How To Exit Your Business: Discover These 5 Ways
If you are a business owner in California and wondering how to exit your business, here are 5 ways to choose from.
Your business is a reflection of your dreams and aspirations. It’s a work of art that’s an expression of who you are and what you are about. It devours your time and creativity so you can’t do other things you would at times prefer to do. So what are you going to do with your business when your time and motivations change?
Whether you like it or not, that day will come. Whether you like it or not, you can either plan and manage your exit or let someone else do that for you. If you would prefer to plan the exit from your business here are the five main and obvious options for you.
1. Family ownership
A lot of businesses are a family affair; whether the members of the family like it or not. It’s also one of the simplest forms of business succession planning. If the business is managed daily by one or both of the parents in a family, the children will generally be involved if they are old enough even if it is only at a basic level.
Family business also permeates the family with the many breakfast and dinner conversations and juggling to attend or not attend business meetings. Transitioning the business from one generation to the next can be one of the most fulfilling and rewarding both financially and emotionally if everyone is on board.
If this is an option for your business, learn and understand the variables as it may sound counterintuitive, but selling the business to the next generation may eliminate legal and tax uncertainties that can occur with gifting the business.
2. Key employees
Many business owners are in deep gratitude to the employees who help build and run the business on a day-to-day basis. To show that gratitude, selling the business to the employees or maybe one or two key employees makes good business sense.
Selling the business to key employees comes with many positives. The employees know the business, other employees, suppliers, and customers. They should also understand the financial performance of the business including bank accounts, machinery and equipment the company owns, and the status of the accounts receivable and accounts payable. Any ownership transition should be smooth and relatively simple.
Selling the business to key employees comes with challenges. The first and obvious problem is that ‘employees’, for good reasons are called ‘employees’ and not ‘owners.’ There is a big difference between owning a business as opposed to working in it. The owner, by definition, is required to make every major decision whether they like it or not. A lot of employees like making small decisions but have no interest in making the bigger and therefore complicated and more important decisions.
Another challenge for an employee is getting the money to come up with a deposit to buy the business. This is a big deal. If they are comfortable being an employee they will probably want to stay inside their comfort zone when owning and operating the business, but that’s not how things get done. Additionally, if they don’t have the drive and risk-taking appetite to buy the business; does that make them a good option to own and operate your business?
An obvious solution is for the business seller to provide the finance for the employee to get a loan and buy the business. This may be a good solution for the buyer and seller but the seller needs to be aware that if the buyer defaults on the loan, the business may come back to the seller and not be in the same condition as when the buyer gained ownership.
Finding an investor to buy the business sounds like a good option. However, investors are by definition those that want to invest their money and get a return on their money; not own and operate the business. Additionally, investors prefer to invest in a public company so they quickly and easily sell their interest and move to another opportunity. Almost without exception, privately held companies are owned and operated for the benefit of the owner and their families making them very unattractive for investors.
A great but tricky option is to sell your business to a competitor. It’s a great option because your competitor probably knows your business. They will also know your suppliers, types of customers, and the industry you are in. Part of the challenge is to find a competitor who has the cash to provide a downpayment, plus the right credit score and credit report to qualify for a business loan; unless as the seller you are willing to carry a lot of seller finance.
Part of the downside is that if you carry the seller finance and the buyer defaults, it can be incredibly difficult for you to get back your business as it will be well and truly interwoven with their previous operation. The other difficult part is in the selling process. The buyer will want to know everything about your business. It therefore becomes challenging with how much and when you disclose to be sure the buyer will close the sale rather than simply take all the information that you shared with them.
5. Do nothing
As I mentioned above, there are four main options to exit your business. There is also a fifth option which is to do absolutely nothing and let someone take care of it for you; which does not seem like a good option at all.
Exiting Your Business With The Commercial Property In California
Once you’ve located a qualified buyer, you can give them a selling memorandum and get ready to entertain an offer. The exchange of information can cease when you ask that an offer be presented. This should be a nonbinding letter of intent or a term sheet that details the major terms of a deal. Getting help from a business broker in California will speed up the process and help you exit your business smoothly and successfully.
There is simply no “one size fits all” approach whether selling or buying a business with real estate. Here are some other factors to consider.
- Some California business owners that also own the Real Estate, simply prefer to keep the Real Estate and offer a lease to the buyer of the business. If a decision has been made to sell the business, before a final decision is made about whether to also offer the commercial property for sale or not, the following are important items to consider.
- How critical is the Real Estate to the operation of the business? For example, if the business is a gas station or a car wash built on the Real Estate the business operates from, it may be hard to sell just the business and offer a lease to a buyer. This is because the business cannot easily and readily be moved
- Is the Real Estate just land or does it include buildings or structures on the Real Estate? If it includes buildings or structures, are they in good condition or do they need repairs and maintenance? If repairs and maintenance are required, is the seller willing to pay those costs so the buildings and structures are brought up to date and the latest building code?
- The buyer will probably want a lease for the Real Estate. If the buyer wanted a three- or five-year lease with options but only stayed for the initial lease and then left, would the Real Estate owner easily find a replacement tenant? If the buyer is getting an SBA loan, they will require a lease to match the length of the loan which is typically 10 years.
- Has the owner or seller of the business been allocating an amount for rent and is this amount a market rate or the amount the owner of the Real Estate is willing to accept as rent? If there is no rent allocation or the rent is below the market rate and the buyer has to pay a higher rent, it will lower the value of the business as expenses are higher.
- This also applies if the owner of the business has not been paying the property taxes, building insurance, or maintenance of the Real Estate and now expects the buyer of the business and Real Estate to cover these costs.
- Are there any environmental issues on, or near the real state? If so, this may lower the value of the Real Estate and the business.
- When was the last time that local zoning ordinances were checked so if the Real Estate is put on the market, it is ‘smooth sailing’ to close the sale?
- Related to local zoning ordinances are local Use requirements typically defined at the municipality level.
- Is the Real Estate part of a flood zone?
- Sample report of California Commercial Real Estate with basic property overview, environment, building, value, and more.
- Sample report of California Commercial Real Estate with climate check including flood, fire, storm, heat, and more.
- Sample report of California Commercial Real Estate property of the environment with regulatory summary and neighborhood.
- Sample report of California Commercial Real Estate flood certificate.
- Sample report of California Commercial Real Estate with property condition report, site summary, building summary, hazard risks, and more.
- Sample report of California Commercial Real Estate estimate of value.