February 13, 2025

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Have you developed a business exit strategy?

Have you developed a business exit strategy?

QUESTION: I am thinking about selling my small business. Can you offer any tips on how to start the process?

ANSWER: Most entrepreneurs spend an enormous amount of time planning the start of their business, planning their products and services, and developing a marketing plan.

However, few give any thought to how and when they want to exit their business. Crafting an exit strategy is something every business owner should start thinking about five to 10 years prior to the sale.

There are several options to consider. You can slowly downsize, liquidate inventory and withdraw as much cash as possible over a period of several years. This method usually entails letting good employees go, and that can be a tough decision.

You can sell to a friendly competitor whose methods of operation and clientele are similar to yours. If it’s a competitor, will they retain your employees? You can also begin conversations with trusted employees who have expressed an interest and begin to turn over to them the day-to-day operations in a measured way. This will allow you to assess if they have what it takes to manage the business.

In both instances, the potential buyers are familiar with the operation and have a good sense of its worth and growth potential.

A typical buyout usually entails a third-party appraisal of the business assets, customer base and good will. Often, the seller requires a cash down payment and takes a note for the balance, payable over time, with interest. All-cash deals are rare and usually result in a generous discount to the buyer.

If yours is a service business with few hard assets, the buyer will need to do some research to locate a lender who is familiar with the type of operation and how to value its customer base, which is primarily based on repeat business and attrition.

If yours is a family business, there are many issues to sort out well in advance. Are your children capable of taking over the reins? If more than one, which sibling will be CEO and make financial decisions? What will be their percentage of ownership and the responsibilities of each? And what about the child who is not working for the company? Is he or she entitled to some ownership, or will you give them other assets?

The sooner you begin the process, the better the end result will be. It’s essential to have professional guidance from an attorney as you navigate through this complex process. They can help clarify sale terms, secure fair dealings between the parties, address potential tax implications of the purchase and ensure legal rights are maintained throughout.

Lastly, a reliable accountant is a must-have for any business sale. They can set up the necessary accounts, line out your financials and help prevent future tax issues while safeguarding you from potential buyer disputes after closing.

Gray Poehler is a volunteer with the Richmond Chapter of SCORE, Counselors to America’s Small Business. To ask a question or request free and confidential business counseling, go to Richmond.score.org/mentors. Learn more about SCORE’s workshops on the website or by calling (800) 634-0245.


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