Succession planning: 4 exit strategies when leaving the family business

2-minute read

Everyone who operates a business will reach a point when they wish to, or must because of health or age concerns, leave the business. This could mean retirement, sale of the business or simply winding it up and closing it down.

Collectively, these are known as exit strategies, and every business should have one. Yet exit strategies are rare among small businesses, largely because most small business owners spend most of their time concentrating on starting and building their businesses instead of leaving them.

As with any strategy, exit strategy planning follows a predictable pattern. First, owners must identify a vision for the business and for themselves—through some personal soul searching and information gathering. Then, once they have identified an exit, they must begin planning and executing what it will take to achieve that exit. Because exiting a business involves many steps, this process must begin long before the actual event takes place. Usually, advisors suggest an exit strategy begin at least two years before the exit.

These are some common business exit methods:

1. Passing the business to another family member

This requires identifying likely candidates and then training them to manage the business successfully. This could involve some time, depending on the complexity of the business.

2. Selling the business

Businesses must be prepared for sale so that the owner can maximize his or her return. Simply making cosmetic changes to a business at the last minute and putting it on the market for sale often results in reduced return. Usually a sale requires a long strategic management process that produces evidence of growth potential and makes the business more attractive to potential buyers. In addition, likely buyers should be identified ahead of time, and alliances or overtures made before the actual event. A version of selling a business involves simply closing it and selling a client list to a competitor.

3. Management buyouts or employee buyouts

Often this is the first option for owners if they do not have a candidate for succession and are concerned with continuing the corporate culture. Usually in these cases there are legal processes, such as arrangement of shares, that must be taken care of first.

4. Takeover or phased exit

This often occurs when an owner wants to leave a business but does not completely exit. It is a way to transfer a business slowly to a new owner who is still being trained. The owner sells a stake in the business to a partner, and the stake grows as the partner takes on increasing managerial responsibility.

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