“Begin with the end in mind” says Stephen Covey in his best-selling management book, “The Seven Habits of Highly Effective People”. In fact, this was Habit # 2. The ability to look ahead and plan for the eventual sale or transition of your business is an important part of any small business Strategic Plan. Unfortunately, most business owners have no exit plan for leaving their business. As a result, most small business transitions do not have happy endings.
There are several different ways to exit your business. Among them are:
- Liquidation. In other words, close your doors, sell off all the assets, and pay off your creditors.
- Sell your business to your employees. This can be accomplished by having one or several key employees acquire your business, or through an Employee Stock Ownership Plan (“ESOP”).
- Sell to your competitor. Under this strategy, it may be helpful to identify your potential successor well in advance and position your company in the best possible way for an acquisition.
- Initial Public Offering (“IPO”). This involves the selling of shares of the business on a public stock exchange. This is not suitable for all businesses, but if the conditions are favorable it could be a very viable option. A potential downside is that you may not be able to withdraw all the capital immediately, depending on the new shareholders’ desire to expand the company, etc.
- Keep it in the family. A good piece of advice here is to identify the family member or members early and make sure that it fits their wants and dreams so that they will be more likely to continue after you have gone. All too many owners assume that their sons or daughters are willing and able to take over their business, when in reality, the next generation would rather liquidate the business and turn it into cash. The sad truth is that very few family businesses survive the second generation of owners.
Once you have decided on the most likely path to take, you can begin to develop your Exit Plan. Here are some tips on exit planning that could make all the difference.
- Do not procrastinate. You may be forced to exit the business much sooner than you expected. Think about such unexpected events as a loss of a key employee, a sudden change in the market, or even your own death or disability!
- Get competent professional advice. Put together an experienced advisory team to help you develop and implement your plan. The team should include your accountant, attorney, a small business valuator, and your personal financial advisor. In addition, be sure to include your spouse or loved one, family, and key employees.
- Have a good personal financial plan. For many owners, their business is their largest single investment. You need to know how your business fits into your personal financial plan. Most importantly, your advisors should help you calculate the minimum “number” that you need to get out of your business. Often this is stated as a range of numbers.
- Commit your exit plan to writing. You need to create a written plan that others can follow, even if you are not there to direct things. Keep it short and to the point, and review it at least once a year. The plan should be flexible, so it can change as your business changes.
- Start working immediately toward enhancing the value of your business. Among other actions, increased value can be achieved by diversifying your revenue sources, grooming a key manager, and taking steps to increase profitability and cash flow in your business.
The best strategy is the one fits your small business and aligns with your personal goals. Whichever strategy you choose, the best thing to do is to start working on it now. Planning your exit strategy in advance will help insure that you do it right and maximize your returns.
Randy Donaldson is a Business Consultant in The University of Georgia Small Business Development Center’s Gainesville office. 770-531-5681, firstname.lastname@example.org