entity. Typically, both businesses combine their assets, operations, and management structures, thus expanding market presence, increasing operational efficiency, and saving costs.
There are various types of mergers, some of which include:
- Horizontal mergers, which occur between businesses operating in the same industry and at the same stage of the production process
- Vertical mergers, which occur between businesses at different stages of the production chain
- Conglomerate mergers, which occur between businesses that have nothing in common
Small business owners must ensure compliance with antitrust laws to prevent legal challenges that could jeopardize the success of the merger. Note that after a merger, you may still need to be involved in the business. Therefore, it may not be the best choice if you want to leave the business completely.
An acquisition involves one company purchasing another. Unlike a merger, an acquisition is often a more dominant relationship where the acquiring company absorbs the acquired company into its existing operations. With this strategy, you will give up your ownership rights to the company that buys your business from you.
Note that acquisitions can either be friendly, with mutual agreement, or hostile, when the target company opposes the acquisition. If there’s a Design patent involved, ensure you involve a patent attorney.
A management buyout (MBO) occurs when the existing management team of a company buys the business from its current owners. MBOs are great because the business gets to be run by people who know its ins and outs, allowing you to rest easy knowing that your business is in safe hands.
Initial Public Offering
An Initial Public Offering, or IPO, involves publicizing a private company by offering its shares to the public for the first time. IPOs are a good exit strategy because they offer a good way for small businesses to achieve significant capital influx by selling shares to shareholders on the stock market.
Transparency is key in an IPO. Small business owners must adhere to stringent disclosure requirements to provide potential investors with accurate and comprehensive information about the company’s financial health and prospects.
An IPO requires the company to undergo intense scrutiny from stockholders and comply with strict regulatory standards. If you are dissolving a partnership and there’s a patent involved, then a patent attorney may be needed here, too.
Also known as the legacy exit, family succession involves passing the ownership and management of a business to a member of the family. This strategy is great for business owners who want to keep a profitable business within the family, or for people who want to retain close ties to their business.
It is important to note that you need to plan for a family succession as well as you will plan for any other exit strategy. The person taking over has to be well-trained and prepared for leadership, to ensure a smooth transition.
Liquidation is the process of selling off a company’s assets to convert them into cash. The assets sold can include inventory, equipment, and real estate. The proceeds from this sale are used to settle any outstanding debts, and the remaining funds are distributed among the stakeholders.
This strategy is a final one and is often chosen when the business is failing financially and other exit strategies are not viable. It could also be chosen when the owner wishes to close the business completely. While it is a fast and simple strategy, it is not likely to provide as much value as other strategies.
What Factors Should I Consider When Choosing an Exit Strategy for My Small Business?
When choosing an exit strategy for your small business, you should consider factors such as your financial goals, the nature and size of your business, market conditions, profitability, timing, and the potential impact the strategy can have on the business in general. Considering these factors will help you choose an exit plan that aligns with your goals.
Do I Need an Exit Strategy From My Business?
Yes, as a business owner, you need a business exit strategy, even if you’re not currently considering an exit. Having a strategy in place ensures a smooth transition when you decide to sell or step away from your business. It also helps you to maximize returns while reducing disruptions to business operations as you step away.
How Does a Merger Differ From an Acquisition?
A merger involves two or more companies consolidating to become one entity. An acquisition, on the other hand, is when one company purchases another. With the former, the businesses share ownership and control of the new entity, while with the latter, the target company is completely absorbed into the acquiring company.
Every business owner needs an exit strategy for when they want to leave their business. Each strategy described above has its advantages and challenges, so it’s important to carefully consider which aligns best with your goals. To choose the right strategy, assess the nature and size of your business, as well as the prevalent economic and industry conditions.