It’s never too early to start planning
Moving on from your business is best when it’s planned well in advance to give you time to get everything in order for a new owner and choose how you want to go. A clean exit is usually best, where you walk away with a substantial payout and safe in the knowledge your business is in good hands.
To help this process it’s useful to be able to choose the right exit method 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 to a family member
Often family-owned businesses 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 learned 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 wanting to be in control and 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 who will inherit
- Access an outside expert valuation
- Solve conflicts of interest
- Use a professional (accountant, adviser) to help facilitate
At the end of the day. consider what’s best for the business. If a family member has the right skills, experience, and business knowledge, then it can be a smooth transition.
Strategy 2: Sell to a business partner
If there is more than one owner of the business, the remaining owner(s) may be interested in buying the business. Like selling to family (in fact, they may feel a lot like family), be cautious if there is more than one shareholder wanting control and get an external valuation to avoid any disagreements on price.
You could also consider allowing the new owner to buy the business in stages if they aren't able to pay in one lump sum. One of the issues is if the business doesn’t perform as well once you’re gone. If they fail to pay you it'll cause problem down the line.
Strategy 3: Sell to your employees
An existing employee (or employees) may see their career path buying the business. Often employees make good buyers because they already know and understand the business, hold relationships with your suppliers, and customers and are likely to want to run the business in the same way you did.
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, like 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 so it’s a fair price (to both parties)
- Use an intermediary (like a business broker or adviser) to help negotiate with the buyer
- Look at what similar businesses are selling for
- Prepare your business for sale by tidying, fixing, and updating
- Document your business plan
Strategy 5: Shut down the business
Some businesses close 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 and it’s hard to justify goodwill.
Alternatively, the business could be under stress and needs to close to fix fundamental issues (expenses outweigh sales and there is no remedy in sight). If this is the case you should liquidate all your assets for cash and pay off any debts, taxes, 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 hire a manager to run the day-to-day operations (who may be an existing employee or someone new). This is a popular option if the business is generating positive cash flow 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
Good timing depends largely on what the market is doing at any given time and ideally you’re not in a rush.
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 adviser, banker, the industry, and other small businesses you trust to help guide you when to sell, for how much, and to whom.