Exit Strategies for Business Owners

Starting a business requires a great deal of planning and execution. Exiting from your small business should entail similar forethought and preparation. Nevertheless, some surveys indicate that nearly half of business owners have no exit strategy.^[1]

After years of expanding your business, you may be at the point where the finish line is getting close. Whether you intend to sell the business, liquidate its assets to fund your retirement, or leave the business to family members, you need a plan to achieve your objective.

You cannot run your business without a good team. When exiting your business, help from a team of legal advisors and other professionals is also needed.

The Importance of a Long-Term Exit Strategy

It can be easy to fall into the trap of showing up to work every day and taking care of the tasks at hand while never thinking seriously about the future. Self-employed individuals, such as small business owners, often have no pension plan guaranteeing retirement income. Many entrepreneurs' only retirement plan is the proceeds from the sale of their business. This risky bet becomes even riskier if there is no exit strategy.

Entrepreneurs often believe in betting on themselves, but self-confidence alone is not enough for entrepreneurial success. Strategic thinking is equally critical at all phases, from launch to growth to exit.

A business exit strategy creates a timeline that informs strategic decision-making, enhances business value, and provides a flexible template. Exit planning provides many benefits, including the following:

• Business owners can be better prepared for unforeseen circumstances (e.g., illness, sudden death, divorce, burnout, or financial failure) by establishing a backup plan to address any issues.
• An exit strategy provides benchmarks that make progress toward the goal more measurable and day-to-day decisions more strategic.
• In preparing for their exit, business owners are more likely to maximize their market position and asset values to obtain top dollar when they finally step away.

Business owners know that not everything goes according to plan. Fortunately, voluntary and involuntary exit strategies are not significantly different in practice. To plan for both, owners should take progressive steps to ensure that the business is less dependent on them and more centered on culture, policies, and processes. These strategies can ensure that business as usual can continue in the owner's absence and add value to a potential buyer. An owner-centric business has less value to a buyer than a company that can continue operating smoothly after the owner steps away.

Different Exit Scenarios and Strategies

There is no one way to run or exit a business, but both require strategic planning.

Among owners planning to exit their businesses, 52 percent said they intended to sell the business, 20 percent planned to leave it to family, and 18 percent planned to close the business. Here are some of the strategies involved with each of these exit scenarios:

• Selling. A business can be sold on the open market, including with all its assets and with or without its existing employees. An owner can also sell their company stake to a partner, co-owner, manager, employee, friend, family member, or associate. In every sale scenario, the business should be appraised to reach a fair purchase price. Another necessity is a formal sales agreement that lists all inventory in the sale. Multi-owner businesses can benefit from buy-sell agreements that enable an orderly transition.^[2]
• Passing to family. Family members may be part of an exit strategy designed to pass the business on to the next generation. Transferring ownership can be done through gifting or a sale. There will be different tax implications depending on the strategy used.
• Liquidating. Business liquidation entails selling assets for cash value. Although it is often part of an involuntary exit due to financial trouble, liquidation can also be a planned exit strategy. Assets up for liquidation should be inventoried, appraised, and promoted. Typically, business owners work with an auctioneer, dealer, or broker to facilitate liquidation. The Small Business Association notes that sales can occur through negotiations, consignment, a sealed bid, or internet or retail sale.^[3]

Are Professional Advisors Part of Your Exit Strategy?

Business owners accept that running a business will take much of their time, but even the most dedicated owner should have an exit strategy. Whether you plan to sell your business, close and liquidate it, or transfer ownership, there will be legal and tax impacts that require an attorney's assistance. Suppose you are unsure which exit strategy is best for you. In that case, our business planning attorneys can help you identify your goals, formulate the appropriate strategy, and assemble the right team to execute it successfully. Book a call to start planning your exit today.

TL;DR Summary

Starting and exiting a business both require serious planning and preparation. Many business owners don't have an exit strategy, which can be risky, especially since many rely on selling their businesses for retirement. A well-crafted exit strategy can prepare you for unexpected events, help you benchmark progress, and increase your business's value when you step away.

Exit scenarios include selling the business on the open market or to someone you know, passing it to family members, or liquidating assets. Each scenario requires strategic planning and consideration of legal and tax implications.

To navigate these complexities, it's wise to work with legal and tax advisors who can help formulate and execute the correct exit strategy for your business goals.

^[1] UBS Investor Watch, Who’s the Boss? (Feb. 8, 2018), https://www.ubs.com/us/en/investor-watch/who-is-the-boss.html.

^[2]   Hugh H. Lambert & Briana K. Wright, Considerations for Using Buy-Sell Agreements, The CPA Journal (Oct. 2018), https://www.cpajournal.com/2018/10/03/considerations-for-using-buy-sell-agreements/.

^[3] US Small Bus. Admin., Close or sell your business, (May 23, 2023),  https://www.sba.gov/business-guide/manage-your-business/close-or-sell-your-business#section-header-10.