Definition: The planned exit of an owner from their business .
Just as you needed a plan to get into business, you'll need a plan to get out of it. Selling or otherwise disposing of a business requires some forethought, strategizing and careful implementation. In some ways, it's a little more complicated than starting a business. For instance, while there's really only one way to start a company, there are at least three primary methods for entrepreneurs to leave the businesses they founded: selling, merging and closing.
Deciding to sell the business you've worked so hard to grow is rarely an easy decision. However, it may be the right one under some common circumstances. Selling may be preferable to owning if:
- You're ready to retire and have no heir to continue the company.
- Partners who own the business decide to dissolve their partnership.
- One of the owners dies or becomes disabled.
- You or another owner get divorced and need cash for a settlement.
- You want to do something more challenging, more fun or less stressful.
- You don't have enough working capital to keep going.
- The company needs new skills, a new approach or resources you can't provide.
If you're aware of the factors that indicate selling is a good idea, you can time the sale to take advantage of high prices. Usually, you'll get the most for your company when sales are climbing and profits are strong. If you have an unblemished history of solid performance, by all means sell the company before trouble strikes. Other factors that may affect the timing of a sale are availability of bank financing, interest rate trends, changes in tax law and the general economic climate.
You can sell your business yourself, but many owners contract with a professional business broker to handle the job. In addition to the training and awareness of relevant legal, tax and accounting considerations, a good reason to use a broker is to protect your anonymity and confidentiality. If you're advertising your business for sale and showing it to prospects, it compromises your ability to continue leading the firm. A broker can front for you, screening prospects and keeping the identity of the business owner secret from all but qualified buyers.
Most business buyers are individuals like you who want to become small-business owners. But sometimes you can transfer ownership of a business to another business in a merger or acquisition. As a rule, businesses have deeper pockets and borrowing power than individuals, and they may be willing to pay more than individuals. Businesses also tend to be more savvy buyers than individuals, increasing the chances your business will survive, albeit perhaps as a division or subsidiary of another company. However, businesses can't move as fast as individuals. It may take you a year or more to get your company ready to be merged or acquired. During that time, you'll need to:
- Clean up the balance sheet.
- Drop poorly performing products.
- Terminate insider deals, such as property the company is renting from you or family members.
- Trim excessive fringe benefits.
- Make sure you're paid up on all taxes.
- Have at least two years' worth of audited financial statements.
The best candidate for a merger is a company that sees yours as a strategic fit with their own firm. If you have something they want and can't find elsewhere, such as a unique product or distribution channel, they may be willing to pay a premium price. A competitor who only wants to put you out of business is usually a poor merger prospect, however. This buyer is motivated only by price and probably isn't interested in preserving the business.
Sometimes, the best thing to do is simply sell your inventory and fixtures, pay your creditors and employees, close your doors, and walk away. Closing may be the best option if your business is failing, isn't valuable enough for anyone to want to acquire it, or is the type of business that's unlikely to be valuable without you personally operating it. (A law office is a good example of this.) If you can't raise enough money by disposing of your assets to pay everyone off, you can give them what you have and promise to pay them the rest later on. You can usually avoid legal wrangles if the debts are small enough.
Variations on this theme include making formal or informal arrangements to pay off your creditors, filing for voluntary liquidation, and declaring bankruptcy. Only bankruptcy is intended to give you a second chance. The others are almost certain to result in the end of your business.