How do I develop an exit strategy for my business?

So, what’s an exit strategy? Simply put, it’s a plan that outlines when you plan to leave, what you’ll do with your business when you go, and how you’ll transition the business to the next stage. In developing an exit strategy, you’ll need to understand what you want to accomplish as you exit and then explore the advantages and disadvantages of various options. It’s also important to know the value of your small business and associated tax implications. In this guide, we provide a summary of the initial steps you can take to develop your exit strategy. 

Determine if you should sell your business

Any decision about your exit plan—including its timing—comes down to your unique situation and goals. There are three important questions to ask that can help you assess whether now is the right time to plan an exit. 

How much is my business worth today? 

Understanding the current market value of your business impacts any decision you make regarding your future, and getting a proper estimate is a complicated task. The timing of your next steps may change depending on your expected price and the fact that selling your business can sometimes take 9 to 12 months. Working with a professional can help ensure that you don’t overestimate the value of your business or underestimate its potential for future growth. 

Is my business in demand? 

Consider the demand for businesses in your sector and privately-held businesses overall. After a few years of increased mergers and acquisition (M&A) activity  that created opportunities for both buyers and sellers, the market saw a cooling off period followed by a possible return to long-term averages. Market conditions can change quickly, so it’s important to understand how the cyclical nature of the M&A landscape could affect your sale prospects. 

What are my personal goals? 

Our personal or financial goals help determine when to exit and your best options. For example, the decision to move on to the next chapter of your life as soon as possible can require more funds upfront, so it’s important to understand the timelines associated with various exit strategy options. 

Consider common exit strategies 

Transition your business to a family member 

Consider transferring ownership or control of your business to a family member if you want it to continue in its present form but would like some relief from the mantle of responsibility. You may be able to transition your family-owned business, with prudent succession planning, to the next generation without the adverse tax consequences, under the intergenerational transfer rules. 

To help facilitate a smooth transition, it’s important to develop a formal and succession plan. Ideally, the plan will identify your successor, outline your training plans to enable them to manage both short- and long-term decisions and responsibilities and schedule exactly how the transition will be deployed. It’s important to note that this may not be an option if you’re looking for a more rapid exit or payout. 

Sell your business to your existing partners or employees 

A management buyout or sale to employees allows individuals familiar with the culture and processes to acquire the company and take control of ownership. This provides continuity in your business and can mean a smoother transition that requires less time to transfer your day-to-day responsibilities. However, selling to your employees can result in a lower sale price and may take longer to fully realize on the funds from the sale, although ultimately the sale price will be dependent on what is happening in the market. 

Sell your business on the open market

If your business is profitable and demand is strong, it could draw more potential buyers and receive more attractive offers. This option requires grooming the business for sale, including making sure that your financial records and asset inventories are current and your processes are adequately documented. 

Understand the tax implications of selling your business 

The tax implications of selling your business will depend on how you exit.  There are exemptions and strategies that can help you make the transfer as tax efficient as possible, though it’s crucial to plan these in advance of the transaction. 

If you’re opting to sell your business, you’ll want to consider the after-tax return on the proceeds of the transaction. Depending on the nature of sale—whether you’re selling only parts of the enterprise, the entire business or if you’re looking to only sell an equity interest in the business—there may be capital gains exemptions and tax deferrals available to you. If you’re thinking about including contingent or earn-out components to the sale of your business, there may be other tax implications to consider. 

There are also tax considerations associated with liquidating your business assets. The proceeds of an asset sale will be used to repay outstanding debts owed to creditors, and the remaining proceeds, depending on the ownership structure of your business, may be distributed to you as taxable dividends. 

The information contained herein is intended for general informational purposes only and does not constitute as advice or opinions to be relied upon in relation to any particular circumstance. For more information about this topic, please contact your Grant Thornton advisor. If you do not have an advisor, please contact us. We are happy to help.