What is an exit strategy?
A business exit strategy is an entrepreneur’s strategic plan to sell their ownership in a company. Exit strategies include acquisition, merger, IPO, or shutting down operations. An exit strategy gives a business owner a way to reduce or liquidate their stake in a business and, if the business is successful, make a profit. If the business is not successful, an exit strategy enables the entrepreneur to limit losses.
In an article by Meredith Wood; The Best Business Exit Strategy for You: 9 Ways to Move On, she defines a business exit strategy is simply a plan for what will happen when you want to leave your business. It describes and outlines the form that the transition will take. Just like you have a business plan to guide your business throughout its life, you should have one that guides it to a conclusion.
Which Exit Strategy is Best?
Which exit strategy an entrepreneur chooses depends on many factors, such as how much control or involvement they want to retain in the business and whether they want the company to continue to run in the same manner. The entrepreneur needs to determine their personal goals and define what success would look like for their business. Next is to research and understand what options are available, and create a plan with options that best fit the venture.
My choice for an exit strategy – Friendly Buy-Out
The dream of many small business owners is to keep your business in the family so that your legacy lives on and provides a living for your heirs.
I have a nephew who is currently in the Marine Corps and will retire out of the military about the same time I will want to transition out of my small business. He is a very hardworking and responsible young man that has an interest in working with me to learn the business and develop into the ownership role.
Keeping your business in the family has some distinct advantages; it can make for a smooth transition by grooming a family successor, it may allow for you to keep a hand in the business in an advisory role or another capacity. You know them, and they know you, so there’s less due diligence required. Your buyer will most likely preserve what’s important to you about the business.
There are also distinct disadvantages to this option as well; family relationships can cloud judgment during sales negotiations. You can get too attached to the idea of the business being bought by someone from the family that you leave too much money on the table.
Succession Planning Tips
Susan Ward wrote an article for TheBalanceSMB.com; Family Business Succession Planning—Tips for Success, and states thatfamily is the primary emphasis of succession planning for many businesses. Whether you’re thinking about the future management of your business, how ownership is going to be passed along, or taxes, you won’t be able to help thinking about how your decisions will affect your family. Susan outlines six key tips to have the best chance at a successful transition.
- Start planning early:Five years in advance is good, but ten years in advance is better. Many business advisers tell budding entrepreneurs to build an exit strategy right into their business plan. The longer you get to spend on succession planning, the smoother the transition process is likely to be.
- Involve family members in discussions:Making your succession plan and then announcing it is the surest way to sow family discord. Discussing the plan helps to identify who in the family wants to be involved directly and who is focused elsewhere. It also might help some family members find interest in the business they didn’t know they had.
- Be realistic:You may want your first-born son to run the business, but does he have the business skills or even the interest to do it? Perhaps there’s another family member who is more capable. It may even be that there are no family members capable of or interested in continuing the business and that it would be best to sell it. Examine the strengths of all possible successors as objectively as possible.
- Do what’s best for the business: Making sure everyone has equal shares seems nice, but it may not be in the best interests of your business. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Another alternative is to use voting and nonvoting shares so that only some of the family shareholders can make decisions on company policy. It may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
- Train your successor(s):How can you expect your successor to take over and run your business successfully if you haven’t spent any time training him? Your succession planning will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but it’s definitely an effort that will pay big dividends for the business.
- Get outside help:Lawyers, accountants, financial advisers, and others can help you put together a successful succession plan. There even are companies that specialize in family business succession planning that will facilitate the process of working through issues.