Beyond the Sale: Exit Strategies for Small Business Owners

When entrepreneurs start a business, the day they will say goodbye to it is seldom considered. However, inevitably there comes a time where exiting the business becomes a reality.

However, did you know that very few small business owners will exit their business through the sale of their company? In fact, according to statistics, only about 20% of small businesses listed for sale actually find a buyer. This stark reality often comes as a surprise when the time comes and thus underscores the importance of preparing for various exit strategies.

In this article we talk about the realities of exiting a business and the various different exit strategies you might consider, plus we share the key planning steps for a clean exit and the role a good accountant will play in the process.

Understanding Exit Realities

The dream of selling a business for a substantial profit is a common aspiration among entrepreneurs. However, achieving this is less common than many anticipate.

The market is saturated with small businesses, creating a scenario where demand from buyers does not always meet the supply. Additionally, businesses often appear less valuable to outsiders than to the owners who built them, due to factors like overestimation of assets or undervaluation of potential risks. This discrepancy in valuation can make it difficult to find willing buyers at the desired price point.

It's estimated that on average, small businesses sell for about 84% of their asking price. This statistic has remained consistent over time, demonstrating a typical gap between what business owners hope to receive and what the market is willing to pay.

Alternative Exit Strategies

So, if selling isn’t going to work, what other exit strategies might business owners consider to transition out of their business effectively? Here are some alternatives that can also lead to rewarding outcomes.

Succession within the Family

For some, passing the business on to a family member is a way to preserve the family legacy and achieve personal satisfaction. This path however, requires grooming the development of a successor who is both capable and interested in running the business.

Selling to Employees

Known as a management buyout (MBO), this approach lets employees who are familiar with and invested in the business take the reins. Approximately 15% of businesses are sold to employees, often helping to preserve the business’s culture and operational direction.

Liquidation

If finding a successor or buyer is not possible, liquidation becomes an option. This involves selling all assets of the business and shutting down. While not ideal, it's a straightforward way to exit and may sometimes be the most practical choice.

Merging with Another Business

Merging with a similar business can increase value and market presence, thereby making a future sale more likely. This strategy can be especially beneficial in industries experiencing consolidation.

Planning Your Exit

Effective exit planning involves several key steps:

1. Start Early: Begin planning your exit strategy early in the business lifecycle. Knowing your exit options and having a plan can greatly influence your business decisions.
2. Build Value: Focus on enhancing aspects of your business that will make it attractive to potential buyers or successors, such as strong customer relationships, a solid financial track record, and a clear competitive advantage.
3. Get Yourself Out of the Business: There is more value in a business when it can be run and decisions can be made without the business owner being in it day to day or involved in every decision. Keep this in mind when planning the future business strategies.
4. Know and Own your Ethos & Values: Knowing and living by your business ethos and values (truly not just as a statement) means that when you meet a potential future buyer they are more likely to see a higher value in the business if they are aligned with your ethos and values. It also, means you can quickly strike off any potential exit plans where they are not aligned.
5. Consult Professionals: Engage financial advisors, accountants, and business brokers who can offer insights and help structure a deal that maximises benefits.

The Emotional Aspect of Exiting

Now, exiting a business is not just a financial or strategic issue, it's a deeply personal one. Many business owners struggle with the emotional aspects of letting go of something they’ve built from the ground up. Support from family, friends, mentors, and professional counsellors can be invaluable during this transition.

The Role of a Good Accountant

A skilled, qualified and emotionally intelligent accountant like ourselves at Troy Accounting, plays a critical role in preparing for a business exit. We not only help ensure your financial records are in order, but we can also provide valuable insights into maximising your company's valuation and strategising for tax implications. We can gently and compassionately, guide you through different exit scenarios, helping you understand the financial and legal intricacies of each option. By leveraging our expertise, you can devise a more effective exit strategy that aligns with both your personal and business goals, ensuring a smoother transition and potentially more favourable outcomes.

To Summarise

While selling your business might be the ideal exit, it's not always feasible. Exploring and planning for alternative exit strategies not only prepares you for a smoother transition but can also open opportunities to maximise the value and legacy of your hard work.

Every exit strategy requires careful consideration and planning, and the best approach will depend on your personal and business circumstances. With the support of a dedicated accountant, you can navigate these waters with greater confidence and clarity, aiming for an exit that best suits your aspirations and life's work.

If you are thinking about exiting your business and would like to discuss this subject in more detail, please get in touch with us at [email protected] or call us on 0330 1340282