There are six basic ways to extract the value from the company you’ve built.
If you’re a small-business owner, your company probably represents the largest single asset you own.
Your investment of time, money and hard work has transformed your once-fledgling enterprise into an extremely valuable property. Unfortunately, most business owners don’t have solid plans for extracting the value from their business when they’re ready.
Knowing your options in advance and preparing for them are the most important keys to a successful exit. Here are six typical methods for exiting your business.
Exit Option 1. Sell to the Open Market
This is what most people think of when they consider exiting their business: listing the business—that is, making it available to the open market. It is generally the most popular option and involves listing the business through a business broker, often at a certain price. The owner then finds out what the market will pay for the business.
The problem is, your idea of a reasonable price might be completely different from what the market thinks, especially if the buyers aren’t intimately familiar with your industry or market. A competitor or a complementary business might be more likely to understand the full value of your business. (See No. 5!)
Exit Option 2. Keep It in the Family
Keeping the sale of the business within your family is a way to leave a legacy. The process of preparing a family member for ownership can take longer, but there are family succession planning documents that can walk you through the steps of making this transaction a reality.
Having family continue in the ownership of the family business could be a way for the owner to stay involved in the company, which may or may not be a good thing. It is often an emotional event to sell to a family member, and staying involved may make the transaction more complicated.
Exit Option 3. Sell to Employees
Your managers and other employees might be interested in acquiring the business, perhaps through an employee stock ownership plan (ESOP), where the owner’s equity is usually purchased over time. This method typically requires a business succession plan that spells out the financial details and includes a process for identifying and grooming your successor.
ESOPs are not the only way for employees to buy out owners. One or more employees could make arrangements to buy the company through other means.
Exit Option 4. Take It Public
An IPO (initial public offering)—selling stock in your company—may be the dream of many business owners, but it’s not appropriate for most small businesses. IPOs can be time-consuming and expensive to execute, but they can also be extremely profitable. However, it can take a long time to extract money from the equity gained in any IPO.
Exit Option 5. Sell to a Strategically Aligned Business
Selling your business strategically to another business is perhaps the most desirable option as there are inherent similarities to how the businesses operate and the transition can be smooth.
Businesses buy other businesses for many reasons—sometimes to reduce the competition, sometimes to expand their capabilities in key areas of operation.
As opposed to putting the business on the open market and seeing who might be interested, in this case, a list of strategic buyers is often developed far in advance. Actions may be taken just to get the businesses into alignment, and then the sale is proposed.
Exit Option 6. Liquidate the Assets
Sometimes the business will not operate without the owner’s continued presence. Liquidating the assets then presents itself as the only option to generate profits from the sale of the asset, because no one is willing to purchase the entire company. In this case, preparing well in advance to maximize the value of the assets is essential.
In all cases, the owner presumably wants to get as much out of the sale of the business and its assets as possible. Knowing this and preparing for it can take a long time. Wise sellers will prepare sometimes years in advance to ensure they get what they want out of the business.