The term “exit strategy” might sound unfamiliar to many small business owners and entrepreneurs, but more than likely, the concept is familiar. An exit strategy is all about how you plan to leave or “exit” your company. After years of pouring your heart and soul into building a successful company, you’ve at least got some inkling of what comes next. Even if you have no intentions of leaving or selling your business any time soon, one day you’ll want to divest yourself from the company to pursue other passions or opportunities. Unanticipated market or life events (or an unexpected pandemic) could also factor into things. With a well-defined exit strategy, you can navigate the complexities of transitioning out of your company. If you haven’t yet developed one, you are not alone. According to recent studies, over half of small business owners don’t have an exit strategy. As small business owners, we are hardwired to focus on the here and now decisions needed to keep our business thriving. But failing to plan your exit could result in a muddled succession process or potential financial losses.
There is no one-size-fits-all approach to transitioning out of a business. Before you begin to plan, evaluate your own unique circumstances, current market trends, and industry conditions. Understand your goals and intentions for the business. Maybe your goal is to make a tidy profit from the sale. Or, maybe you need to limit liabilities and losses because the business isn’t performing as well as you’d hoped. Do you want to sell the company, liquidate all assets, and dissolve it or do you want to keep the company in the family as part of your legacy? Answering these questions can help determine the strategy that works best for you and your company. Three of the more common exit strategies employed by small business owners include:
Business owners sell their companies for a variety of reasons and it’s the most obvious choice for an exit strategy for small businesses. You’ll need to gather pertinent information like financial statements, tax returns, list of loans (with balance and payment schedule), approximate value of inventory, list of employees and clients, as well as any lease agreements, or franchise agreements. Before sticking with this option, have your business professionally appraised to ensure that the business is sold at a fair price, under favourable terms, and in your best interest. You’ll want to know what your company is worth beforehand to avoid leaving money on the table.
Many successful small businesses are family-owned and operated but only about 30% survive into the next generation according to the Family Business Institute. While Canada’s family-owned businesses contribute immensely to our economy, transferring ownership is not without challenges. However, if family members have grown up in the business, they have intimate knowledge of its inner workings, so it may seem logical to hand them the reins when you are ready.
Liquidation is the fastest way to close out your business and finalize financial affairs. It may be the only option in cases where the business is struggling financially, facing bankruptcy, or the owner can’t find a suitable buyer. During this process, the small business owner converts all company assets into cash by selling them and then closes its doors for good.
These are some of the more common exit strategies. To properly plan your exit strategy, you need to gather your team of professionals (business advisors, lawyers, accountants, etc.), to help with business valuation, clarify the complexities and implications associated with various exit strategies and assist with developing your plan. The Business Development Canada (BDC) website also offers valuable insights and helpful guides on selling your business. If you don’t have an exit strategy yet – it’s time to get started.