Man staring at exit door
Exit plans take into account not only the segueing business owner, but the customers, employees, and investors, as well. — Getty Images

Establishing an exit strategy is not usually the first thing entrepreneurs think to do when starting a business. However, when it comes time to leave, having a solid plan in place helps ensure a successful financial future.

There are three main questions that will inform your exit plan:

  • How long do you want to stay involved in the business?
  • What are your financial goals?
  • Do you have investors or creditors to pay off before exiting?

Steps to developing your exit plan

Once those three questions are answered, you can start exploring your available options. Leaving your business can be emotional and overwhelming, so planning a proper exit strategy requires diligence in time and care.

To plan a proper exit strategy, consider the six following steps:

  1. Prepare your finances. The first step to develop an exit plan is to prepare an accurate account of your finances, both personally and professionally.
  2. Consider your options. Once you have a complete picture of your finances, consider several different exit strategies to determine your best option.
  3. Speak with your investors. Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid.
  4. Choose new leadership. Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans.
  5. Tell your employees. When your succession plans are in place, share the news with your employees and be prepared to answer their questions.
  6. Inform your customers. Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.

Leaving your business can be emotional and overwhelming, so planning a proper exit strategy requires diligence in time and care.

Weighing your options: closing vs. selling

There are two strategies to consider for your exit plan.

Sell to a new owner. Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.

In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because

  • The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
  • The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
  • The transition for your employees and customers will be a smooth one, since the buyer likely already has a stake in the business.

However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.

Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.

The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.

Liquidate and close the business. It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.

There are two main ways to liquidate your business.

Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry, and then closing up shop.

The benefit to this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.

The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.

The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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Published March 07, 2019