TOP REASONS WHY EVERY OWNER NEEDS A BUSINESS EXIT STRATEGY

How to choose the right exit strategy as a business owner

There are a few common exit strategies to consider when you decide to sell your business.

Some business owners choose to sell on the open market, while others take a more personal approach, such as passing it on to a family member or selling it to an employee.

It’s important to keep in mind that some exit strategies aren’t suited for many small businesses. Options like initial public offerings (IPOs), mergers and acquisitions can be expensive, time-consuming, complex, and stressful.

Choosing the best exit strategy for your business is a very important and personal decision and one that shouldn’t be taken lightly. The type of exit will depend on your personal goals, financial needs, industry conditions and the current state of your business.

Common exit strategies

1 – Sale to market (third party)

Let’s start with the most common exit strategy that business owners pursue. Selling to an external/third party buyer. Most business owners choose this exit strategy due to its simplicity.

It consists of finding a business broker, establishing a market value of your business, putting it on the market to sell and then finding a potential buyer.

It’s important to take note that most businesses that go on the market might not actually sell. The ABS reported in 2018 said that of the 2,313,291 businesses in Australia there was a 12.5% exit rate (about 289,000 Businesses). The number one reason that businesses are not sellable is because the owner did not plan their exit effectively.

Understanding the selling process, what potential buyers are looking for, how to position and package your business can certainly improve your chances of a successful sale.

Creating a successful sale requires a well-prepared exit strategy, planned well in advance. This takes time, effort, and experience.

2 – Employee or management buyouts

Many business owners don’t consider a potential source for a buyer to be an existing employee of the business. An employee or management buyout can be one of the best ways of preserving the legacy of a business and ensuring a smooth change over process.

For many business owners, safeguarding the future of their business and its employees is an important objective when selling.

It’s a very effective way of organising your exit. It’s usually less disruptive to the current business operations than other alternatives and ensures your business continues running during the takeover process.

3 – Selling your business to a family member

This exit strategy is common among business owners who are looking to retire and exit the business they have created. They wish to pass their legacy to their children or another family member. This is a simple exit strategy if younger family members are interested in keeping the business going.

A recent survey by the Australian Centre for Family Business at Bond University found that 40% of family businesses are hoping to transfer either wealth or operations to someone else in the next five years but many don’t have an actual succession plan in place.

If this is your preferred exit strategy then succession planning needs to be in effect well before you even start thinking about exiting your business.

4 – Initial public offering (IPO)

There is debate as to whether an IPO is an exit strategy in the true sense, or a funding event. An IPO allows the company’s founders and early investors to sell a portion of their shares. This helps them maximise profits from their private investment.

This is of course if the IPO goes to plan, attracts interest and achieves a healthy share price.

Taking a business to an initial public offering is also known as ‘going public,’ and involves selling a portion of shares of the company on the public stock market. In the small business sphere, this exit strategy option is rare and it certainly isn’t for everyone.

The main reasons are the expense and the extensive regulations required not only to launch an IPO but in running the company once it goes public.

Because most IPOs are usually underwritten by investment banks, your business needs to be in tip top shape, in every sense.

An IPO requires an extensive, well-prepared, and well executed exit strategy.

5 – Closing the business (Liquidation)

This business exit strategy is usually a forced exit strategy. In a business liquidation sale, the owner has usually run into trouble and needs quick access to cash to pay debts.

Generally, the business does not hold much value and therefore cannot be sold for much profit. The owner, therefore, needs to liquidate the business assets to generate cash.

There are many things to consider when liquidating your business. Creditors still need to be paid. Staff still need to be paid, including leave and sick entitlements.

Employees will lose their jobs, vendors lose business, and a community may lose an important employer or iconic business.

A liquidation sale is usually the simplest form of exiting a business as it is a quick, simple process that allows access to immediate cash. However, the cash return is a lot less than other exit strategies.