How Do I Exit My Small Business?

Just as no two small businesses share an origin story, no two small businesses are going to find success with identical exit strategies. What all small business exits do have in common, though, is the importance of preparation. 

It’s not like cramming for an exam, though. It takes much longer and follows a much less rigid, predictable roadmap. You have to know more than just the ins and outs of the business. You need to consider accounting, CFO, and HR details as well. The strategy you use and the amount of preparation behind it affect not only the payout you receive but the short- and long-term health of the organization, too.

What Does It Actually Mean To Exit a Small Business?

Exiting a small business means transferring ownership through a small business exit strategy. It could be acquired by a strategic buyer, sold to a private equity firm, or transferred through family succession, for example. An owner could also consider a management buyout or Employee Stock Ownership Plan (ESOP). 

Each exit strategy for small business owners has its advantages and drawbacks, so it’s important to review your options carefully during business transition planning. Or, you might want to consider small business exit strategy consulting to make sure you’re able to meet your objectives without leaving money on the table.

Is Transferring Ownership the Same as Closing Your Business?

No, transferring ownership and closing a small business altogether are not the same thing. When you transfer ownership, the business continues to operate, generate revenue, and keep workers employed. 

The specific terms and details depend on the exit strategy chosen, as well as business valuations and market conditions, among other factors, underscoring the importance of exit planning for small business owners who want to maximize valuation and secure a favorable deal.

Closing a business, by contrast, ceases to operate. It’s a quicker process for the seller but results in lower asset liquidation value, as well as layoffs and potential liabilities. 

If your business is still profitable, you are most likely better off choosing one of several common business exit options, rather than shutting the company down completely.

 

What Are Your Small Business Exit Options?

When it comes to how to sell a small business, several options exist, each with its own advantages and disadvantages.

Targeting Strategic Buyers 

These buyers value one or more aspects of your business in addition to its revenue potential, looking to make strategic acquisitions to expand into a new market or acquire assets, intellectual property, or new customers.

Selling to a Private Equity Firm or Financial Buyer

When a private equity firm acquires a business, they do so as a standalone investment. After holding it for three to seven years, they’ll often look to sell the business again to turn a profit. The biggest advantage of selling to private equity is the amount of liquidity at closing, but you have to accommodate their timeline. 

Considering a Management Buyout (MBO) 

A management buyout for a small business usually provides a smooth transition with minimal disruption. Instead of shopping the business around on the market, you sell it to the existing management team.

Starting an Employee Stock Ownership Plan (ESOP)

Starting an ESOP provides employees with a retirement benefit similar to a 401(k)-type retirement plan, but instead of being funded by payroll deductions, an ESOP is funded by the employer with company stock. 

Transferring the Business through Family Succession

A family succession plan is a great way to ensure business continuity, although family dynamics are never guaranteed to remain positive. A substantial benefit of this strategy is that it enables a tax-efficient method to transfer wealth to the next generation.

Can You Exit Your Business and Still Remain Involved?

Yes, some small business exit strategies enable the owner to remain involved with the company. 

• When you sell to a strategic buyer, it’s typical for owners to exit the business quickly, though they may stay on briefly for a specified transition period (depending on the buyer’s preferred timeline).

• Selling to a private equity firm provides some flexibility in terms of previous owners maintaining involvement. It’s not uncommon for the seller to retain a minority equity stake and stay somewhat involved in operations after the deal closes, at least during a transition period.

• In a management buyout, the previous owner’s ongoing involvement is mostly up to them. In theory, though, your continued involvement shouldn’t be necessary since the company is being taken over by the existing management team.

• There’s no set timeline for an owner to wind down their involvement if their exit strategy is through an ESOP. Instead, the ownership transition is gradual and takes place over a span of years.

• Similar to a management buyout, when you transfer ownership through family succession, you can usually dictate the extent to which you remain involved in the company’s day-to-day operations.

How Do Your Personal Goals Shape the Right Exit Strategy?

A good exit strategy is one that maximizes the value of the business and aligns with the priorities of the small business owner, including their timeline for exiting the company. For some owners, maximizing the return is the top priority, while others are more concerned with business continuity, brand reputation, or even family legacy. Some want to close on a quick timeline, while others are in no particular hurry and instead monitor market conditions and other factors to identify when the time might be right. Whatever your priorities, a guide to preparing to sell a small business starts with getting clear on what a successful exit actually looks like for you — because that definition shapes every decision that follows.

If you’ve never navigated the exit process before, it can be difficult to identify what a good exit strategy looks like. 

With so many factors to consider, small business exit strategy consulting is often an invaluable resource for small business owners. A team of qualified advisors guides them through the process while protecting their interests and helping them minimize liabilities. 

How Do You Know If Your Business Is Ready for a Successful Exit?

There are a few signs to look for, including your own exit readiness and the extent to which yours is a buyer-ready business.

