In the U.S., about 50% of small businesses fail within the first five years of their existence due to various challenges, including, among others, lack of adequate financing, no market demand, and stiff competition. Despite these challenges, some small businesses do grow and thrive over time. Even if your business is doing well, your business plan should include a clear exit strategy. Here’s some more information about creating an exit strategy for your small business.
The Need for an Exit Strategy
According to Small Business Trends (SBT), 48% of business owners who want to sell do not have documented exit strategies. Typically, having an exit strategy does not mean that you plan on leaving your business after some time. Instead, it simply means that in case you, at some point, want to retire, transfer the ownership of your business, or switch to a dormant partner, you will have clear guidance on how to transition.
Effective Exit Strategies to Consider
Before choosing an exit strategy, it is prudent to consider factors, such as how long you intend to stay in the business, your financial status and expectations, and any stakeholders such as investors and creditors that may be affected by your exit. That said, here is a look at the common exit strategies that work for most small businesses.
Initial Public Offering
According to the Corporate Finance Institute (CFI), Initial Public Offering (IPO) is the process of selling shares of your business to the public. IPO turns your business from private to public, which can help increase publicity, brand awareness, and even profitability.
Instead of transferring ownership, you can also decide to close your small business through liquidation. This refers to the process of selling your business assets or redistributing them to creditors and investors. While this strategy can be profitable if you have high-value assets to sell, it should be your last resort considering you’ll lose unsaleable items, such as client lists and business relationships.
Selling Your Business to a Familiar Party
You can also exit your business by selling it to someone you know, including, among others, a family member, a partner, an employee, or a friend. This enables the buyer to acquire an established business without making a huge initial investment. However, selling the business to a familiar party may trigger wrangles if one party does not hold up their end of the deal. To prevent such issues, ensure you sign the sales contract in the presence of an attorney and witnesses, even if you’re selling it to your sibling.
Selling Your Business in the Open Market
To avoid some of the risks of starting a new business, some entrepreneurs prefer to purchase established businesses. As such, selling your business in the open market is also a great way to exit. More specifically, it attracts more buyers, giving you a chance to make more profit by selling your business to the highest bidder.
Selling Your Business to a Competitor
There may be similar businesses that would like to acquire your enterprise. That said, ask around to find out if any of your competitors want to buy your business. You can also take a role in the new company if you are still willing to stay in the business.
Use these tips to create an exit strategy for your small business. Take note that carrying the right business insurance in Seattle, Washington, is also a great way to prepare your business for eventualities that may force you to exit early. At Humble & Davenport Insurance, our experts will help you find commercial insurance policies that meet your business needs. To get started, contact us today!