Building Your Business Becoming an Owner Business Plans How to Create an Exit Strategy for Your Small Business And Why Your Business Needs One By Ella Ames Updated on May 10, 2021 In This Article View All In This Article Why Small Businesses Need Exit Strategies Liquidation Sell the Business to Someone You Know Sell the Business in the Open Market Sell to Another Business An IPO (Initial Public Offering) Photo: Mikael Väisänen / Getty Images Choosing an exit strategy for your business might not seem like an obvious step when you’re just getting started, however planning ahead is an important part of building a business. An exit strategy is a plan for how you will eventually leave the business. It also includes details on what will happen to the enterprise after you have left. We’ll explain the value of having a plan in place, discuss your options for exiting the business, and weigh the benefits and drawbacks of each scenario. Why Small Businesses Need Exit Strategies All businesses need an exit strategy at some point, even if that just means transferring ownership of the company when one owner decides to retire. Leaving a business can be stressful, and emotions can often cloud your judgment. Should this occur, a good exit strategy that you’ve come up with in advance will enable you to address tough situations rationally. Here are some things to consider when making your exit strategy: The length of time you plan on being part of the businessYour financial situation and expectationsAny investors or creditors who need to be compensated, and what that process will look like Having an exit strategy in place early on can help you to make decisions that will support your eventual exit. This allows the process to be as easy and profitable as possible. Note You’ll want to revisit your exit strategy often to see if it still fits your situation and goals. Then, you can make adjustments as necessary. Learn five common exit strategies for small businesses. Liquidation Liquidation is the process of closing a business and selling off its assets or redistributing them to creditors and shareholders. There are two main ways to do this. Close and Sell Assets as Soon as Possible One option is to close the business and sell the assets as soon as you can. This is often a last resort method for a business, as you only make money off the assets you can sell, while valuable items like client lists or business relationships are lost. Before liquidating a business, you’ll want to work with liquidation experts to make sure you’re following the right procedure for selling your assets, paying back all debts, employee protocol, and finalizing all legal and financial commitments. Pros Relatively simple exitDepending on the sale of assets, it can be a quick closing process Cons You only make money on the assets you’re able to sell (real estate, inventory, equipment, etc.)If there are creditors, they must be paid first from any money generated Liquidating Your Business over Time The other common liquidation option is paying yourself until your business finances run dry, then you ultimately close the business. This is often referred to as a “lifestyle business.” The owner takes the funds out over time instead of reinvesting them back into the business. Pros You have cash flow to maintain your lifestyle Cons The business’s growth potential and sale value are stuntedIf there are other investors who aren’t being benefitted, they will likely be upset with the situationHow you withdraw the funds will affect your tax situation Sell the Business to Someone You Know You may decide to sell the business to someone whom you’re familiar with, whether that’s an existing partner, a manager or employee, a customer, a friend, or a family member. Commonly, during a seller financing agreement, the buyer is able to pay off the business gradually. This allows the seller to maintain an income while the buyer begins to run the business without making a large initial investment. The seller can also act as a mentor during the transition, which helps to make the process smoother for everyone. Be aware that valuation, business transfer, and estate planning issues can be complex when selling to a family member. You’ll want to involve attorneys, accountants, and family successors when planning the transition. Pros A long-term buyout could help incentivize employees, making them feel more committed to the business’ success If sold to someone who’s already familiar with the company, there may be less disruption to the businessYou may be able to remain involved in the business if you want to Cons Could stress family relations and cause disagreements among the family You may be tempted to sell at a discounted price, which means you won’t recoup the full amount the business is worth Sell the Business in the Open Market Buying an already established business can be an attractive option for entrepreneurs. This is because it’s less risky than starting a new enterprise, and seller financing makes the purchase easier to fund than it would be if you were financing a startup. Buyers also benefit from assuming a business’ existing systems, its sales stream and cash flow, established client base, and brand reputation. For these reasons, it’s best to put in the effort to prepare your business in advance and make it as appealing as possible to attract potential buyers. The U.S. Small Business Administration can also be an asset, as it provides helpful information regarding closing or selling your business. Pros If your business is in good financial condition, it will likely be attractive to buyersThe business’ goodwill can be incorporated into the company’s value, enabling the seller to profit from years of relationship and brand building Cons It can be a long, tedious process to find a buyer for your business in the open market Valuing a business can be complicated, and you might not receive the selling price you want Sell to Another Business In some cases, a competitor or similar business may want to acquire your company. Your business could be a strategic fit for their enterprise or a competitor may want to eliminate the competition. This is a good option for someone who wants to continue work in their chosen industry but with less responsibility. Generally during acquisitions, the business owner is offered a position with the new company. If this is the case, make sure you’re comfortable with the role and fully understand the dynamics and culture of the new workplace. You’ll want to work with an attorney when structuring the acquisition agreement. Pros The purchasing business may be willing to pay a high price for your company Cons The cultures and systems of the two businesses might clashSome or many of your employees may be laid off during the transition An IPO (Initial Public Offering) An initial public offering usually refers to when a business first sells its shares of stock to the public. Companies typically go through this process to raise additional capital. Going public is a big step for any business—it’s a long, expensive process, and afterward the company is subject to public reporting requirements. Pros It can be very profitable to become a public companyGoing public can help boost publicity, reputation, and brand awareness Cons Taking your company public is a tedious, lengthy, and expensive endeavorGoing public comes with new obligations like filing SEC reports and providing information about business operations, finances, and managementShareholders get to have a say over the company’s direction, which could cause you to lose some flexibility in managing the business Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U.S. Chamber of Commerce. "Ready to Move On? How to Create an Exit Plan for Your Business." Accessed May 10, 2021.