Exit Strategies | What Are They and Does Your Small Business Need One?

Posted on: September 25, 2019

Whether you’ve been running your small business for ten years or are just beginning, an exit strategy may be on your mind. You have a lot to consider, from your preferred lifestyle to your business’s industry, when considering whether an exit strategy is right for you.

Here, we dig into what an exit strategy is, what exit options you have available, and a few pointers on how to decide whether an exit strategy should be on your radar. Let’s get started:

What Is an Exit Strategy?

As the name implies, an exit strategy is a plan of action to leave (i.e., exit) your small business in some capacity.

In the startup community, for instance, ideal exit strategies usually proceed as acquisitions or initial public offerings (IPOs). In both scenarios, investors (and owners) have the opportunity to sell their equity and ‘exit’ the company. Although startup exit strategies are generally the most publicized, any business owner can perform an exit. And there are multiple ways to do so.

The Numerous Kinds of Exit Strategies

While some exit strategies are more popular than others, there’s no single plan you need to follow. For high pace startups with ample venture capital funding, IPOs and acquisitions are generally the best bet. Smaller companies and service-oriented businesses may want to consider equity sales instead.

The following are a few of the most popular exit strategies businesses are utilizing today.

Initial Public Offering (IPO)

It’s likely that if you’re even considering an IPO, you’ve grown well past the small business stage. In an IPO exit, you sell shares of your business to institutional and retail investors as stock on the public stock market. Because IPOs heavily involve retail investors, you don’t have much leverage in negotiating the value of your business.

IPO exits are generally the most lucrative, but they require approval from the Securities and Exchange Commission (SEC). Additionally, you’ll need to contract the services of numerous lawyers, investment bankers, and accountants if you choose to go the IPO route. These services and additional regulatory steps cost a substantial amount of time and money. So, for small businesses, IPOs are usually out of the question.

Acquisition

Chances are, regarding exit strategies, you’re most familiar with acquisitions. In an acquisition, one company (typically the larger of the two) purchases, or acquires, another company. Even within acquisitions, there are a variety of outcomes.

Your level of interest in remaining with the business is the most influential determinant in how your acquisition plays out. Some owners don’t want to leave their company, so they’ll opt to stay on as an employee, typically at a manager-level role or higher. Others choose to move on to their next endeavor, handing over the reins entirely to the acquirer.

With an acquisition as your exit strategy, the exit terms are ultimately yours to decide. If you don’t agree with an acquirer’s valuation of your business or oppose their employment offering, you can simply reject the deal.

This flexibility does come at a price, however. Negotiating with your acquirer may take months (or even years) to reach an agreement. Be prepared to continue operations throughout the acquisition process.

Acquihire

Like an acquisition, an acquihire involves another company purchasing your business. The motivation behind the acquisition, though, revolves around you and your employees rather than other company attributes.

In an acquihire, the acquiring company is interested in the unique skill set that you and your team offer. After the acquisition, the new company may liquidate everything else. If you’re interested in keeping the legacy of your product or service, an acquihire may not be right for you.

Merger

A cousin to the acquisition, a merger unifies two businesses to create a new, single organization. Whereas an acquisition contains a buyer and a seller, businesses participating in a merger are on equal footing. The newly established company won’t retain the name, branding, business registration, etc. of either of the former businesses and will contain a leadership team comprising of employees from both of the previous companies.

Equity Sale

It’s not uncommon to have a personal exit strategy for a relatively successful small business. Sometimes you want to retire or move on to another project. In an equity sale, you effectively sell your ownership in the company to another person. There are a few common scenarios in which this sale takes place.

If you have partners, you may sell your stake in the company to them. This option is referred to as a partner buyout and leads to a relatively straightforward exit and turnover. Because your partners already know the ins-and-outs of the business, operations shouldn’t stall much during, and after, the sale.

Another option involves selling your equity to an employee. Doing so is a common choice for solo business owners as it allows them to place their business in the capable hands of someone who already understands it well. Like the partner buyout, this exit strategy should cause relatively few hiccups during the transition.

You may want to keep your business in the family. With 5.5 million U.S. businesses operating as family-run, you won’t be alone. In that case, you would simply perform an equity sale to a relative.

Liquidation

Sometimes you have no better option than to close down shop and liquidate your assets. Only half of all small businesses make it past year five, so you shouldn’t feel upset if you fall into this category.

