Business owners should start planning their exit strategy as soon as they start thinking about opening their business.

Whether your business thrives or faces unexpected challenges, having a clear exit strategy gives you control when it matters most.

That may mean selling your business, transferring ownership, or simply shuttering your doors. The strategies you will develop will depend on the size of your business and its stage of growth. But every single business owner, for one reason or another, will exit their business one day.

Here’s how you should plan for it: 

Key Takeaways

  • It’s never too early to start formulating an exit strategy.
  • Exit strategies vary depending on the profitability, size, and industry of your business.
  • Succession planning, transferring ownership, and selling your business are three ways to plan an exit.
  • New buyers typically prefer stable, profitable businesses.
  • We can help you sell a business.

What Is An Exit Strategy?

An exit strategy is a plan to leave your business; the plan will seek to maximize your profits or minimize your losses. There are several potential exit strategies; they can involve selling your business, appointing successors, or shuttering your doors.

Understanding Exit Strategies For Businesses

There are several different exit strategies for business owners. Exit strategies include:

Initial Public Offerings (IPOs): A prestigious exit strategy with high potential profits; most mainstreet businesses will not be able to meet the requirements for an IPO

Management Buyout (MBO): An exit strategy in which you sell your business to your management team or employees

Liquidation: All of your assets are sold to buyers. The process is simple, but leads to lower returns—in liquidation strategies, the business is shuttered.

Family Succession: The business is transferred to a family member

Mergers and Acquisitions (M&A): Another company merges with yours or acquires yours; it can be very high value, but must be navigated carefully, as negotiations are complex. 

Strategic Acquisition: Selling your business to a company in the same space; the process can lead to a high payout, but not all business owners feel comfortable selling to their competition.

In any exit strategy, you must juggle priorities. Want to retain some control over your business? You may see a smaller payout. Want to leave your business immediately to retire? Your payout may be smaller, as the buyer is assuming a higher risk. Want to maximize your payout? You may have to sell to your competitor, or see your company restructured.

There are always pain points when exiting a business; determining what is most important to you is part of what makes a good exit strategy. Your priorities will change as the years go on; your exit strategy should, too.

We recommend getting regular business valuations; valuing a business is complex, and knowing how much your business could go for on the market can help you determine when you should exit. 

Benefits Of Exit Strategies

Having a business exit strategy carries three key benefits:

  • Emotional: Leaving a business can be incredibly stressful. By planning well in advance, you’ll have the chance to do plenty of soul-searching, to truly understand when and why you want to leave your business, and be comfortable with the realities of leaving something you built from the ground up.
  • Financial: Planning your exit early can help you maximize profits tax-efficiently. Early planning can also help you manage the tax implications of leaving your business.
  • Legacy: By planning your exit early, you can help cement your legacy. From your brand to your key stakeholders, creating a sound exit strategy can help you bolster your reputation in your community.
  • Operational: Running your business with an exit in mind, whether now or in the future, and understanding how a prospective buyer will view your business, will guide the implementation of operational improvements.  

Common Exit Strategies

The many different business exit strategies can be grouped into three broad categories: Successorship, transferring ownership to management or employees, and selling to a third party. 

1. Appointing A Successor

A successor is a chosen person whom you will transfer your business to. Appointing a successor can mean keeping your business in the family or passing it to a friend. 

Appointing a successor reduces third-party involvement and helps you maintain influence over the business—you should choose a successor with whom you have a good relationship.

Successorship isn’t always clean, however—jealousy can lead to conflict, and close personal attachment can lead to you selecting a successor who isn’t up for the job. Like the kings of old, you have to choose your successor carefully, or risk your empire. 

2. Transferring Ownership

Choosing a successor often means keeping the business in the family; transferring ownership means keeping the business in the hands of the people who run it. A group of employees—often the management team—can purchase the business from you. 

Many of the advantages of appointing a successor apply here; there is less third-party involvement, and you can maintain influence over the business as long as you have a good relationship with the employees involved. The business will be run by people whom you already trusted to run it while you were heading it—that can be an incredible feeling.

As with appointing a successor, however, not all employees are cut out to run a business. Another similar downside is jealousy; some employees might grow dissatisfied with the new owners, especially if they were not involved in the ownership bid.

3. Selling The Business

Selling the business to a third party may lead to the highest profits, especially if you time the sale right.

Here, the main disadvantage is that you may lose most or all influence or control over your business, and that the process can be much more time-consuming. 

There are many ways to structure the sale of your business, some of which leave you with more control over the business after it is sold. Consider all of your options carefully if you decide you want to sell to a third party. 

Selling Vs. Closing Your Business

Business exit strategy planning is typically focused on the ideal scenario: Your business has value, and you sell it to interested buyers or pass it down to a family member. 

Unfortunately, not all businesses are successful, and some must simply close. In these cases, you will likely have to sell all of your assets piecemeal. This can be a painful process, but if you know that there is no path to success, it is sometimes better to close sooner to give yourself the runway you need to start again. 

Factors To Consider When Selling

The time of sale: Business owners often exit their business because they are looking to retire, or because they are interested in other business ventures. The more flexible your timeframe is, the more likely you are to structure a deal that meets most or all of your priorities. Markets can shift fairly quickly; it’s all about timing.

The value of your business: Have a large, valuable business? You may be able to exit with an IPO or attract businesses interested in an M&A deal. Own a smaller business? You may be more likely to sell to direct contacts or other small business owners. Here at Catchfire, we have a number of contacts who may be interested in purchasing your business—no matter what size it is.

Your industry: Think about your competitors, the market, and your stakeholders. All of these things can influence who you sell to, when you sell, and how much you can sell your business for. 

What New Buyers Prefer

New buyers generally prefer businesses that are stable and have shown consistent growth. There are exceptions, of course—we’ve all seen Silicon Valley buy unicorns for inordinate amounts of money on what amounts to a gamble. For most businesses, however, stability is key. 

You Can Expect To Pay Taxes When Selling In Canada

There will be tax implications in the sale of the business.  Minimizing their impact requires advance planning.

We highly recommend talking to a tax professional to minimize your tax liability when selling your business. Your M & A Advisor should work with your tax advisors to ensure transactions are structured to protect your best interests.

How To Develop An Exit Plan

 

Consider Potential Options

Think of the advantages and disadvantages of appointing successors, transferring ownership to employees, or selling to a third party. Think about who might want to acquire your business, and how much control you want over it once it is acquired. 

When your business is struggling, you should also consider whether or not it is the right time to cut your losses. That is not an easy decision to make, but doing so can spare you greater pain in the future.

You should also think about whether or not the business can run without you. If it cannot, consider training management to take on more of your responsibilities; businesses that run as turnkey operations can be more attractive to buyers. 

Prepare All Financial Documents

The due diligence process is complex; preparing all of your financials well before selling your business can help smooth over the process. Going over your finances can also help you determine the value of your business.

Appoint A New Leader

Planning on a succession? Want to leave the business in good hands after a sale? Start training your successor or key employees to take on your roles and responsibilities. 

When To Consult An M&A Advisor

We recommend consulting an M&A advisor early on in the exit strategy planning process. We can help you at the earliest stages of planning—beyond M&A services, we also offer strategic executive coaching to help you get to the heart of your goals and aspirations when exiting your business.

 

It’s never too early to begin exit planning. Contact our M&A advisors today.