4 Exit Strategies for Sole Proprietorships

A business exit strategy is an inseparable part of any successful business plan, no matter what the business is. It ensures that it can move to the next. An exit strategy can boost your business and save it from the existing situation.

 

Scenarios That Raise the Necessity of Having a Business Exit Strategy

Different exit strategies are developed in response to different situations. Nonetheless, the business exit strategies for small businesses are similar.

Their goal is simple; to ensure that the owner receives a fair amount of money from implementing the strategy at the occurrence of a particular scenario. Let’s see the scenarios for which we devise exit strategies.

Maybe the time for exit has arrived

 

All Business Objectives Are Met

When an individual starts a business, he determines an ultimate goal that he wishes to achieve after years of endeavor. The purpose can vary from person to person. An individual may have a passion for starting a business in a particular field from scratch, make it successful, and then move on to the next one. Another person may decide that when a certain amount of net profit is made by the business, it is time to leave.

 

 Business Failure

No matter how remote a person thinks that the chances of his business failing are, it is still a scenario that could happen. Businesses can fail for many reasons, such as an economic recession, inability to cope with new conditions, or new regulations that make it difficult for your business to continue operating. For whatever reason a company cannot perform well, having a strategy can serve as a contingency plan.

 

Expanding the Business

Sometimes a sole proprietorship may reach a point that it is very hard or impossible to grow without changing its business structure. In this scenario, a business exit strategy implies ceasing a sole proprietorship and starting with a new business form.

 

Business Exit Strategy or Business Transition Strategy?

Before going through the business exit strategies, it is worth pointing out that a business exit strategy is also called a business transition strategy. This is because exiting a business, in many cases, is equivalent to transferring the ownership to someone else.

 

Unfortunately, when it comes to a business that you own, its transferral to another person is not trouble-free. It is because transferring your business ownership to others, depending on to whom you want to transfer, has its subtleties to take care of.

Now, let’s see what some of these business exit strategies are.

 

 

Private Annuity Strategy

A private annuity is a tax-efficient business transition strategy to pass on your business to a family member. If you choose to use this strategy to transfer your business ownership, you will receive a certain sum of money at set intervals from your heir. Compared to other methods for transferring ownership to a family member, this method’s advantage is eliminating estate taxes on the transferred property’s value.

 

Business Transfer to Employees

Unfortunately, sometimes no matter how successful your business is, you don’t have a family member who is passionate about what the company does. You still want to pass on the legacy you built from scratch to someone who knows its real value and potential to generate income. Then, your best bet could be transferring your business to an employee of yours. This strategy is typically implemented through an employee stock ownership plan (ESOP) in corporations. However, if you are a sole proprietor, transferring your business to your employee could be as simple as selling your business to them.

There are two possible advantages of using this business transition strategy, firstly, while retired, your expertise and views might still be appreciated by the new owner, so you see yourself contributing to your business’s betterment until the very end. Secondly, you can hope to sell your business at a higher price to your employee who cherishes it more than an outsider.

 

Selling Your Business on the Open Market

This business exit strategy can be implemented by selling your business to two types of buyers. You may sell your business to another individual who wants to continue what you have been doing, enjoying the goodwill you have built up with your customers for years. It also could be the case that a larger company that intends to have your business in its portfolio bids a price for your company.

In the first scenario, the new owner is very likely to continue what you have been doing. They may even decide to keep the employees as they know every bit of the business.

In the second scenario, since the more prominent firm opts to develop your business and turns it into its subsidiary, division, or something similar, significant changes are likely to happen. This is because if a larger firm takes over your business, it is most probably in line with its growth plan.

You will probably be asked to stay with the acquiring county to manage the business once you own it in both scenarios.

 

Initial Public Offering (IPO)

While impractical for many sole proprietorships, implementing this business exit strategy is the dream of many small businesses. In this transfer ownership method, the company shares representing its capital are sold in the stock market. In exchange for accessing a remarkable amount of money, its ownership is transferred to the shareholders.

Becoming a public listed company on the stock market comes with its complications as regulatory bodies set many compliance requirements; however, it is gratifying. Even though IPO is a business transition strategy, unincorporated companies usually expand to the next level.

For example, when Michael Dell had his company listed on the New York Stock Exchange Market, he could raise $30 million for his recently named Dell Computer Corporation. The money raised in the IPO helped Michael convert Dell into a PC Industry giant while making him accountable to shareholders. However, in 2013 Michael and Silver Lake Partners (an investment firm) bought back its shareholders. Michael’s primary purpose was to focus on the long-term strategies without having to be answerable to shareholders.

 

Choosing, Planning, and Implementing the Right Business Exit Strategy

The four business exit strategies mentioned above are not the only ways for transferring your business ownership to others. Several factors play a role in choosing the most appropriate strategy for you. Among these factors is the nature of your business, its current and expected financial position, to whom you want to transfer your business when you opt to receive the proceeds, etc.

 

Whichever business exit strategy you intend to choose, it is certainly not a good idea to wait until the last minute to implement it. Having the business transition strategy in place enables you to get the right amount of money at the right time while ensuring that you pass on the business to the party you want.

 

If you start your business or have already started your business and don’t have a business transition strategy yet,

PurpleZ Marketing Agency offers what you need. We listen to your goals, analyze your business, and develop a detailed business exit strategy that suits your business.

 

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