Every business reaches a point where the owner decides to exit the business. It’s inevitable, yet less than 15% of small business owners have a documented plan to transition out of their business. Although numerous exit strategies exist, small businesses typically utilize three common exit strategies. These strategies include selling to a known buyer, liquidation, and finding and selling to a 3rd party. Each strategy has its own pros and cons and will be explained in detail below.
Strategy 1: Sell to a known buyer (business partner, family member, or employee)
The first exit strategy that small business owners tend to use is selling to a known buyer. Some examples include: selling to a friend, family member, employee, or someone else the business owner knows and trusts. This is generally the first option for many small business owners. They can look at their own network to see the most suitable candidates to buy their business. In addition, these potential buyers have some understanding of the business.
Selling to a known buyer overcomes the hurdle of marketing the business, finding a buyer, and educating prospective buyers on the inner workings of the company. Most first-time business sellers prefer selling to a known buyer. It can be one of the quickest ways to get a business sold. However, some of the pros and cons of this strategy include:
- Owners can select the best candidate from their network: The business owner can search through their personal and professional network for a potential buyer.
- Help ensure payments are made: Selling to a trusted and competent person already familiar with the business is very important; most deals are seller-financed. In other words, the new owner will pay for the company using proceeds from the business over several years.
- Legacy: There’s an opportunity to continue the legacy of the business if it is sold to a family member. Many small businesses value family ownership and history. This exit strategy provides an avenue for business owners who value legacy. Independent ownership helps ensure the culture of the company stays intact.
- Less marketing: Selling to a known buyer results in less marketing for the business owner. Therefore, these deals do not require the owner to market the business to find a buyer and eliminate the need to pay broker fees, which puts more money in the buyer’s pocket.
- Personal relationships: Selling to a friend or family member may cause a strain on personal relationships. Family members or friends may not be competent enough to buy the business, and differences can sour personal relationships. It may be challenging to find a person who’s willing and able to run the business within a limited circle of people.
- When you involve your friends and family in selling your business, they may not support your decision about who will take over the business. This is especially true if they are one of the bidders for your business. This can continue to put additional strain on personal relationships.
Strategy 2: Liquidation & Dissolution
Liquidation allows the business owner to sell the assets of the business and close the company through a process known as dissolution. Although dissolution may seem bad to owners, it can be a profitable and less stressful exit strategy for the business owner. Basically, this involves selling off the assets, paying any remaining liabilities, and keeping the remaining proceeds.
- Can be profitable: With liquidation, you can receive immediate cash for your business assets and rely less on a single buyer. You don’t have to wait years for a payout based on proceeds from the business.
- Less stress: As long as you pay your taxes and creditors, this is a reasonably easy exit strategy. This makes selling your business straightforward financially and avoids marketing, finding a buyer, preparing, and going through the due diligence process.
- Creditors paid first: Taxes and creditors still need to be paid when you liquidate your business. This may be less profitable for your business, depending on the amount of debt your business owes. After taxes and creditors are paid, you can keep the proceedings.
- The value of the business entity is not fully captured: Liquidation results in your business assets being sold at a price that a buyer is willing to pay. This may not capture goodwill, brand recognition, or other intangibles.
Acquisition by independent 3rd party buyer:
The best way to get the highest price for your business is by having multiple buyers interested. Creating this interest can lead to a bidding process resulting in a great price. It is important to understand what is driving their interest in your company. For instance, if another business owner thinks buying your business is a strategic advantage, they’re likely willing to pay a premium. For example, suppose a prospective buyer is seeking to simply own and operate the business as a primary source of income, and another prospective buyer sees your company’s purchase as a special advantage for their company. In that case, the buyer who sees a strategic advantage may pay extra to win a bidding war.
- Experienced buyers: Companies that acquire business often have significant experience buying businesses. This can save business owners a lot of time and expedite ownership transition.
- Bidding potential: If multiple companies are interested, it can create a bidding war and net the business owner a much higher net profit. This can be common in the acquisition of a strategically valuable business.
- Negotiations: A savvy buyer will have experience in negotiating more favorable terms. If this is your first time selling a business, you may end up agreeing to terms that are not in your best interest.
- Lack of culture integrations: Company that acquired your business may completely overhaul your products, culture, and employees. This can be a less personal process as some buyers are seeking to maximize profits.
What you hope to achieve and what is feasible may be different. That’s okay; it is wise to step back and consider goals other than maximizing price. The legacy of the business, exiting sooner to address personal issues or goals or ensuring that the business will be run well may lead to a different strategy. Consider all your options and know that plans may change and you may need to adapt.