If you’re unsure whether you’re fully ready to exit the business, ask yourself these questions:

• “Can the business continue to operate without my daily involvement?” If not, you have an owner-dependent business, which will turn many buyers away. As you prepare your exit, you’ll need to evaluate and address this issue through strategic exit planning. 

•  “Are the finances clean, up-to-date, and organized?” Any serious buyer is going to perform their due diligence, and you can expect any issues that arise to be scrutinized and used as leverage, driving down your potential return.

• “Am I ready to move on?” You have to look inward for this one. Picture yourself months or years down the road. Do you think you’ll wish you were still involved, or do you envision yourself being perfectly content and invested in new endeavors (or retirement)?

In addition to being sure you’re personally ready to move on from the business, you’ll also need to think about how appealing your business might look to a potential buyer. The more you can do to verify that yours is a buyer-ready business, the easier time you’ll have in getting the return it deserves.

What Business Value Metrics Matter Most to Buyers?

The most important metrics largely depend on the exit strategy and buyer type. Buyers want to see that the business is functioning well and has a positive forecast. Some of the most common small business valuation drivers they might consider include:

• Recurring vs. project-based revenue
• Management depth
• Customer concentration
• Clean financials (at least three years’ worth)
• Key employee dependencies, systems

If you’re looking for a simple rule of thumb, here’s one: 

Profitability + Recurring Revenue + Runs Without You = Real Exit Options

In other words, if you have a profitable business with recurring revenue that runs without you, then you have real exit options. By starting your exit planning well in advance of your target exit date, you have more time to identify anything a prospective buyer might scrutinize and address those issues before you start engaging serious buyers.

How Do You Prepare a Small Business for Sale?

The process of preparing a small business for your exit is one you don’t want to rush or blindly jump into. It’s comparable to putting your house on the market. If you want to attract serious buyers that will be motivated to pay a fair price, you’re going to need to fix that leaky roof, clear the garage clutter, freshen up the paint on the walls, and so on. It’s both a matter of curb appeal and a signal to buyers that the place has likely been taken care of and won’t be falling apart soon. If you opt not to do these things, you lose leverage and will likely get a lower price than you would otherwise.

The same is true for exiting a business; you need to take steps to make it as buyer-ready as possible. 

How Long Does the Exit Planning Process Actually Take?

It’s best if you think of exit planning as a process that takes between 6 and 24 months, at a minimum. Examples of how to prepare a business for sale include:

• Normalizing your EBITDA by documenting (and removing) one-time or personal expenses
• Implementing GAAP-compliant financial best practices, like rolling budgets, monthly reviews, and timely forecasting
• Reducing owner dependency by building a deep management team and documenting key processes
• Locking in key employees, customer relationships, and vendor contracts
• Tightening up intellectual property (IP) documentation to preserve and protect vital assets
• Reviewing contracts and legal documentation to identify any liabilities that could threaten a potential deal

The truth is that most owners who exit their businesses aren’t as prepared as they should be. A rushed or incomplete exit planning process has a direct impact on its outcomes. Owners who don’t thoroughly prepare are leaving money on the table, whether due to a messy financial picture or liabilities that arise during a buyer’s due diligence process and become leverage for their side of the negotiation. 

They also forfeit a certain amount of control over the type or types of outcomes available to them. The more you prepare, the easier it becomes for you to be in the driver’s seat, rather than taking a reactive posture as a prospective buyer continues to scrutinize the details of your business.

Finally, a rushed planning process threatens to disrupt what you’ve built. Depending on how your exit plays out, you might weaken the brand reputation, disrupt key relationships, cause operations to go askew, and create a generally unstable situation.

When Should You Work With a Business Exit Strategy Consultant?

Here are a few signs that it’s time to make the call to chat with an exit strategy consultant:

• You’ve never sold a business before.

The exit process involves valuation, deal structuring, due diligence, buyer negotiations, and legal and financial documentation that most owners simply haven’t navigated before, and one misstep in any of those areas can cost you significantly.

• You’re not sure what your business is actually worth.

Most owners either overestimate or underestimate their company’s value, and without an accurate, defensible number as your starting point, every conversation with a potential buyer begins on shaky ground.

• You have a timeline in mind (even a loose one).

Whether you’re thinking 6 months or 3 years out, having any sense of when you’d like to exit means the clock is already running, and the earlier you bring in expert guidance, the more time you have to close gaps, build value, and approach the market on your terms.

The Milestone Approach

At Milestone, we know the best exit planning approach requires several types of expertise, which can make it daunting. But with Accounting, CFO, and HR expertise all under one roof, the Milestone team is ready to empower you with the insights, support, and services you need to make your exit, on your terms. We leverage a proven, three-stage methodology to help small business owners understand the process, maximize their business valuation, and find the perfect extra strategy for their unique case. Contact us today to take the first step toward your exit.