How to Exit Your Business
Making the decision to exit your business can be difficult. Once the decision is made, many owners wonder how to start the transition process.
Making the decision to exit your business can be difficult. In many cases, you have spent countless hours building and refining your business. For some, it will be an emotionally charged decision, while for others, it is little more than a business decision. Owners choose to end their involvement in their businesses for many different reasons, including:
- To take a step back from the day-to-day of running a business for personal reasons like spending more time with family or health restrictions
- Burn out or boredom
- To invest the money in something else
- The business isn’t doing well financially or isn’t successful
Whether you want to exit your business or you have to exit your business, once the decision is made, many owners are left wondering how to start and what the exit process looks like. Before you can exit your business, you will have to answer many questions. A business is a complex entity and exiting typically isn’t as easy as turning off the lights and locking the door. This article will take you though key considerations for business owners who are exiting their business.
Consult (or Build) a Business Transition Team
To help you with the process of exiting your business, consult with business transition experts and business professionals to make the transition as smooth as possible. Some financial organizations offer Business Transition Advisory Groups for their customers, and there are business consultants who specialize in business transition. Keep in mind that some business transition advisory teams will work only with larger businesses and may charge a fee. It is typically not necessary for small business owners to work with a formal business transition team when they are exiting their business, but you will still need the advice of trusted business professionals. To get that advice, you can build your own informal business transition team. Often the members of this team will be professionals you have worked with in the past to run your business.
If you are building your own business transition team, be sure to include the following business professionals:
- Attorney: Exiting a business can be complex. It is best to consult with an attorney on the legal details of your transition to ensure you are protected and compliant before, during, and after the transition.
- Accountant or bookkeeper: An accountant or bookkeeper can help you organize and prepare the financial documents necessary to cease business operations or to transition your operations to new owners. They can also help you plan what to do with any profits, help develop a financial plan to deal with any loses, and determine the tax implications of leaving your business.
- Business appraiser: A business appraiser is a professional who will provide a detailed report on the value of your business. This is necessary for the sale of your business, but can also be helpful for tax purposes if you are closing your business.
- Business advisor: A business advisor, like the coaches at AOF’s free Coaching Hub, can help you think through the details of exiting your business. They can advise you on your specific business situation and offer resources on the best way to transition out of your business based on your goals.
Any time you hire professionals to help or advise you on your small business, make sure you do your research. Ask for recommendations from friends or your local chamber of commerce, interview candidates, and ask for references.
The further ahead you can plan when exiting your business, the better. Whenever possible, it is beneficial to have time to research and plan your exit before taking the first steps. This also allows you to plan for your financial and professional next steps after the transition and maximize any personal financial benefit that can be gained from the transition. For a transition that is not urgent, experts recommend you begin to plan your exit 2-3 years in advance.
Planning isn’t always possible. Sometimes, transitions have to happen urgently. We all experienced this in the early 2020s when the COVID-19 pandemic changed the small business landscape overnight. Transitions can happen quickly if they have to, but it is most beneficial for all stakeholders, including the owners, investors, employees, and customers, if they are well thought out and controlled.
Decide How to Exit Your Business
There’s more than one way to cook an egg and there’s more than one way to exit your business. The options for a complete exit, where the owner is no longer associated with the business in any way, typically fall into two categories: selling or closing the business. Here are some of the most common ways to sell or close your business:
Sell to another party
Hold off on the balloons and confetti (until the transition is complete anyway) – it’s not that kind of a party. Selling to another party means selling your business to an individual or group of individuals who plan to continue to operate the business themselves. The new owners would own the business in a similar way to how you own your business. While there are no guarantees, if your business is doing well, new owners typically continue to operate the business in a similar way to you, especially at first. They may even choose to keep the same employees and vendors. In some cases, customers don’t even know that the ownership of the business has changed. Review our guide on How to Sell Your Business [LINK] to learn more.
Sell to another company: acquisition or merger
For the owner, selling to another company and selling to another party of individuals is often a very similar experience. However, what happens to the business itself can change significantly depending on the new owner. In an acquisition, another company buys your business, typically with the intent to continue to run your business as a separate entity. In a merger, two companies combine together into one company. Within a merger, there is usually a “surviving” company, which keeps its brand and much of its management, and a “non-surviving” company, which is folded into the surviving company along with its assets, business lines, and sometimes employees.
For some owners who are exiting their business, it is very important that their business survives and continues to operate. In that case, a merger or acquisition may not be the right choice. For other owners, it doesn’t matter what happens to the business after they exit it.
Employee (stock) ownership
Another way to sell or exit your business is through employee ownership. Employee stock ownership plan or ESOP is the most common form of employee ownership in the US. In this method of transition, employees are given (or given the opportunity to purchase) ownership shares in the business. The business becomes an employee owned business that is managed by a board of fiduciary directors that make recommendations and take action based on a democratic employee-owner voting system. If you are interested in transitioning your business to an employee ownership model like some of these companies, you will need to consult with employee ownership experts. The National Center for Employee Ownership is a great place to get started.
Another option is to sell your business to a group of investors, like a private equity firm. Private equity firms are funded by groups of investors who buy, hold, and operate businesses for several years before selling them again to make a profit. Selling to a private equity firm has a similar outcome for the owners as when working with other types of buyers, however what happens to the business after the sale varies widely depending on the new owners.
Close your business
While rarely a business owner’s first choice, sometimes the best or only option is to close your business. In addition to notifying key stakeholders, like investors, employees, and customers, you will need to cease business operations and notify government entities like the IRS and your state’s business agency. You will also want to sell any assets owned by the business and take care of any liabilities owed by the business.
Consider Alternatives to Total Exit
After understanding your options to completely exit your business, you may realize you aren’t ready to let go quite yet, but you still need to take a step back. Alternatives to total exit allow you to maintain a stake in your business and get financial benefit from your business without having to manage your business day-to-day. Common alternative include:
When you step back from the daily management of your business into a different role, you lose some (or all, depending on your new role) control of business decisions, but you gain the freedom to do something else with your time while continuing to get income from your business.
Review Tax Implications
Just about everyone has to pay taxes on monetary transactions, and exiting your business is no different. Many of the common ways of exiting your business will have significant tax implications for both your business and personal taxes. Your tax professional can help you understand the detailed tax implications of your specific situation. Before you exit your business, you should understand how federal, state, and local taxes will apply to the transaction and how that will impact you as the owner. Tax implications vary based on the nature of the exit and the type of legal entity of your business.
Not only will this be a big change for you, this will also be a big change for others who rely on your business, including employees, customers, contractors, and vendors. If you are selling your business or otherwise transitioning it to new management, there are no guarantees that the new owners will keep things exactly the same as they were. The new management can choose to do what they think is best for the business, including staff changes, working with different suppliers, and changing products or services and their prices. If you are closing your business, the impact of that change will be even stronger for key stakeholders. Every situation is different, but communicating the change to each stakeholder and what it means for them is a vital part of ending your involvement in your business. Experts recommend communicating the change on a need-to-know to know basis until you are far along in the transition process. You don’t want to cause unnecessary panic, but you also want to give all stakeholders enough time to adjust and react.
Take Time to Reflect
Once you have successful exited or transitioned your business, take a step back from the busy life of a business owner and evaluate what you want to do next. Maybe you are ready to set some goals for your next professional endeavor or perhaps you need to re-evaluate your priorities and find a better work-life balance. No matter what you want to do next, take some time to reflect on what went well, what didn’t, and everything you learned along the way.
Our experienced business coaches can help you prepare to exit your business and with any other small business questions you might have. Sign up for a free coaching session here.