Additionally, liquidation may not be a negative outcome for your particular situation. If you’ve lost interest in running your business, and don’t want to deal with a sale, liquidation provides you with some final cash from your venture.

When liquidating, there are a few things to remember. First, notify your customers and employees well ahead of time that you plan on closing your business. Failing to do so is not only unethical, it could also tarnish your reputation when starting your next company. Most people forgive a company that shuts down; however, you lose people’s compassion when you rip the rug out from under them.

You should also pay back any loans, outstanding debts, and investors (if any) before paying yourself. If you don’t, you could likely end up in court.

Bankruptcy

Bankruptcy is a worst-case scenario for your small business. Unlike the previous exit strategies, there’s not much planning you can do for bankruptcy as it often comes unexpectedly.

You have three options when filing for small business bankruptcy – Chapter 7, Chapter 11, and Chapter 13.

Chapter 7, business bankruptcy, is a type of liquidation to pay off your debts. Many owners file for chapter 7 bankruptcy when their business debt becomes insurmountable. In this scenario, a trustee will come into your business, take control of your assets, and divvy them up to your creditors.

If you’re a sole proprietor, you have no obligation to your debts after bankruptcy. However, when part of a partnership or corporation, you still have some debt responsibilities.

If you think you may be able to turn your business around, Chapter 11, business reorganization, is worth looking into. In a reorganization, you provide a plan on how you’ll fix the company and work with your creditors to agree on a revised payment schedule. If your proposal is approved, the business continues to operate under a trustee.

Your last option, Chapter 13, or personal bankruptcy, only applies to sole proprietorships. Once again, with Chapter 13, you need to submit a repayment plan to the bankruptcy court. Differing from Chapter 7 and Chapter 11, Chapter 13 bankruptcy ties personal assets with the business’s, so you run the risk of losing items such as your car or house when filing.

Do I Need an Exit Strategy for My Small Business?

Sometimes the best exit strategy for your small business is no exit strategy at all. Many successful entrepreneurs choose to run lifestyle businesses in which they have no desire to leave or sell the company. If you’re content without some big, fanciful exit, this strategy may be right for you.

However, those types of businesses owners are the exception. No matter which stage your business is in, it’s wise to formulate at least a basic exit strategy. Before you bog yourself down with details, though, you must ask yourself a few questions:

  • ○  Are you comfortable watching someone else run your business?

 

  • ○  How important is it for you to be your own boss?

 

  • ○  Are you tired of running a business or just tired of your business?

 

  • ○  What do you hope to achieve with your exit?

 

  • ○  When do you want to accomplish your exit?

 

All of the above questions will help you discover which type of exit strategy is best for you. If you want to exit your business quickly, an IPO or merger is likely out of the picture. If you can’t stand working for someone else, you can rule out an acquihire. And if seeing someone else run your company is going to give you anxiety, you may steer towards a liquidation.

Don’t limit yourself to these questions, either. Exiting your business is one of the most monumental transitions in your life, so take some time to think long and hard about it. Dig into your motivations and think through different scenarios. You can never be too prepared.

Stay Flexible With Your Exit Strategy

Having one exit strategy is fine, but you should at least be open to multiple. Just as adaptivity is a vital part of running a business, flexibility is crucial for a successful exit.

There are several factors out of your control which affect the exit strategy that would be best for you. For example, you can’t predict the industry landscape, market health, or actions of your competitors – all of which affect your exit options.

It’s best to maintain a few exit strategies in case your first choice doesn’t work out. You may want another company to acquire you, but that only happens if you can find another company that’s on board. It’s possible that there’s no interest in the market and you’ll be forced to liquidate. You don’t want to be caught off-guard if that’s the case.

Tying yourself to a single exit strategy has unintended consequences as well. Executing on an exit strategy take up time. If you’re spending hours on end trying to find an exit that fits in your plan, your core business will suffer. Staying flexible allows you to work on your departure while keeping your business thriving.

Additionally, pigeon-holing yourself into a single exit strategy diminishes your negotiation leverage. If an acquirer or potential equity buyer knows that you’re not considering other options, they’ll likely try to strong-arm a better deal for themselves.

Start Planning Today

Don’t wait until you’re interested in exiting to begin forming an exit strategy for your small business. As with most things in life, it’s best to plan ahead and be prepared for when the opportunity arises. You now have enough exit strategy knowledge to get started on one – at the very least, a basic one. Start planning for the future today.

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