Thinking about the end of your business’s life can be fun or scary. When we have big plans for the end (selling or passing to future generations) it’s a fun conversation. When we aren’t sure of what the end holds, it’s scary.. unknown.
This is one of the reasons it’s so important to plan for the end. Have an exit strategy. What’s the end goal?
An exit strategy allows you to plan and guide your business in the direction you choose. As you’ll see there are pros and cons to all exit strategy options.
Some example exit strategies:
- Sell the business to a buyer:
There are many ways to put a business up for sale and coaches to help prepare for this process. If the business is run well and profitable, it should be attractive for a buyer to pay a premium. You’ll receive value for the goodwill and time you’ve spent building systems. It’s important to note that a business that’s losing money or barely making a profit won’t market very well and businesses can sometimes be difficult to value making the price lower than expected.
Another option here is to sell the business to another business. Another business may see yours as an awesome addition to the services or products they offer. Businesses also buy other businesses to get rid of competition. Advantages here are that the buyer might be highly motivated to buy quickly and for a premium. Disadvantage is depending on the reason for the purchase, the buyer may lay-off current employees or liquidate.
- Sell the business to managers or employees:
If you’ve been grooming a manager to do your job, they might be interested in buying the business from you when you’re ready to retire. The benefit here is that the manager has a clear understanding of how to run the business and the culture of the company. They are familiar and enthusiastic about the business. You also may be able to stay around as an advisor. The cons here are similar to passing it down to a family member – they might not be ready or might want to make large changes that upset customers. In the latter, it’s best to step back and see if those changes would be for the better of the company as a whole.
- Liquidation: close business & sell all assets
This option is simple and can generally happen very quickly. Buyers can see the benefit of buying equipment, machinery and inventory at a discounted price. The downside here is that this option has the lowest return on investment. You don’t receive a lot of money for the goodwill – relationships built over the life of your business. It’s also worth noting that you likely won’t be selling the tangible assets you own at a premium, since they’ve depreciated since purchase. *A buyer may buy a higher price if they can step into your shoes and do the job you were doing.
Another take on liquidation is to liquidate over time. This is ideal for a business owner who wants to take advantage of the lifestyle the business is providing & pull all profits out of the business instead of reinvesting for growth. This is done by taking a large salary or large draws for the last few years of the business’s life before closing down & selling the assets. This generally works if all parties invested in the business are on the same page. Downside is losing out on some tax benefits and decreasing the value for a sale if the end goal changed.
- Pass the business to the next generation:
Many business owners dream of passing their life’s work onto their children, teaching them as they grow up. Leaving a legacy for their kids. This option can allow for you to keep a hand in the business or watch it grow as you retire. It can also make for a smooth transition as you train the next business owner. On that same note – running a business with family can be taxing and emotional. Setting boundaries is difficult. Family members may not have the right skill sets or may not want to work in the same field. Younger generations tend to want to modernize the business and take it in a different generation which has the potential to upset customers.
Picking a strategy is personal and depends on what benefits fit your business and personal goals. You must decide what you want to walk away with at the end and how you want the business to be left.