Exit strategies aren’t just for investors. Entrepreneurs need an exit strategy as well. Having an exit strategy in place gives you control over the future of your small business. How do you plan for this? Well, first you should talk to a financial advisor for entrepreneurs in Washington DC. There are several things to consider, but here are a few of the most common exit strategies for entrepreneurs.
Keeping It in The Family
Many business owners dream of keeping the business in the family. This ensures that their legacy will live on through their heirs. This strategy offers the chance to groom a family member successor, leading to a smooth transition, and may allow you to keep a small hand in the business. However, choosing a successor can be difficult and may lead to strife within the business and the family. Your clients may not approve of new management or have a relationship or rapport with the other family members. In addition, your family members may not have the skills or interest to take your place.
Selling to Manager or Employees
The current managers or employees may be interested in buying the business. This offers several advantages. The business has a good chance to thrive and maintain previous success since employees are familiar with the business. A long-term buyout by employees can increase loyalty and work to motivate staff to work hard and ensure that the business succeeds. This strategy may also allow you to keep a share of the business or stay on in an advisory capacity.
This strategy assumes that the employees are qualified and capable of taking over the business. Even in situations where you have a solid employee pool or a strong successor candidate, clients may not approve of the new management or changes in the company’s direction.
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Selling in the Open Market
This is the most popular exit strategy. Typically, when a business owner is ready to retire, he/she will put the business up for sale, sometimes working through a broker or third party. Ideally, the business owner walks away with the amount of money he/she wanted to get for the business.
The advantages of this strategy are that a profitable business should sell quickly, and assets and goodwill can be incorporated when valuing the business for sale. This will maximize the owner’s profit.
However, a business that is only marginally profitable will be difficult, or impossible, to sell. Finding a buyer on the open market may take a long time and the owner may get a much lower selling price than expected.
If this is your plan, you need to spend considerable time grooming your business for sale. Make it as attractive as possible to potential buyers.
Sell to Another Business
Making your small business a desirable acquisition can be very profitable. Businesses buy other businesses for many reasons. New acquisitions are a quick path to expansion or realizing synergies from complementary business activities. Furthermore, it’s a great way to buy out the competition. A competing business would likely be very motivated to purchase your business. This would make for a quick sale and maximum profit.
The downside to this strategy is the potential for a purchaser to close your business after the purchase and existing employees may be at risk for losing their jobs. There are also other potential pitfalls in that a competitor may only pretend to be interested in buying your business to access your customer list and financial information. To succeed with this exit strategy, its best to target your potential acquirer in advance and position your company accordingly.
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Liquidation is sometimes the only option for small businesses, especially those dependent on the performance of a single individual or in cases where the business is not profitable. This is a simple exit strategy and could be very quick. However, liquidation has the lowest return on investment to the owner.
The only money from a liquidation sale is from the disposal of assets. Any goodwill value is lost. Secondhand business asset values for items like machinery and equipment can be very low. Lastly, creditors have the first claim on funds from asset sales.
Liquidation Over Time
This allows the owner to extract most or all the profits out of a business over time, before selling or closing, rather than reinvesting them in the company. This is usually done by taking out large salary draws or dividends over several years.
The advantage of this strategy is that you can maximize cash withdrawal on an ongoing basis for personal use instead of waiting for the eventual windfall of selling. However, extracting profits reduces the growth potential and sale value of the business. Other shareholders (if they exist) will likely object to this strategy. Finally, salary is taxed as personal income but profits remaining in the company increase the value of the business and will be taxed as capital gains when the business is sold.
An Initial Public Offering is not always suitable for all small businesses, but it can be a viable strategy. Taking your company public can be extremely profitable. However, it is a long and costly process to become a public company. You may or may not be able to withdraw any of your capital at the time as new shareholders may want to see all the money raised by the IPO used to expand the business. Lastly, public companies have much higher compliance and reporting standards. You may be liable, as owner, or subject to prosecution for any prior accounting “irregularities” or failures in disclosure.
Financial Advisor for Entrepreneurs Washington DC
The best strategy for you will depend on your business and your goals. Whichever strategy you choose, it’s important to start working on it as soon as possible. Contact Argent Bridge Advisors to learn more!