5 Business Exit Strategies and How to Plan
When you quit your 9-5 job to become a full-time business owner, you may have thought that you finally found your passion and that this is forever. However, circumstances change, and in 5 or 10 years you may decide to start a new venture, return to working for someone else or maybe it will be time to retire. What happens to your business then? There are a few possibilities when it comes to exiting your business. But what they all have in common is that you need to pick one or two and start planning the exit right now. This will help you make sure your business and legacy are handled the way you wanted and not left to hastily decisions. And our Maryland financial business consultants at CFO Source are always happy to help you plan for this important transition.
Businesses can be sold and purchased almost as casually as a carton of milk or your morning coffee. Of course, the process is a bit more involved, but it can be smooth and swift if you are working with the right broker. Selling a business is a good way to put a decent sum into your retirement account or lay a solid financial foundation for a new business.
However, in order to get the most out of this sale, you need to make sure your business is in its best shape to sell for a top dollar. Although there is a market for “going out of business” companies, you don’t want to end up there. If you intend on selling, keep growing your business and look for the right opportunity to cross your path. Consider fluctuations in the market, as well as your niche. It can take a while to find the right buyer who will agree to your conditions, so start the process early if you are bound by time constraints.
Give it to Your Employees
Well, not necessarily give it, but let your employees buy out your share of the company when you leave. This can be accomplished by establishing an Employee Stock Ownership Plan (ESOP). Of course, it has to be thought through and established way before you plan to exit the business. ESOP is a great option because it allows you to pass your company along to your employees, so you know it will be in good hands. Besides offering an exit strategy, an ESOP can also help you out in the meantime by allowing you to borrow money and repay with tax-deductible contributions, as well as create additional benefits for your employees. However, if you have high employee turnover and no long-term staff, ESOP won’t work for you.
Merging or acquisition is another common strategy to jump the ship, so to speak. For a generous compensation, you are basically allowing another company, typically representing the same industry, to absorb yours. Why would someone want to acquire your business like that? There are hundreds of different reasons. Maybe they are after your well-developed customer base or business infrastructure, or maybe they want to eliminate you as a competitor.
Merging or acquisition typically carries a certain degree of risk. What if it doesn’t go through as planned? Do you have a plan B? Also, the acquiring company may require you to stick around for the transitioning process. Are you willing and available to do this? There are many pros and cons to weigh in this case.
Sometimes, it may make sense to just end your business. Maybe it’s been going downhill anyway, or maybe there is no way anyone would buy it. Some businesses had the majority of their success attributed to the owner. For example, if you are a famous chef in your own restaurant, the food won’t be the same without you. In this case, you have two options. The first one is to drain your business by slowly taking out cash and allowing it to dwindle down. The second option is to file for dissolution and sell or auction off your business assets. Dissolving a business can be complicated if you have a partner, so make sure to review your partnership agreement.
Pass it on
Do you have a friend, family member or a dedicated employee who’s been working by your side for a long time? Have you considered giving the business to them to preserve your legacy and allow for the company you’ve built to live on? If so, you would need a succession plan. Transferring a business to someone is more complicated than gifting a car or a piece of real estate. But by planning ahead and preparing your successors you can have peace of mind in regard to the future of your business.
No matter which exit strategy you choose, one of the biggest factors to consider is tax implications. How much in taxes will you owe? How can this amount be minimized? Is there a better time to exit the business? As Maryland business consultants, we help business owners answer these and many other questions. Give us a call or contact us online today if you need help with business and financial planning.