Exit planning for small businesses is not a thought on the horizon for the majority of business owners when developing their business plan. Understandably so. Who wants to think of the end of a business venture just as they are starting off?
If your business plan will be used to woo investors, you can rest assured that investors will be interested in your exit plans. This is why you must have a sound exit strategy to show them before they will be willing to put money into your business.
Understanding this early, or, even later in the life of a business and developing a plan will save you a lot of unnecessary stress down the line when you want to retire.
This article reviews all you need to know about exit planning for small businesses.
Your Personal Plans and Investors
Many investors are only interested in putting money into a business for a limited amount of time. They want to know when they will get their money back and what sort of return they will be receiving at that time. After all, to them it is just business……and their own profit!
Both issues are closely linked. Therefore, when preparing your business plan to pitch to potential investors, you must ensure that you have outlined your long term plans with a sound exit strategy
In order to do this properly you must ask yourself a few questions about your own personal plans regarding the business.
Do you wish to stay involved in this business in the long run, or are you more interested in getting it off the ground and letting someone else take over then? These are a few of the questions you must address in your exit strategy.
You will also want to know a little about the investors you are pitching to and their expectations regarding the future of the investment
Exit Planning for Small Businesses and Venture Capitalist Investors
If you are dealing with venture capitalists you have to be aware that they are looking for a high return.
They will generally be expecting the business to go public at the end of the period or make some other high profit move.
The period for which they are willing to invest is about three to seven years, so you will need some sort of high return exit strategy at the end of that period.
However, you should not opt for going public unless you are confident that it is a realistic goal for your company. Public offerings are very rare for small businesses and the investors you are speaking to are very aware of that fact!
Exit Planning for Small Businesses and Angel Investors
If you are thinking of approaching an angel investor, they too will be looking for a high return but thankfully, they will not be overly concerned with the type of exit strategy you use, as long as it seems sound.
They will be less sophisticated than the venture capitalists or institutional investors you may deal with, and are more likely to be involved because of a personal relationship with you or the business.
Types of Exit Strategies in Exit Planning for Businesses
There are a number of exit strategies you can consider:
Basic Exit Strategy – Bleed the Business Dry
The most basic exit strategy would be to simply bleed the business dry. This is a weak strategy. It can be done by giving yourself a huge salary or other remuneration, regardless of the performance of the business.
While it is not appropriate in most cases, there is no doubt that it can get a lot of your investment back out of the company in a short time.
This option could also work well where there is a high owner equity in the business. You have been pumping in personal funds as “loans” to keep the business afloat
Another simple option is liquidation. Simply close the doors and wait for the company to be wound up. All debts will be paid off, and then whatever is left over will be clear to the shareholders. Again, this is not a strong exit strategy!
While the options of bleeding dry and liquidation are quite practical and effective, they are unprofessional and generally frowned upon.
Hence, you may wish to propose a more sophisticated exit strategy if you wish to impress potential investors and get their money!. Consider strong exit strategy options.
Strong Options – Exit Strategy for Small Company
These options range from outright sale through to public offerings (IPO).
One viable option could be selling to a friendly buyer. While you may have come to the end of your relationship with the business, there may be many people who would be saddened to see it end and may well be willing to step in to take over.
This might include passing it on to another member of the family, or selling it to employees or customers.
There are many businesses where this will be a realistic option, unfortunately, it is difficult to predict it at the beginning of the venture.
Predictions can be better made when the company is maturing, but nevertheless considering an outright sale is a good exit strategy for many businesses.
Knowing this early on provides a huge advantage because it ensures that as the business grows, you are consistently putting in place the systems, processes and controls to make the business attractive when you want to sell.
Exit Planning for Small Businesses – Mergers & Acquisitions
Another viable option is acquisition. This is when a rival firm, usually one wishing to expand, agrees to buy you out. You can negotiate the price and terms with the buyer and there is a good chance that both of you can come up with a very attractive price.
You will get a good price because together with your assets, the buyer will be willing to pay for goodwill, market share, client contacts etc. This means you can get a very good price for the business.
Public Offerings – Not Recommended for Most Small Businesses
Public offerings are potentially the most lucrative of all, but when reality kicks in, they might not seem like the dream you thought they were. The hard truth is that a minuscule percentage of companies manage to make it through an IPO.
This is because process costs millions, includes lawyers, analysts, publicity agents and a lot of other costly professionals. The odds are against you ever making it.
And if you do, you will probably be left with only a fraction share of the company you used to own.
Check out more details in a related article Exit Strategies for Business Owners Retiring – How to Prepare
Conclusion – Exit Planning for Small Businesses
Exit planning for small businesses is very important not only to get investor buy-in, but helps put the future in perspective with an end goal.
Know this, exit planning can be done at any time during the life of a business, but most owners are too busy “running around” in the business.
Getting it done at whatever stage of business is the important thing and not when you are about to hit the brick wall of retirement! Learn how we can assist. CONTACT US TODAY
Forbes (2022) Business Owners: Why You Should Have an Exit Plan https://www.forbes.com/sites/forbesbusinesscouncil/2022/06/21/business-owners-why-you-should-have-an-exit-plan/?sh=56801fe5a79c