Exit Strategies Beyond Selling: Exploring Alternatives for Small Business Owners
- Entrepreneurs must always look ahead, even all the way to the exit
- Selling offers the upside of a financial windfall and a clean break, but there are other strategies to ponder
- Mergers, internal buyouts, and family successions have their own pluses and minuses
What do you envision when the thought of exiting your business pops into your head? The standard view is handing over the reins to a younger partner, selling to a larger industry competitor, or just receiving a juicy check that represents the years or decades of work you’ve invested.
Today, we chime in on the pros and cons of selling a business, including the financial implications and psychological hurdles that must be overcome. But let’s zig rather than zag this go-round. There are alternative exit strategies that should be explored in the years leading up to the transition.
Among them are mergers, management or employee buyouts, and family succession. These potential paths may offer more flexibility, while centering on a legacy rather than just a hefty payout. Let’s explore them.
Why Look Beyond a Traditional Sale?
Selling can be a quick win, and it often makes sense. Check in hand, you can efficiently put money to work in markets through a diversified portfolio. I’m happy to help you do that, but the better approach is to figure out what maximizes value to you. Value being life satisfaction, along with snatching as much of the proverbial gold at the end of the rainbow as possible. Hence, the biggest cashout is not always your optimal exit.
A clean break through a sale may come at the cost of losing control of the business you cherish, disrupting the lives of the employees who have been by your side through the highs and lows, or tarnishing the company’s reputation. Alternative strategies can mitigate these potential pitfalls, giving you more ways to:
- Phase out over time rather than all at once
- Retain influence in the business’s direction
- Reward loyal employees and their families
- Minimize the tax hit through tactical planning
To check all those boxes, planning three to five years in advance is key. It all starts with knowing your options.
Option 1: Mergers and Strategic Acquisitions
Are you a dealmaker? If so, this can be your last hurrah (at least before you climb the next mountain). Merging with or being acquired by an expert partner can be an attractive exit path. Common practice is to join forces with a larger organization as a bolt-on, tuck-in, or whatever your favorite M&A jargon is.
Clear Harbor helps entrepreneurs with acquisitions, ensuring their practice fits well within an industry and brings the most value to all stakeholders. More value = a bigger final payday. Indeed, strategic buyers may be willing to pay a premium for your customer base, intellectual property, or operational proficiency.
Mergers are often best when the founder wishes to see their firm continue to grow and thrive, even if under a new structure. Many such deals allow the owner to stay on in a leadership or advisory role for a set period, providing continuity for staff and customers. This transition stretch will enable you to gradually reduce your workload.
What could go wrong? Well, M&A is inherently complex. Negotiating the terms of the deal and executing it may take months, quarters, or even years. We are talking detailed business valuation work, due diligence, and back-and-forth between attorneys.
For acquisitions, specifically, you might be able to command a higher price tag if your enterprise owns a niche. If you’re reading this with years of growth ahead, always remember that moves you make today to widen and deepen your business moat can pay off when you seek an exit.
Option 2: Management or Employee Buyout
If your partners and employees have the acumen, ability, and willingness to accept the responsibilities of operating the business, a management buyout (MBO) or employee buyout (EBO) could be the ideal solution. This approach not only allows you to divest, but it also rewards key personnel for their commitment to growing what you started.
It’s common for long-tenured workers to know almost as much about the industry and its outlook as the founder, so passing the baton to them ends up being a win-win. An MBO or EBO better preserves organizational culture. Yes, the vibes matter as much as the dollar signs.
But how does it actually work? Buyouts often use a mix of seller financing, bank loans, and sometimes equity incentives to fund the transition. For owners, this means you may receive payments over time rather than a lump sum. Depending on your goals, that might work, or it might not. It’s all part of the evaluation process. We also did a deep dive on Employee Stock Ownership Plans (ESOPs) a little while back that you can check out.
The real x-factor is whether your team has the prowess, mindset, and capacity to swim on its own. As with many exit strategies, it’s essential to have strong legal and financial structures in place to avoid valuation disputes or conflicts during the transition.
Option 3: Passing the Business to Family Members
I have worked with clients who just want the biggest windfall, and others who value legacy above all else. Option 3 is geared toward the latter. Family succession is a classic exit journey, particularly for family-owned businesses. I call it a journey because there are inevitable twists and turns with emotional considerations at each juncture.
Like with Option 2, much depends on whether the next set of would-be leaders is enthusiastic about ownership as you are/were. If so, legacy is the primary upside. Moreover, if the deal is constructed thoroughly, then there’s a sense of fulfillment in what you’ve created and handed down—a feeling that goes beyond simple peace of mind.
But family succession requires more than just handing over the keys. It often involves years of grooming the successor, instilling leadership skills, and building credibility with employees and clients. Additionally, there are financial planning opportunities, including strategic gifting, tax-smart sales, and optimization using trusts. In such instances, we work closely with business attorneys and estate lawyers to ensure it gets done right.
Also, to protect against strife and legal challenges, establishing clear governance structures, roles, and expectations up front can prevent misunderstandings and family conflict down the road.
Put Your Blinker On: Preparing for the Exit
There are right and wrong ways when it comes to relinquishing control, and they hinge on your values, priorities, and long-term financial goals. To move forward effectively, you must prepare early, perhaps after a period of business growth. Start by:
- Knowing (and Boosting) Enterprise Value
Clear Harbor advises small business owners to take the proper steps to increase their firms’ value. It’s not just about being a spreadsheet warrior and hoping for a fair market multiple upon exit; there are strategies to tackle during the growth and plateau phases that can maximize a potential selling price. Uncovering these value-gems and filling the gaps is crucial.
- Crafting a Comprehensive Exit Plan
Your strategy should address financial, operational, and legal elements, including succession planning, tax strategies, and timelines. Financially, be sure to clean up your books, manage debt, and ensure consistent profitability. For family or employee transitions, determine the most efficient transfer methods to minimize taxes and legal complications.
- Assembling Your Advisory Team
We (or any financial advisor specializing in working with small business owners) can bring together accountants, attorneys, and sometimes business brokers or M&A specialists. There are many moving pieces, and the investment is worth it to structure the best deal.
- Communicating Clearly with Key Stakeholders
Transparency is a must. Whether you’re working with family, employees, or partners, clear communication helps maintain trust and reduces uncertainty during the transition. You don’t have to update everyone within six degrees of the exit, but keeping partners and employees in the loop is important.
The Bottom Line
Financial needs, goals, and aspirations are unique to each person. The same goes for small business owners seeking an exit. There may be an obvious choice, but often, it requires extensive planning and self-examination. The process may begin with number-crunching, then transition to emotional considerations.
Selling remains a common option, but there are other exit strategies for entrepreneurs to assess. By starting early, building the right advisory team, and crafting a thoughtful plan, you can create an exit that’s as successful as the business you’ve built.
