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5 Exit Strategies For Small Business Owners

By: Lending Tree

 

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Every small business owner has different long-term goals. Some may be content leading the business for decades, while others might see it as a passing experience or short-term investment. No matter your goals or timeline, you may be looking to move on to your next chapter. Read on for five potential exit strategies for small business owners.

1. Sell your ownership shares

If you own a business with a partner or have investors, one option is to sell your shares. The way you do that will depend on how your business is structured. Here’s a closer look at what that looks like:

  • Partnerships: All partners must vote on changing ownership percentages. You’ll also need to review your partnership agreement to see how shares are to be split between the remaining partners.
  • Limited liability companies (LLCs): Look at the buy-sell details, which should be in your LLC’s operating agreement. Anyone who has an ownership stake in the company must agree to changing ownership percentages.
  • S-corporations and C-corporations: Review the company’s shareholder agreement to see what’s required. Transferring your shares will require approval from other shareholders and/or the board of directors.

It’s probably wise to work with an attorney and tax professional when selling your shares. They can help ensure that it’s done properly and in a way that reduces your tax liability.

2. Sell the business

Selling your business can allow you to walk away completely or stay on as an employee, depending on how you negotiate. You can take this route if you own your business on your own or have partners or investors. According to the U.S. Small Business Administration (SBA), you can go about it in a few different ways.

  • Sell your business outright: If you sell your business in full, you’ll receive a payout and ownership will transfer immediately.
  • Opt for a gradual sale: This is when you allow a buyer to finance a long-term payment plan. They’ll make regular payments for a predetermined amount of time, which provides you with income until the sale is complete.
  • Lease your business: By leasing your company, you’re temporarily giving up the rights to the business. This can be a good option if you aren’t certain that you want to sell.

These options all require an interested party who’s ready to invest in the business. Online business listing websites, business brokers and investment banks could be good starting points. You can also spread the word throughout your professional network.

3. Pass the business on to a family member

When planning your exit strategy, you might like the idea of keeping your business in the family. It can be a great way to leave a legacy and transition to a more advisory role. Instead of managing the day-to-day running of the business, you can step back and act as a mentor to whoever you choose to take your place.

The process for selling the business or transferring ownership will be the same as above — or you might choose to gift your business to a loved one. Consult with a tax advisor before making any moves. Doing things gradually and spreading the donation over multiple years can help minimize your tax burden.

4. Consider a merger or acquisition

Merging with another business brings the two companies together to form one new business. You might choose to do this and sell your ownership shares. Alternatively, you might explore an acquisition. For small businesses, this often means getting bought out by a larger company. According to the FDIC Small Business Resource Effort, that may allow you to stay on as an employee and continue working after receiving a payout and relinquishing your ownership rights — or you may choose to walk away completely. From there, you might retire, start a new business, or buy an existing business.

5. Close the business

This doesn’t necessarily mean filing for bankruptcy, though that is an option. Instead, you might sell your assets, settle any business debts and shut down operations. It might make sense if you run a very small business with simple bookkeeping. It’s quick and much less complex than other exit strategies. But things could get complicated if you have employees to think about. If you take this approach, be sure to give them plenty of notice before shutting your doors. Also keep in mind that you might fetch a better return by selling the business or exploring a merger or acquisition.

Steps to take before exiting your business

These action items can set the stage for a smoother transition:

  1. Conduct a business valuation: Understanding what your business is worth can help you price it accordingly. The SBA suggests looking at your business’s assets, debts and projected revenue. You can also research what comparable businesses have recently sold for, or seek a professional valuation.
  2. Make a succession plan: This can help keep your business going strong after you leave. Think about your team, which includes management and those who handle day-to-day operations. How can you best support them through the transition? Will there be any changes in workflow that they need to prepare for? Also think about your customers and any information or resources they may need during this time.
  3. Consult the professionals: That may include a financial advisor, attorney or tax professional — or a combination of all three. Exiting a business can have serious financial repercussions. Enlisting a strong team can help prevent unwanted surprises along the way.

There isn’t one right or wrong way to walk away from a business. What matters most is choosing an exit strategy that feels right to you and is aligned with your financial goals and personal vision for the future.

Published: November 28, 2023
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Lending Tree

LendingTree is an online loan marketplace for various financial borrowing needs including auto loans, small business loans, personal loans, credit cards, and more. We also offer comparison shopping services for autos and educational programs. Together, these services serve as an ally for consumers who are looking to comparison shop among multiple businesses and professionals who will compete for their business.

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