The Elusive Exit Strategy

By Lee Wood, DC

Every small business owner looks for an exit strategy. No matter what kind of business you have, whether you are running a one-person sole proprietorship, a partnership, or an LLC, you need an exit strategy. 

For any business owner, the questions are the same when it’s time to move on. How are you going to get your money out of the business, and how much money are you going to get?

Having an exit strategy worked out in advance helps ensure that you get what you want. Here are six exit strategy options for businesses to consider:

1. Liquidation

This is the “close up and sell the assets” exit strategy. For small businesses, especially those dependent on the performance of a single individual, liquidation is sometimes the only option because there’s really nothing else to sell. If you’re in this position, you will need to spend some time figuring out your best tax advantage.

Advantages:

• Simplicity
• The business can be wound up very quickly depending on the sale of assets.

Disadvantages:

• Liquidation has the lowest return on investment to the owner(s). The only money garnered from a liquidation sale is from the disposal of assets, such as land, equipment, or inventory. Any goodwill value from client lists or other business relationships is lost.
• Remember that creditors have the first claim on funds from asset sales.

2. Liquidation over time

In this exit strategy scenario, the owner(s) extracts most or all of the profits from the business over time before eventually selling or closing the business. That is typically done by taking out large salary draws or dividends over a number of years and is suitable for owner(s) who wish to maximize their current lifestyle rather than aggressively expand their business.

Advantages:

• Lifestyle — maximizing cash withdrawal on an ongoing basis for personal use.

Disadvantages:

• Extracting the profits reduces the growth potential and eventual sale value of the business. These profits are taxed as personal income.

3. Keep your business in the family

The dream of many small business owners is to keep the business in the family. It ensures that your legacy lives on and provides a living for your heirs.

Advantages:

• It can make for a smooth transition by grooming a family successor while allowing you to keep a hand in the business in an advisory role or other capacity.

Disadvantages:

• Developing a family succession plan can be difficult and may lead to infighting among family members over ownership or participation in the business. 
• Family members may not have the skills to take over the business.
• Clients may not approve of new management or changes in company direction.

4. Sell your business internally to employees, partners, or an independent contractor

Current employees or other insiders may be interested in buying your business. One way of setting up this exit strategy is through an employee share ownership plan, which is a stock equity plan for employees that lets them acquire ownership in a company. 

Advantages:

• The business can thrive because employees will get an established business that they are familiar with and are enthusiastic about.
• Arranging a long-term buyout with an employee can increase loyalty and greatly motivate staff to work hard to make the business succeed. This also may allow you to keep a share of the business and stay in an advisory role or capacity.

Disadvantages:

• Employees may not be suitably qualified to take over the business. 
• Clients may not approve of new management or changes in company direction.

5. Sell the business in the open market

This is the most popular exit strategy option for small businesses. If this is your exit strategy, you should spend some time grooming your business for sale, making it as attractive as possible to potential buyers, which may even include passing on the accounts receivable.

Advantages:

• A profitable business should be attractive to buyers and sell quickly.
• Assets and goodwill can be incorporated when valuing the business for sale, maximizing the return to the owner(s).

Disadvantages:

• A marginally profitable business can be very difficult to sell, and finding a buyer on the open market can be a long process.
• Businesses can be difficult to value, and the selling price may be much lower than expected.

6. Sell to another business

Positioning your small business to be a desirable acquisition can be very profitable. Businesses buy other businesses for all kinds of reasons, such as a quick path to expansion. The trick to success with this exit strategy is to target your potential acquirer(s) in advance and position your company accordingly. 

Advantages:

• A competing business may be highly motivated to purchase your business, making for a quick sale and maximum profit.

Disadvantages:

• If the purchaser’s only motivation is to reduce the competition, they may fold your business after purchase. Any existing employees may lose their jobs.

The Best Exit Strategy

The best exit strategy is the one that fits your small business and your personal goals. If you want to sell, take the profit, and give away the liabilities while still being able to practice at your location (which is what I did), there are even ways to do that.

Whichever exit strategy you choose, you need to start working on it. Planning gives you the time to do it right and maximize your returns. 

About the Author

Dr. Lee Wood has been in active practice for more than 43 years. He is a veteran consultant and the founder/CEO of One-On-One Chiropractic Coaching. He works with hundreds of chiropractors worldwide on a host of topics, including new patient acquisition, practice management, prosperity consciousness, and personal growth. 

If you have any questions regarding this article or any coaching questions, please email Dr. Lee Wood at [email protected].