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Exit Strategies for Small Business

Exit Strategies for Small Business: What You Need to Know

Your excitement for starting your business or the success of your current one might make you think you will be an entrepreneur forever. But, life gets in the way of plans, especially as the market changes. Before starting your small business, you need an exit strategy. Exit strategies for small business help make sure you and your business are protected.

When you create a business plan, include your small business exit strategy. If you have a business plan and exit strategy, you should update it as you grow your business and as the market changes.

What is an exit strategy?

An exit strategy is how a business owner plans on selling their investment in their business. An exit strategy is part of the business plan, which is a document every entrepreneur needs. Exit strategies help business owners have an out if they want to retire, leave, or if the business fails.

Exit strategies are also important for investors and lenders because they want to know their money is protected. If your business fails, exit strategies help the transition of power go smoothly.

Exit strategies for small business

There are a few different types of exit strategies of a business. The exit strategy you choose depends on your type of business structure and size. Take a look at these exit strategies for entrepreneurs.

Exit Strategies for Small Business

1. Merger

A merger can occur when two businesses combine into one new business. Mergers increase your business’s value, which is why investors or shareholders like them.

In order to go through with a merger as an exit strategy, you still need to be a part of the business. Through a merger, you will be an owner or manager of the new business. Your employees might be employed by the new merged business.

If you are planning on doing away with your business entirely, a merger is not the best exit strategy for you. However, if you still want to be a business owner and see your ideas come to life, you might consider a merger.

There are five main types of mergers:

  • Conglomerate: the two businesses have nothing in common
  • Horizontal: both businesses are in same industry
  • Market extension: the businesses sell the same products but compete in different markets
  • Product extension: both businesses’ products go well together
  • Vertical merger: both businesses make parts for a completed product

Your business might combine with another small business that sells completely different products, or you might combine two like businesses, depending on the business you merge with. You might consider merging with a local business or a supplier.

Before you merge businesses, make sure that the new business is a good fit with your current one. If they are opposite work cultures, you could send your business and the employees who stay into a completely different workplace. If tensions are high, the business could lose revenue from decreased production.

2. Acquisition

An acquisition is when a company buys another business. With an acquisition exit strategy, you give up ownership of your business to the business that buys it from you.

One of the positives of going with an acquisition is that you get to name your price. A business might be apt to pay a higher price than the actual value of your business.

However, an acquisition might not be the right exit strategy for every business owner. The thought of no longer being in charge of your business idea might not sound appealing.

You might need to sign a noncompete agreement with an acquisition. A noncompete agreement means you promise not to work for or start a new business similar to the one you just sold.

There are two types of acquisition: friendly and hostile. If you have a friendly acquisition, you agree to be acquired by a larger business. However, a hostile acquisition means that you do not agree. The acquiring business purchases stakes to complete the acquisition.

If an acquisition is your exit strategy, your acquisition should be friendly. You know that this is how you want to give up your investments, and you attempt to find an acquiring business with similar core values as your own.

3. Sell to someone you know

You might want to see your business live on under someone else’s ownership. In many cases, you can sell to someone you know as an exit strategy.

If you have family members who want to continue your business, you could sell it to a child, sibling, or another family member. Maybe you have friends who are willing to make you an offer because they see the potential of your business.

There are some cases where your business is a staple in your local community. Someone in the community might have an attachment to your business, like if they grew up going to your business. If that’s the case, you could sell your business to a customer.

Before selling your business to someone you know or are acquainted with, weigh the pros and cons. You don’t want to jeopardize personal relationships over your business. Make sure to disclose things like liabilities and the profitability of your business before a family, friend, or acquaintance buys it from you.

4. Initial Public Offering (IPO)

An Initial Public Offering is the first sale of a business’s stocks to the general public. This is also known as going public.

Businesses are either private or public. If a business is private, there are one or a couple owners, like in a sole proprietorship or partnership. Public businesses are large and sell ownership of the company to the public.

Going public might be difficult for small businesses, as it costs a significant amount of money. If you want a fast exit strategy, an IPO might not be the way to go.

To start an IPO, businesses need investment banks, lawyers, certified public accountants, and Securities and Exchange Commission (SEC) experts to get started.

5. Liquidation

Another exit strategy for small business is liquidation. When a company can no longer pay its debts, it must be liquidated. With liquidation, business operations end and the liquidation value of your assets are split between creditors.

Liquidation is a clear-cut exit strategy because you don’t need to negotiate or merge your business. Your business stops and your assets go to those you owe money to.

If you liquidate your business, however, you lose your business concept, reputation, and your customers. Your business will not live on like in other exit strategy options.

How to write an exit strategy for a business plan

In your business plan, you need an exit strategy so investors or lenders know how you plan to protect their money. And, the exit strategy gives you a plan if your business starts going south. Once you decide which exit strategy you will go with, include it at the end of your business plan.

Your business plan outlines what your business is, how it will be run, and what kinds of products you will sell. A business plan projects the next 3-5 years, so it’s important to include financial projections and exit strategies.

Keep in mind that you will update your business plan and exit strategy as your company goals change.

For example, you might have originally planned on merging with another business as your exit strategy. After five years of owning your business, your son says he would like to buy the business from you. If you decide to sell instead of merge, update your business plan to reflect your new exit strategy.

Here is an example of an exit strategy you would include in your business plan.

Example: Our preferred exit strategy is to merge with another local small business. The business plan supports the possibility of a merge. We believe a product extension merger would be our target exit strategy, but we are also open to a horizontal merger.

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This is not intended as legal advice; for more information, please click here.

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