Every small business starts with a vision, but what happens when it’s time to move on? That’s where exit strategies come into play. Whether you dream of selling your business for a big profit, passing it on to a family member or trusted employee, or simply closing shop after a successful run, having a business exit strategy is crucial.
Importance of Having an Exit Strategy
An exit strategy should be a part of your business vision. Without a clear direction, you’re essentially wandering without a path. Even if your exit is decades away, having an exit strategy helps shape what you build and what you avoid. For example, if you plan to sell, you should work on building business systems that don’t require your involvement to make it more attractive to buyers.
Planning Your Exit Strategy
Ideally, you should start planning your exit strategy from day one. If you haven’t, now is the time. Reflect on what your business looks like today, where you want it to go, and whether you are on the right path or need to course-correct. This foresight can significantly impact your business’s future direction and success.
Creating a Business that Runs Without You
If you want to step away from the day-to-day operations but still own the business (or eventually sell it), you must build a business that can run without you. This involves creating strong systems and processes.
A great resource for this is the book Clockwork by Michael Michalowicz, which outlines how to build systems over two years to take a four-week vacation while your business runs smoothly. Some of my clients also use EOS (Entrepreneurial Operating System), which is helpful for slightly larger businesses.
Building for Profit and Retirement
Another exit strategy is maximizing your business’s profitability to save for retirement. Start by determining how much you want to save each year. Research the IRS limits for different retirement plans and consider additional non-tax-advantaged savings. Develop financial projections based on achieving these profit levels and build your business model around these goals.
Selling Your Business
If you want to sell the business, you must create a valuable asset that doesn’t depend on you. This means building systems and creating unique value independent of your direct input. Buyers are interested in businesses that can thrive without the original owner, so focus on systematization and creating a strong brand that stands alone.
Passing the Business to a Family Member or Insider
Another common exit strategy is selling or passing the business to a family member or an insider. Unlike selling to an external party, which usually involves a lump sum payment, this method often involves profit-sharing or long-term payouts. This approach requires ensuring the successor can effectively run the business to maintain those payments.
Financing the Sale to a Family Member or Insider
If a family member or insider doesn’t have the capital to buy the business upfront, they might take out a business loan. However, they might not have access to sufficient capital, and you, as the owner, may choose to finance the sale, allowing them to buy you out over a longer period.
Dealing with the Owner as a Roadblock
Often, the business owner can become the biggest bottleneck, slowing down the business’s growth. The first step to overcoming this is awareness. Identify areas where you are the roadblock and determine how those tasks can be delegated. Define processes for delegation and find the right people for those roles.
Considering Selling Your Book of Business
Sometimes, selling your book of business can be a strategic move. This might be due to a change in your focus or services, or simply downsizing. Selling to someone who finds your current clients a better fit can provide value for clients who no longer align with your business direction.
Closing Your Business
If you decide to close your business instead of selling it, it’s essential to have an orderly process. Fulfill all contractual obligations, find successors for your commitments, and address the legal, tax, and record-keeping requirements. Consulting with legal counsel about the specific steps involved is highly recommended to ensure a smooth closure.
Whether you’re planning to sell, pass on, or simply retire, having a clear exit strategy is essential for your business’s long-term success. By understanding different strategies and planning accordingly, you can ensure a smooth transition and maximize the value of your business. As you navigate this process, remember to build systems, set clear goals, and stay informed about your options. Your future self will thank you.
Learn more about the writer, Karen McConomy, owner of Your Numbers Person.
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