How to Create an Exit Strategy for Your Small Business

Exit strategies are essential to the well-being of any small business. These exits can vary, from passing a business down through a family member to selling a business in it’s third year of operation to a stranger. However, despite variances in the methodologies of how business owners exit their business, one thing holds true: at some point, every business owner must exit their business. Therefore, developing a proper exit strategy is essential to the success and longevity of any business.

What is An Exit Strategy?

An exit strategy is an actionable plan that allows a business owner to maximize the value of their business when selling it. An exit strategy encompasses many aspects of a business in regards to selling. These aspects include, but are not limited to, how much the business is worth, how you plan on selling the business, and who you plan on selling the business to when the time comes. For example, do you plan on passing this business down to a family member, or just any person with the funds and good intentions? Furthermore, how much should your business be sold for in the first place? All  factors of an exit strategy are important and must be treated as so. Exit strategies allow business owners to not blindly make important decisions regarding their business and legacy.

Pre-Sale Business Cleaning

A business is similar to a home or car in many ways. For example, owners often struggle with selling a long-owned car, vehicle, or home. Similarly, an owner is responsible for a few logistics prior to being able to sell their car or business. This stage focuses on making your business as attractive as possible for buyers. “Cleaning-up” regards the process of fine-tuning the logistics of a business prior to planning to sell. This stage of the exit strategy is somewhat preliminary, but vital. Owners can raise the value of their business, or handle unexpected mistakes, by cleaning-up their business. While there are many faucets of cleaning a business, there are key areas that cannot be overlooked when fined-tuning your business. These three areas are necessary for a successful exit strategy, and as follows:

Legal

This step of an exit strategy consists of refining the legal logistics of a business. Cleaning-up legal matters includes making sure that one’s business has no outstanding legal issues. These issues could be something such as lawsuits that are pending against your business. Additionally, a business owner should ensure that all of their licenses and regulations are up-to-date. Many licenses are necessary for business operations but can sometimes go overlooked. In turn, any unresolved matter can cause problems for a business owner looking to sell. In many cases, legal issues will lower the value of a business in the eyes of buyers. Unresolved legal matters or issues can make it impossible (or at least, improbable) to sell a business. Cleaning-up any legal issues is a key step for any successful exit strategy.

Financial

The financial aspect of cleaning-up a small business for sale includes reviewing over and polishing all financial aspects of the business. For example, evaluation of prior income statements, balance sheets, and tax documentation are all parts of cleaning-up a small business. Business owners can get a better gauge of valuation by reviewing these financial documents, as well as fix any past errors. Cleaning-up the finances of a small business is compromised of the bookkeeping of past and present financial documents for your business.

Marketing

Cleaning-up the marketing of a small business, in regards to an exit strategy, refers to boosting the business’ public image. The value of a small business can often be boosted, or lowered, based on public opinion of the business. This phenomenon is visible daily in the rise and fall of various stocks based off of public opinions, and the business’ or owner’s actions. Therefore, a business owner can increase the value of the business that they are selling by improving or maintaining the business’ public image. Good finances, logistics, and products can only get a business so far — accordingly, cleaning-up the brand surrounding yourself and your business is essential when selling a small business. Having a good brand can only work positively for a business, and subsequentially the business-seller.

Asking Price

A reasonable asking price is a very important part of selling a small business. An adequate asking price will allow you to maximize profits on the sale of your business. For example, an overestimated asking price may minimize or scare buyers. On the other hand, asking too little can decrease the actual value of your sale. A business owner must complete an accurate valuation of their business in order to achieve a fair asking price. Valuating a business can depend on various factors, each of which are different from business to business. While there are many components of valuating a business, there are many factors that should not be included. For example, emotional attachment to a business not be a high-impact factor valuating your business. For more tips of valuating your small business check out the “Valuation” section of our blog on “Funding Your Purchase of a Small Business“. 

Regardless of how a business owner comes to their asking price, it is essential that the price be fair. Do not be afraid to negotiate on your asking price! Compromise and negotiating are essential to creating a reasonable asking price, and in turn a profitable exit strategy.

How to Sell

There are a few options for how to sell your small business, and deciding the correct strategy or method differs from person to person. However, it is essential to a good exit strategy for a business owner to know who he wants to sell to. Some options include a business broker, someone the business owner knows personally, or the open market. Selling your business to someone you know may leave an owner more secure in the future of that business. On the other hand, selling on the open market may maximize the value of the business sale. A business broker is a good option for a seller who does not want to be as involved in the selling process or needs assistance–  a business broker can handle much of the legwork, and just present the seller with the final options.

While these options are some of the more frequently-taken routes, it is important to remember that these are not the only options. For example, many companies merge with other or larger businesses. This option allows the seller to possibly maintain levels of involvement within the new company. A seller must have a solid plan for how to sell, regardless of which option a they choose.

Execute and Announce

Finally, the exit plan ends with the execution and announcement of the business deal! This step is often a big sigh of relief for business sellers. However, the final step of your exit strategy should not be rushed. For example, it is important to not reveal your business deal to customers or the public until the deal is final. This aspect is important for a few reasons. Primarily, this makes sure to not confuse customers or the public if the deal was to fall through. Furthermore, this keeps other options open for other potential buyers if the deal falls through. A seller should take their time and be precise in the execution and announcement stage of the exit strategy; as the saying goes, do not count your chickens before they hatch.

Written by Brian Kennerly, Pennsylvania SBDC Lead Office Marketing Team

Brian Kennerly is currently a Graduate Assistant at Kutztown University of Pennsylvania while pursuing his Master’s in Business Administration. His hometown is Upper Darby, PA, and he attended the University of Virginia for his undergraduate career.