Whether you want to retire or start a new business, having an exit strategy can smooth the process.
As a small business owner, at some point you may face the decision of whether to continue investing in your current business or prioritize other goals, like retiring, buying a home, or paying for a child’s education. If you have assessed your situation and decided now may be the time for your small business exit strategy, it’s important to consider the many options available, from selling part or all of your business to winding it down completely. Use these questions to help you determine your next steps. Once you know that, fill out our worksheet (PDF), which includes details and definitions, to help you get your exit plan started.
How much is your business worth?
You may have a rough idea of what your business is worth based on your current revenue, profitability, or balance sheet. But if you’re thinking of potential exit strategies, a ballpark figure isn’t enough. You need to have a clear, detailed understanding of what your business is worth before you can decide how to move forward. There are a number of ways to value a business, which is important to consider if your sales have fluctuated a lot due to the pandemic.
- The asset approach to valuation tallies all tangible assets the business owns and subtracts liabilities.
- The market approach considers the market value of other companies in the same industry to arrive at a figure for your own business.
- The income approach is calculated using net cash flow, or profitability.
Tip: When considering a sale, make sure you have a strong sense of your company’s profit and loss (P&L) statement.
Does a sale make sense?
A sale may be the best way to cash in on the value in your small business. But a sale doesn’t make sense for everyone. To help you determine if you’re ready to sell, and which type of sale might make sense, start by thinking about whether you’re comfortable relinquishing control of the business and, if so, how much. Remember, there are many ways to structure a sale; it’s not just selling and walking away.
- An outright sale is the traditional idea of a “sale,” where you transfer ownership of your small business immediately and receive payment immediately.
- A partial sale involves selling a stake of your business to raise capital. This can be done so you retain majority control of your business.
- In a gradual sale, you offer a long-term payment plan for buyers who can’t afford immediate payment.
- In a revenue or profit share, you may receive an upfront payment similar to in an outright sale, but the agreement also includes terms that allow you a share of revenue or profits going forward.
It’s important that you look for buyers who agree to your terms and vision, as there’s often an intangible and emotional component to selling a business.
Tip: Strategically, you may want to consider selling your small business to a competitor. However, this can be a more complex process. If you go this route for your exit strategy, be confident in your valuation, divulge information gradually, and be ready to walk away if they refuse to budge on terms that are important to you. Working with a team of professionals — like bankers, lawyers, or even a business broker — can help you protect your interests.
Is liquidation a good idea?
When considering your exit plan, it almost always makes sense to explore a sale first, since businesses tend to have the most value when they are operating (because of the value of your client list and other intangible assets). But in some cases, particularly if you’ve your small business has been shut down or operating at partial capacity, or if you have a wealth of inventory and/or machinery, liquidation may make sense. If you choose this path, consider the different types of sales for your business assets: Consignment, internet or sealed bid auctions, and retail are the most common. Keep in mind that you may be charged fees if you use an intermediary to help you sell assets and that the liquidation value of business assets is generally 20% less than retail value.
Tip: Experts recommend using a non-recourse bill of sale when liquidating assets of your small business. This means that the buyer accepts the risks associated with the goods they’re buying. This will help you move on to new ventures with a clean slate.
Are you ready for next steps?
If you decide you’re ready to move on, there are a number of logistical steps that you’ll need to complete to execute your exit plan. You’ll need to speak with vendors, lenders, and suppliers about payoff options and contract cancellations. (If you sell, these may be transfers instead of cancellations.) You’ll also want to cancel or transfer all registrations, permits, and licenses associated with your business, once you’re sure of your exit date.
Tip: There may be tax implications in either a sale or a liquidation. A professional can help you assess the situation. (If you aim to claim tax credits associated with a liquidation, make sure you file dissolution documents.)
How you decide to wind down your small business can help pave the way for future opportunities, both personal and professional. Perhaps your exit strategy will free up the time and money you need to open a new business you’ve always dreamed of. Or maybe you’ll get to spend more time traveling or visiting friends and family. Our worksheet can help you dive deeper into some of the questions raised in this article about whether you’re ready to move on.
In addition, learn more about products and services that can help you as you make decisions about your business. To talk with a banker, make an appointment today.
