Many small business owners focus on starting, expanding, and sustaining their businesses for the long term. While these are important, one more thing you as a small business owner should plan is exiting the business. Tides may change in favour or against the business. You may retire or be forced to shut down your business due to economic or personal circumstances. The best that you can do is learn about the various exit strategies and what works best in which scenario. While things may not go as planned, planning can help you make informed decisions and get the best possible outcome for your business.
5 Business Exit Strategies for Small Business Owners
Your exit strategy depends on how you perceive your business. Do you want your business legacy to sustain, do you want it to get a better growth platform, do you want to retire but still hold influence, or do you want maximum returns? Your exit strategy will change as per your objective. Here are five business exit strategies you can consider.
Liquidating Small Business
Liquidating a business is like a clearance sale. If your business has several assets, liquidation is a good strategy as you can sell each asset (building, furniture, car, inventory, patent, client list) to a different buyer and get the best possible price. Liquidation is also a good strategy when your business is struggling in a weak economy or due to industry trends.
Some business owners set up lifestyle companies where liquidation is predetermined. The sole purpose of a lifestyle company is to generate maximum profit for the owner while keeping expenses to the bare minimum. Such companies don’t spend on expansion and are dissolved when profits decline.
Transferring the Business to a Successor
If you want to keep the business in the family, you could transfer the operations to the rightful heir using several tax-efficient estate planning strategies like a holding company, family trust or estate freeze.
You could retain some ownership while passing on part ownership to your family. This way, you can still have influence and sustain your business legacy. When transferring business to a successor, you are in control of the transfer and can avail yourself of various tax benefits. An experienced tax consultant can guide you throughout the process.
However, this strategy could create conflicts in the family. If your children are incapable or willing to take over the business after you, this strategy might not yield the desired outcome.
Transferring Business Ownership to Employees or Management
When you don’t have a rightful successor and still want to retain the business legacy, you could consider selling your shares to the management team or employee pool. In a management buyout, you have a ready buyer for your shares. This sale doesn’t need much due diligence, and you can stay in control of the transfer.
However, an employee/management buyout strategy will only work if you have a proper succession plan, like an employee stock ownership plan. The company should have strong management willing to take over the company. Employees and management often fund the buyout by taking a loan, which could weaken the balance sheet.
Hence, you must plan this strategy well and keep sufficient money to fund the buyout.
Selling Business to a Third Party
You can also sell your business to a third party. This opportunistic strategy can give you the best premium for your business if the economic conditions are in your favour. There are two ways to execute this strategy – mergers and acquisitions (M&A) or initial public offering (IPO).
Both scenarios have a lot of due diligence and regulatory filing requirements.
Mergers and Acquisitions (M&A)
In an M&A, the business owner sells a controlling interest in the company to the strategic buyer. Once the acquisition is complete, the owner no longer influences the company. But to sell your business to a third party, you need an interested buyer. Most M&A deals are to eliminate competition, expand operations, or acquire technical capabilities, customers, or employees.
Act fast if you find a strategic buyer who has made you an attractive offer. If the deal drags for a long time, any change in the economy could make the deal less appealing. The pandemic is a perfect example, as many M&As got cancelled.
If you want to take the M&A route, ensure the company is eligible for the long-term capital tax exemption. This exemption requires 90% of the corporation’s assets to be used in active business at the time of sale and 50% or more 24 months before the sale. Moreover, the shares must be owned by the small business owner 24 months before the sale.
Initial Public Offering (IPO)
In IPO, privately held companies sell some of their shares to the public by listing on the stock exchange. However, a company must meet revenue and other criteria to qualify for an IPO. It involves high administrative and financing costs as you must release the company’s financial statements and comply with the exchange requirements.
Selling your business is like selling your home. It is the biggest asset transaction you will make in your life. Give it detailed thought and consult a professional accountant and tax expert to understand the tax and other implications of the transaction.
Contact KSSP Partners LLP in Markham to Help You with Business Exit Strategies
A professional accountant and tax consultant can help you review various exit strategies and suggest the ones most suitable for your business. At KSSP Partners LLP in the GTA, our accountants and tax consultants can provide services such as business reviews and business exit strategies. To learn more about how KSSP Partners LLP can provide you with the best accounting and consultation, ontact us online, or by telephone at 289-554-5997.