Small Businesses Need to Plan an Exit Strategy, Too

Choosing an exit strategy for your small business may not seem like an immediate action when you’re just starting your business. Planning ahead, however, is always a crucial step when it comes to building your business. An exit strategy functions as a blueprint on how you can leave the business when it’s time to do so. It also includes details on what will happen to your business once you’ve left.

Whether you’re a small bakery or a small business investing in skip hiring, preparation is always important, especially for your success.

It pays to always have a plan in place, even if it’s a business exit strategy. Small businesses like yours must discuss their options when it comes to exiting the business, as well as weigh the drawbacks and benefits of each scenario.

Why Small Businesses Need an Exit Strategy

At some point in the life of any business, an exit strategy will be necessary, even if it means the transfer of ownership of the company when the owner decides to retire. Leaving a business can be a stressful and emotionally charged ordeal, which can easily cloud your judgment. In case of these, a good exit strategy can help you rationally address tough situations.

With an exit strategy early on, you can make decisions that will also support your eventual exit. This simplifies the process and makes it more profitable.

So, when making an exit strategy, consider the following:

1. Your financial expectations and situation
2. The length of time you plan on being part of the business
3. Any creditors or investors who require compensation, as well as how that process will look like

Common Exit Strategies For Small Businesses

Liquidation

This process involves the closing of a business, as well as the selling or redistributing of assets to shareholders and creditors. There are two ways to do liquidation:

a. Close and sell assets as soon as possible

This is often treated as a “last resort” by exiting businesses since you can only make money off the assets that you sell. However, you will lose valuable items like business relationships and client lists. Before liquidating your business this way, make sure you’re following the right protocols for paying back your debts, selling your assets, finalizing all legal documents, and employee protocol.

1. 1. Pros:

1. A simple exit.
2. It can be a quick closing process, depending on the sale of assets.

1. 1. Cons:
2. You can only make money if you can sell your assets.
3. If there are creditors, you have to pay them first.

b. Liquidate your business over time

Another common liquidation option is paying yourself until you run out of finances. Once the funds run dry, you can close the business. In some cases, the owners take the funds out over time and reinvest them back into the business.

1. Pros:
   1. You have a consistent stream of funds.
2. Cons:
   1. Your business’s sale value and potential growth are stunted.
   2. Investors who did not benefit from the liquidation will be upset at you.

Sell Your Business in the Open Market

Buying an already established business can be attractive to entrepreneurs since it’s less risky than starting a new business. Buyers can also benefit from the company’s existing systems, current client base, and brand reputation.

• Pros:
  • If your business is in good financial condition, it can still attract buyers.
• Cons:
  • It can be a long and tedious process, especially when the stream of potential buyers is slow.

Sell The Business to Someone You Know

Another option is to sell your small business to a person you trust or are at least familiar with. It could be anyone you trust: a manager, employee, existing partner, friend, or family member.

During a seller financing agreement, the buyer can pay off the business gradually. This enables the seller to maintain a steady stream of income while the buyer starts running the business off minus the large investment. During the transaction, the seller can also serve as a mentor, which helps the process become smoother for everyone.

If you want to sell the business to a family member, keep in mind that business transfer, valuation, and estate planning can be complex. As much as you love your family, you have to involve accountants, family successors, and attorneys to make the process go smoothly and without bias.

• Pros:
  • If you sell the business to someone who is already familiar with it, there is less disruption to the business.
  • A long-term buyout incentivizes employees, which makes them feel more committed to the success of your business.
• Cons:
  • You might be tempted to sell the business at a discounted price, which means you can’t gain the full amount of the business’s worth.
  • The process can cause stress to family relations.

An exit strategy might not be on your priority list, but it pays to prepare for the future. Plan for a strategy earlier so that you have one less thing to worry about.

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