Exit Strategies

While every aspiring business owner starts a new enterprise with dreams of success and growth, it's wise to know how your small business ownership story may end before you begin. When and how you plan to exit can make a big difference in how you manage your new company throughout its life.

Closing a business need not be a negative experience. It could mean new opportunities, a long-awaited retirement or the chance to gear down as an employee for someone else, leaving the management and ownership challenges to someone else.

Or, a business closure can be the result of less pleasant situations involving the health of the owner, an economic downturn or increased competition. Whatever the reason, being prepared for a closure with a sound exit strategy ensures you can enjoy business ownership knowing that if an exit becomes necessary, you'll be ready. When the time comes, you'll have several options.

One is to pass the business to children or other family members. Or, you may want to sell the company. You could choose to liquidate it and sell the business assets. Or, in the worst-case scenario, you could end up filing for bankruptcy to deal with substantial debt.

As you plan your strategy, consider how what you plan to do tomorrow affects your business today. For instance, you may want to hand the company off to a family member, but is that person qualified? Does she need training? Does he have the interests and innate abilities to be successful? Will you truly be able to hand the reins over to someone in the family without feeling as if you need to maintain some control?

If your plan is to sell the company, you will want to take steps to constantly enhance the value of the company in terms of facilities, assets and networks. Selling to a partner or even a competitor who already has systems in place might mean you want to put your investment in product lines and increasing the customer base.

Like most things in life, timing is everything. Remember that you opened the door to your business so you could have the independence, autonomy and pure enjoyment that come from being your own boss. The day that business ownership ceases to be a pleasurable experience (even with its innate challenges) is the day you should begin your exit strategy.

Starting your business wasn't an easy process. But as challenging as that was, exiting may be even more so. It will depend on whether or not there is a market for the company and whether or not the price that the owner believes to be fair is considered fair in the marketplace.

This, of course, puts a great deal of emphasis on the valuation of the business prior to a sale. Since there are many approaches to valuing a business, it should be done in a way that is fair to both buyer and seller. From your first day of business, bookkeeping should be clear, consistent and comprehensive. Your records should be something you'd be proud to show to a prospective buyer. With a good set of books in hands, valuation is much easier. Be wary of undervaluing the business—a common mistake.

An important element of your exit strategy should be your personal plans. Give serious thought to the first day you awake and don't have to report to the shop for work. How will you feel? What will you do?

Chances are the separation will be a gradual one that involves training and transitioning of intellectual capital. In some cases, if you particularly excel at one facet of the business and would enjoy continuing to perform that function, the new owner might welcome your experience in that role. To avoid confusion and bad feelings, negotiate an arrangement that clearly delineates where your duties end and the new owner's begin.

If you intend to keep the business until you literally expire while working the counter, make it simple for your heirs and employees to continue through a transition. Insure the company and its assets sufficiently to function while the valuation and final disposition of the company are settled.

Although planning an exit strategy is important and should be as specific as possible, remember to stay flexible. Shifts in the market or in the community, changes in your personal goals, family situation or health or even the appearance of a better opportunity could change your strategy and timing.

Much like keeping your home presentable when it's on the market, managing your business everyday as if you are preparing to sell it will guarantee you are ready to seize the right opportunity at the right time.

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Authored by: Mary Paulsell, Assistant State Director, Missouri Small Business Development Centers
Source: Creating Quality Newsletter, Volume 13, Number 1, January 2004

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