This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
When launching and growing a business, entrepreneurs should also look toward the future. Even in the early stages of running a small business, having some goals in mind related to the ultimate exit for the company can help prepare you for long-term personal success and peace of mind.
Every small business owner’s potential to plan their endgame differs depending on their company’s size and revenue, as well as other elements of their corporate structure (such as the value of their assets and whether or not it’s a family business).
Here are seven possible outcomes for exiting a company.
Going public via IPO
During an initial public offering (IPO), the company sells shares of the business to the public at a price based on a preset valuation determined using a number of industry-related factors. Owners could reap a substantial profit when this happens, as it makes the company into a publicly traded and owned entity rather than a privately owned one.
An IPO also brings a huge level of brand awareness to the business (as the process involves months of high-level publicity) and creates a path for the business to thrive well past the founding team’s exit. Companies, however, must exhibit high potential for growth and undergo costly filing and due-diligence processes to qualify for an IPO. It’s also very rare for businesses of any size, most especially small companies, to clear the requirements necessary for an IPO: In 2019, just 159 companies went public.
Companies that do clear the requirements must release extensive financial information and prepare for extraordinary scrutiny of their leadership and finances from analysts and potential stockholders. For those who lead the business post-IPO, the costs of maintaining a public company are very expensive and come with high-compliance reporting standards and continued pressure to deliver profits.
Merger and acquisition (M&A) or acquihire
Merger and acquisition opportunities (M&A) are another exit avenue with high potential for profits, depending on the circumstances. Unlike with an IPO, business owners engaging in M&A can negotiate company valuations during the sale process.
Mergers and acquisitions are typically associated with (and highly common among) large corporations, but smaller companies engage in M&A as well, and for a variety of reasons. In competitive industries, for example, thriving businesses may be bought up by larger peers to help them better compete, grow market share, or reduce expenses through the acquisition of resources. In other instances, small companies merge to grow income and market share, lower overhead costs, add new value to both companies, or realize other synergies. Finally, some acquiring companies will be interested in M&A primarily to recruit its employees rather than for its products or services, this is considered an acquihire.
As with IPOs, however, mergers and acquisitions tend to take a long time and involve extensive due-diligence processes and negotiations. Business owners looking to exit via M&A are always wise not to count on a deal going through until the paperwork is signed; a deal can fall through at any time, for any number of reasons.
Sell to a family member or peer
With enough planning, entrepreneurs have plenty of options for selling their businesses to people they already know. Grooming a successor from inside the owner’s family is a fairly common exit of this kind: About 30% of U.S. family-owned businesses turn into second-generation businesses, according to the Family Business Institute, and PwC research finds that 58% of family businesses have succession plans.
Succession inside family or peer groups allows entrepreneurs to preserve some of their legacy with the business. However, it can strain the family or peer relationship with their planned successor. Entrepreneurs can pursue this path if they feel that all parties involved can handle the added pressure.
Additionally, business owners must be mindful that whoever they choose to take over the business may not be accepted by existing employees. For this and other reasons, some entrepreneurs may find ways to stay involved in the business post-sale or otherwise help smooth the transition to new ownership for staff and employees.
A buyout by managers
It’s also possible for the existing management team, or other employees, to buy out company leadership outright. Alternatively, a business owner can sell the company through an ESOP, or employee stock ownership plan, to provide the workforce with an ownership interest in the company and further help keep the legacy intact.
ESOPs also offer possible tax advantages for sellers, including tax deferral in connection with the sale of a C corporation to an ESOP.
In both scenarios, the business benefits from the continuity of individuals already familiar with the business taking the leadership reins. Depending on the circumstances, either approach can allow business owners to stay involved in the company beyond the sale if they choose to do so.
Sell to partners or investors
Similar to a sale to employees, business owners can let their fellow shareholding partners or any other investors buy out their stake in the business — ideally for a healthy profit.
When the transaction goes smoothly, it can help maintain strong continuity in the business beyond the sale. That said, a sale to partners or investors can be contentious depending on the circumstances of a partner’s departure and the level of motivation (on both sides) to get a deal done.
In some cases it may be appropriate to liquidate the business by selling off its assets and terminating its customer and vendor relationships. This step is not to be taken lightly (and business owners are wise to consult a lawyer or accountant before taking this or any of the exit planning possibilities).
Liquidation can be an alternative to filing for bankruptcy that some sole proprietors and small business owners pursue as it allows them to liquidate their business assets. In the event it becomes necessary, business owners can liquidate a business in one of two ways.
The first is to simply close up shop and sell all of the assets all at once, which typically incurs the lowest returns for business owners upon exit. The second is to remain open as long as possible and sell the assets over time, which allows business owners to extract more profits (via salaries and dividends) long term; this means they draw down the valuation of the business over time and pay taxes on the personal income, rather than pay capital gains taxes on profits remaining in the company were it to be sold to a third party.
If an entrepreneur has no means to keep the company running and is unable to pay off the business’s current debts, filing for bankruptcy may become a necessary exit for addressing the responsibilities and debts of the business.
Filing for bankruptcy has a permanent impact on a small business owner’s credit. Business owners should carefully consider which type of bankruptcy protection they need. Chapter 7, for example, known as liquidation bankruptcy, requires companies to sell off assets to pay back creditors. On the other hand, Chapter 11, known as reorganization or rehabilitation bankruptcy, allows the firm to reorganize (if possible) and try to later reemerge as a healthy company.
Find an exit plan that works for you
Ultimately, growing and scaling a small business is what entrepreneurship is all about. But keeping a company’s exit in mind throughout the business life cycle is the only way to stay prepared if economic or business conditions require business owners to rethink their retirement or succession plans.