Invest Transition

Preparing an Exit Strategy

1. Preparing an Exit Strategy

An essential part of owning a small business is planning for and preparing an exit strategy.

As an entrepreneur, it is easy to be caught up in the initial excitement of opening a business or in its daily operation, but it is also important to have a clear exit plan – for both you and your potential investors.

Consider your long-term plans for the business. Are you planning to eventually sell your enterprise? Pass it on to your children? Take it public? When would you like to retire from your business?  Once you have decided on a vision for the future of your business, take the appropriate steps to ensure that your exit strategy is executed on time, that it meets the needs of you, your staff and your customers, and that it is financially viable (and hopefully beneficial!).

The BDC document, “Business Transition”, is a detailed guide on the transition and exiting process for entrepreneurs. It outlines exiting options like family transition, management or employee buyout, and external sale, explains how to determine the value of your business and establish the steps for closing your business.

Canada Business provides a good guide to succession planning, leading you through the steps of selling or handing over your business to a family member, friend or other entrepreneur.

2. Common Exit Strategies

‘Run Dry’. This strategy works well for sole proprietorships, where the owner simply increases personal salary/bonuses over the years preceding the planned exit. Make a final payment to yourself, settle your accounts and shut the door.

Liquidation. Life happens, even for diehard entrepreneurs, and sometimes you need to shut down quickly. Liquidating your business assets may be a way of repaying creditors or shareholders. While liquidation offers a quick and simple exit, you run the risk of not getting the most for your business’s assets or realizing its full market value.

Sell Your Shares. This strategy is ideal for partnerships. Selling your shares to an existing partner(s) offers a way for you to exit your business simply and effectively, and possibly with some financial gain from the sale of equity.

Sell Outright. The sale of your business to a family member, employee, customer or outside buyer is another form of exit strategy. You may choose to sever all ties with the business, or negotiate for equity. Make sure the buyer is a good fit for your business.

The Canada Revenue Agency provides a good guide to selling your business. The question-and-answer format addresses common issues like cancelling a business number, transferring or closing a payroll or GST/HST account, and determining the value of inventory and assets.

Acquisition. Other business may seek to acquire yours, adding the value of your business to their own. Look for companies who you think would benefit from the purchase of your business, argue your business valuation, and negotiate a deal. If you are of strategic value to the acquirer, they may pay more for your business than you would receive from selling outright.

Go Public. While IPO’s have the potential to make a lot of money, they take thousands (or millions) or dollars to prepare and require the backing of professional investors.