Plan Ahead – 5 “Exit” Options for Small and Midsize Business Owners

You’ve built a thriving business, but now you’re ready to move on to the next adventure.

That might be easier said than done. As you undoubtedly know, separating yourself and your business is no small feat. It can take years of planning and possibly years more to execute. 

That being said, you do have options. It’s just important that you understand them fully before committing to a course of action.

Here’s what you need to know about five popular choices business owners make when they’re ready to move on — from selling their stake to an existing partner or external private equity firm to transferring ownership to their employees or their heirs.

Weighing the pros and cons of each option requires thoughtful consideration of your personal goals and the long-term impact on the business.

1. Sell Your Stake to a Partner

If you own your business in partnership with other individuals, your easiest way out might be to sell your stake to them.

This presupposes that they have (or are willing to borrow) the capital to purchase your stake, and that the business has a value substantial enough to be worth selling.

Even if you’re on good terms with your partners, you may need to engage a third-party appraiser to determine the value of your stake.

This not only ensures fairness but also protects your interests in the transaction.

Keep in mind that the transition period can involve complex negotiations regarding roles, responsibilities, and how the business will operate moving forward without your input.

You’ll also need to consider the impact this sale will have on your long-term financial plans.

Will the payout from selling your stake sustain your retirement or future ventures?

It’s also important to make sure that legal protections are in place to avoid any future conflicts that might arise from misunderstandings about the terms of the sale.

2. Pass It Down

If you are nearing retirement age and you have relatives who work in the business or are interested in taking it over, consider passing it down to them.

This is known as a succession plan, and it’s quite common in family-owned businesses. In a nutshell, it provides a roadmap for how the business will operate after you step away.

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The most common sticking point with this strategy is the willingness of the next generation to take over operation of the business, so it’s important to have open and honest conversations with potential heirs before making any assumptions.

You will also need to have a “conversation” with yourself about the prospect of your heirs taking the business in a direction you disagree with.

Remember: Once you’ve passed down your stake, it’s no longer yours.

3. Sell to a Private Third Party

If you have no partners or heirs willing to assume your stake, or said partners or heirs seem likely to turn around and sell it anyway, your best option could be to sell to a third party.

Possible buyers include private equity firms, larger competitors, and independent investors. Be prepared to negotiate the terms of a sale and retain a third-party appraiser to protect your interests.

This approach often requires thorough due diligence on the part of both parties, and it’s essential to have your financial records, contracts, and any intellectual property in order.

While a third-party sale might provide a clean break, you’ll need to evaluate how the buyer’s intentions align with your own vision for the business’s future.

Some business owners find it emotionally difficult to walk away if they feel the new owner may make drastic changes or fail to preserve the business’s culture.

Plus, depending on the terms of the deal, you might still have to remain involved for a transition period, which could extend your timeline for truly moving on.

4. Transfer Ownership to Your Employees

Many companies offer employee stock ownership plans to provide their most important assets — their workers — with an added, and often powerful, incentive to perform.

Often, these arrangements lead to full employee ownership when the original owner or ownership team is ready to step back.

This method, known as an Employee Stock Ownership Plan (ESOP), can be a way to reward long-term employees and maintain the company’s culture and values after your exit.

Due to the significant amounts of money involved, it can take many years to transfer ownership to employees, and the details are often quite complicated.

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To get the process started, speak with other business owners who’ve made similar decisions and with a business advisor who has helped other entrepreneurs exit in this fashion.

An ESOP can be particularly attractive if maintaining the integrity and vision of your company is a high priority, as employee ownership often fosters a deeper commitment to the business’s success.

However, be prepared to invest in legal and financial advice to ensure that the transition is structured to benefit both you and your employees.

5. Pursue an IPO

If your company is on the larger side or is enjoying rapid growth, consider an initial public offering.

This may be the riskiest, most complicated, and costliest exit strategy on this list, but the financial upside is undeniable.

Going public can provide a massive influx of capital, allowing you to fully step away with substantial financial rewards.

However, the IPO process requires extensive preparation, including compliance with stringent regulatory requirements, and you may need to hire investment bankers, lawyers, and accountants to guide you through the process.

Keep in mind that once your company is public, you’ll be subject to shareholder demands and public scrutiny, which can significantly change how the business operates.

You’ll have to assess whether your company is prepared for the increased transparency and operational shifts that come with being publicly traded.

Also realize that an IPO may not offer an immediate exit — you may still be involved in the business until your shares are sold or vested, which could extend your timeline for truly moving on.

Ready for Your Next Adventure?

Exiting a business can be a stressful, time-consuming experience. It can also be a bittersweet one if — as is often the case — you’ve spent many years (and countless hours) of your life building something. 

However, when you’re ready to move on, the moment of exit can be a transformative one.

Think of all you’ll do with your time from here on out — and, perhaps, the next business or businesses you’ll build with your good fortune.