How to Exit Your Business

Transitioning out of a business encompasses a range of scenarios, with the most common being the sale of the business to an external party. However, there are alternative avenues for exiting, such as transferring ownership to a family member or a trusted member of your management team or distributing shares to your employees. Additionally, mergers entail agreements to merge your company with another entity, while liquidation involves the sale of individual assets or components of your company that may hold greater value separately. 

It's important to note that business exits should not be viewed solely as failures; some entrepreneurs establish businesses with the intention of eventually selling them for a profitable return. Other instances of "exits" may involve circumstances such as bankruptcy or the closure of a business resulting in financial loss.

Recognizing the significance of an exit strategy is crucial for business owners, yet it often tends to be disregarded until major changes become imperative. Neglecting to plan an exit strategy that guides the trajectory of a business can restrict future possibilities for entrepreneurs. To secure the best outcomes for your business, it is essential to develop an exit strategy well in advance of the actual departure.

Defining an exit strategy 

While an exit strategy is commonly associated with closing a business, it encompasses far more in terms of best practices. It serves as a roadmap that steers a business toward long-term objectives and facilitates a seamless transition into a new phase. This can involve reimagining the direction or leadership of the business, maintaining financial sustainability, or adapting to overcome challenges.

A comprehensive exit strategy takes into account all stakeholders, financial aspects, and operational considerations of the business. It outlines the necessary steps for either selling the business or closing it down. Exit strategies may differ based on the type and size of the business, but effective plans acknowledge the true value of the enterprise and lay the groundwork for future goals and new directions.

In the event that a business is thriving, an exit strategy should aim to maximize profits. Conversely, if a business is facing difficulties, an exit strategy should aim to minimize losses. Implementing a well-crafted exit strategy ensures that the value of the business remains intact, providing additional opportunities to optimize business outcomes.

Advantages of an Exit Strategy 

Having a well-crafted exit strategy in place goes beyond preparing for unforeseen circumstances; it fosters purposeful business practices and focuses on long-term goals. Although a plan may not be implemented for several years or even decades, developing an exit strategy provides the following benefits to business owners: 

Guiding business decisions: 

By keeping the future stages of your business in mind, you are more likely to make strategic decisions aligned with your envisioned business outcomes. This allows you to set goals with a clear sense of direction.

Upholding the value of your business: 

Creating an exit strategy involves conducting a thorough financial analysis that provides quantifiable value for your business. This information informs the optimal selling situation, ensuring that the value of your business is recognized.

Enhancing attractiveness to buyers: 

Prospective buyers place significant value on businesses that have well-planned exit strategies. Such strategies demonstrate a strong commitment to the business's vision and goals, making your business more appealing to potential buyers.

Facilitating a seamless transition 

Exit strategies encompass detailed plans for all roles within the business and how their responsibilities contribute to its operations. By ensuring that every employee and stakeholder is well informed, transitions can occur smoothly and with minimal disruption.

Achieving post-exit goals: 

Implementing an appropriate exit strategy tailored to your business's value and potential can help prevent undesirable consequences, such as bankruptcy, after leaving the business. It enables you to navigate the transition effectively while pursuing your personal and business goals.

Given the emotional and overwhelming nature of leaving a business, crafting a comprehensive exit strategy demands careful attention and dedication of time.

The challenge with this option lies in merging two distinct cultures and systems, which can create imbalances. As a result, there is a possibility that some or many of your current employees may be laid off during the transition.

Careful consideration of these factors is essential when determining the best course of action for selling or closing your business.

Evaluating Options: Closing vs. Selling Your Business 

When developing your exit plan, it's essential to consider two strategies: closing your business or selling it to a new owner.

Selling to a new owner: 

Selling your business to a trusted buyer, such as a current employee or family member, offers a straightforward transition away from day-to-day operations. Ideally, the buyer will share your passion and continue your business's legacy.

In a typical seller financing agreement, the buyer pays for the business over time. This arrangement benefits both parties because:

However, selling your business to someone you know has drawbacks. The personal relationship with the buyer may lead you to compromise on the business's value, selling it for less than its actual worth. Transferring the business to a relative can also introduce familial tensions that may spill over into the workplace.

Alternatively, you may consider targeting a larger company to acquire your business. This approach often yields greater financial gains, especially when there is a strong strategic alignment between your business and the acquiring company.

Liquidation and Closure of the Business 

Closing down a business that you've dedicated significant effort to building is undoubtedly challenging, but in certain cases, it may be the optimal choice for repaying investors while still realizing financial gains. One approach is to gradually liquidate your business over time, often referred to as a "lifestyle business." This involves paying yourself until the funds within your business are depleted, ultimately leading to the closure of operations. 

While this method allows you to continue receiving a paycheck and maintain your lifestyle, it may result in dissatisfaction among investors and employees. Furthermore, this approach hampers the growth potential of your business, potentially reducing its value if you later decide to sell.

The alternative option is to swiftly close your business and expedite the sale of assets. This straightforward method can be executed promptly, but the revenue generated will solely derive from the assets you are able to sell. These assets may encompass real estate, inventory, and equipment. Additionally, if there are any outstanding creditors, the proceeds from the sale must be allocated towards settling their claims before you can compensate yourself.

Regardless of the chosen liquidation method, certain crucial steps must be taken before permanently closing your business:

Carefully following these steps will help facilitate a smooth and legally compliant closure of your business.

Inform your employees: 

Once your succession plans are in place, openly share the news with your employees. Be prepared to address their concerns and questions with empathy and transparency. Clear communication will help alleviate any uncertainties and maintain a positive work environment during the transition.

Notify your customers: 

Finally, inform your clients and customers about your exit plans. If your business will continue under new ownership, introduce the new owners to your clients and ensure a smooth transition of services. In the case of closing down the business permanently, provide your customers with alternative options and assist them during the transition period.

Steps to Formulating Your Exit Plan

Developing a well-thought-out exit strategy requires careful attention and consideration, as leaving your business can evoke strong emotions and be overwhelming. To ensure a successful exit that maximizes the value of your business, follow these six steps:

Prepare your financials: 

Begin by thoroughly assessing your personal and business finances. This involves gaining a clear understanding of your expenses, assets, and the overall performance of your business. Accurate financial information will enable you to seek offers that align with the true value of your business.

Explore various options: 

With a comprehensive financial overview, consider multiple exit strategies to determine the best fit for your circumstances. Your decision should be based on your post-exit vision and how your business aligns with it. Seeking guidance from a business lawyer or financial professional can be valuable when facing difficulty making a decision.

Communicate with investors: 

Engage in discussions with your investors and stakeholders to inform them of your intention to exit the business. Develop a strategy that outlines how the investors will be repaid. Clear communication and providing supporting evidence from your financial analysis will enhance their confidence in your plans.

Select new leadership: 

As you finalize your exit plans, gradually transition some of your responsibilities to new leadership. Documented operational procedures and strategies will facilitate a smoother handover of responsibilities. Identifying and training individuals who will assume key roles will ensure continuity and mitigate challenges during the transition.

Remember, the most suitable exit strategy for your business depends on your specific goals and expectations. If you desire the continuity of your legacy, selling the business to an employee, customer, or family member may be the best choice. On the other hand, if your objective is a quick exit with the highest possible purchase price, exploring acquisition opportunities or liquidating the company might be more appropriate.