Oct 13 • Exit Planning 101,
The 3 Exit Paths Every Owner Should Know About
The vast majority of business owners would love to see someone in the family to take the business over and run it successfully for generations. This is the most commonly imagined path to business succession (aka Plan 1) and sometimes it works great depending on the family members. I know of a number of 1st generation successes like this, but it is a small number, definitely not the number one way business owners DO pass on their businesses. In fact less than 30% of all businesses are ever passes down to 2nd generational family (in US and Canada), 12% to 3rd and less than 4% to the 4th generation due to many factors, one of which is lack of planning.
The 2nd Path) Sale to a third party
This method involves selling the business to an external buyer, such as a strategic buyer (a competitor) or a financial buyer (a private equity firm). It is often the preferred option for maximizing financial return and making a clean break from the business.
How likely is it?
- Low probability of success: Data indicates that only 30% of businesses GET LISTED for sale and only 18% of those actually find a buyer and successfully close the deal (that's 5.4% of all businesses) Many owners are disappointed by the outcome, whether due to a lack of offers, low valuations, or other challenges in the sales process.
- Best for: Businesses with a strong track record of profitability, defensible market position, clear growth potential, and a management team that can operate independently of the owner. Many businesses again fail here due to poor representation and Lack of Planning.
Plan 3) Close the doors and Liquidate. Sounds easy and safe to some, and Sadly it's THE MOST COMMON, and has MASSIVE DOWNSIDE for the owners and the community. The data shows that liquidation of community based business are not just bad for the seller but pose an agregated threat to every community they leave behind; For the owners liquidation provides: Downsides of liquidation for owners
- Lowest financial return: Liquidation involves selling assets individually, which usually yields a far lower value than selling a business as a going concern. Goodwill, brand value, and other intangible assets are lost. Owners who sell to a successor can often receive significantly more, even through a structured buyout or installment plan.
- Minimal funds: After paying creditors, the remaining proceeds for the owner may be minimal or non-existent. In a worst-case scenario, if the business is insolvent and the owner has provided personal guarantees, they may be held personally liable for debts.
- Loss of legacy: For owners who have dedicated their lives to building a business, liquidation erases their life's work. Passing the business to a successor preserves the legacy, name, and mission they worked to create.
- Reputational damage: Liquidating can damage an owner's professional reputation, making it more difficult to start a new venture in the same industry.
- Loss of control: The liquidation process puts control in the hands of a liquidator, removing all decision-making power from the owner.
Downsides of liquidation for the Community
Economic losses
- Job losses: A business liquidation results in job losses, leaving former employees and their families to face financial hardship and job hunting. When a community's employment landscape is limited, these layoffs can be especially devastating.
- Loss of revenue: The community loses the income and purchasing power of the salaries paid by the business. When employees lose their jobs, they have less to spend at other local establishments, causing a ripple effect throughout the local economy.
- Supplier disruption: The liquidation breaks a link in the local supply chain. Local suppliers, vendors, and service providers lose a valuable customer, which can threaten their own viability.
- Reduced tax base: The loss of the business shrinks the local tax base. This reduces the revenue available for funding public services like schools, police, and infrastructure projects.
- Reduced cross-selling: The closure eliminates cross-selling opportunities for other local businesses that shared customers. For example, the closure of a hardware store would impact local contractors who bought supplies there.
- Declining property values: An empty storefront or property can become an eyesore, signaling economic distress in the area. This can cause nearby property values to decline, discouraging new business investment.
Social losses
- Erosion of community identity: Long-standing local businesses are often part of a community's social fabric and identity. Their closure can cause a sense of loss and uncertainty, changing the character of the neighborhood.
- Loss of charitable giving: Many community-based businesses are active in local charities and civic organizations. Their liquidation removes a source of donations and corporate sponsorship, weakening the support network for local causes.
- Reduced civic engagement: Local business owners often play a critical role in civic life, participating in business associations and local government. Their absence can leave a leadership vacuum in the community.
- Increased crime and vandalism: When a business closes, the loss of "eyes on the street" can contribute to an increase in crime and vandalism, making the area feel less safe.
Again, lack of Awareness and Succession Planning causes this and we want to help the owners get a continued income from their hard built businesses and keep the funds coming to support these communities, we have to prevent the "ECONOMIC DUST BOWL" from happening.
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The 3 Exit Paths Every Owner Should Know About
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