It’s never too early to start planning. Moving on from your business works best when it’s planned well in advance, giving you time to get everything in order for a new owner and choose how you want to exit your business.
A clean exit is usually best — one where you walk away with a substantial payout and safe in the knowledge your business is in good hands. To help this process, you need to be in a position to choose the right exit method — one that suits your circumstances, rather than rushing a decision which may not deliver the results you want. Here are six typical exit strategies to match against your circumstances and future opportunities.
Strategy 1: Pass on to a family member
Often, family-owned businesses will have someone from the next generation preparing to take over. This can be an obvious choice if that person is already working in the business, has learnt your role, understands how the business works, is familiar with staff and can continue to grow the business.
However, family businesses can be complicated if there is more than one sibling or relative eager to take control, and if they have radically different ideas than your own.
To make it easier to sell to family:
- Communicate your intentions early
- Decide who’s best qualified to lead
- Get a consensus of agreement on who will inherit
- Access an outside expert valuation
- Solve conflicts of interest
- Use a professional (accountant, advisor) to help facilitate
At the end of the day, consider what’s best for the business, and whether a family member has the right skills, experience and business know-how to ensure a smooth transition. Consider consulting a lawyer to put an agreement into place to facilitate the transition.
Strategy 2: Sell to a business partner
If there is more than one owner, then another owner may be interested in buying the business. You might also consider letting the new owner purchase the business in stages if they can’t afford a lump sum payment. However, if the business underperforms after your departure and they can’t keep up with payments, it could create complications you’ll want to avoid.
Strategy 3: Sell to your employees
An existing employee (or employees) may see their career path culminate in buying the business. Employees often make good buyers because they already know and understand the business, hold relationships with your suppliers and customers, and are likely to want to continue the way you ran the business (at least for a time). If an employee doesn’t have enough capital to swing the deal on their own you might be involved in helping them fund the purchase, but similar to selling to a business partner, it’s usually better to ask them to find their own capital so you can make a clean break.
Strategy 4: Sell to an outside buyer
Finding another person or company to buy your business outright is often the best exit, as you can negotiate for the highest price and leave the business without feeling any personal obligations to the new owner.
To make this easier:
- Get professional help valuing your business to establish a fair price (to both parties)
- Use an intermediary (like a business broker or advisor) to help negotiate with the buyer
- Look at what similar businesses are selling for
- Prepare your business for sale by tidying, fixing and updating
- Set out your business plan for the future
Strategy 5: Shut down the business
Some businesses close down because it’s difficult to transfer any value and find a buyer. A good example is if the owner is the only employee (in a service industry like an architect) where ‘they’ are the business.
Alternatively, the business could be under stress and needs to close to prevent reckless trading (expenses outweigh sales and there is no remedy in sight). If this is the case you could consider liquidating all your assets for cash and paying off any debts, tax or financial obligations before winding down the business. Seek professional help if it’s likely you need to close.
Strategy 6: Keep the business and install a manager
You may decide to keep the business and employ a manager to run the day-to-day operations (this may be an existing employee, or someone new). This is a popular option if the business is generating positive cashflow and you can draw dividends that provide a better return than investing the sale proceeds.
Recognizing the right time to sell
When to sell can depend on what’s happening in your industry (demand up or down), and of course your own internal retirement clock. Indicators when to sell include:
- You’re confident on the return on investment for another buyer
- The business has gone as far as you can take it
- The next generation is ready to take over
- You’re ready for another challenge
- There is potential for growth
Next steps
Selling your business is probably the most important decision you’ve made since you started up, so take the time to think about what’s best for you and the business. The more time you have before the sale date, the better the outcome is likely to be. Seek as much advice as you can from your accountant, business advisor, banker, your industry, and other small businesses you trust to help guide you when to sell, how much for, and to whom.
This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
