How To Exit Your Business: Discover These 5 Ways

March 12, 2014
Deal Structure, Selling your business

How to Exit Your Business.

If you are a business owner in California and wondering how to exit your business, consider the following five options.

Your business is a reflection of your dreams and aspirations. It’s a work of art that expresses who you are and what you’re about. It devours your time and creativity, so you can’t do the other things you would prefer to do at times. 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 prefer to exit your business in California, here are the five primary options to consider.

Family ownership

Many businesses are a family affair, whether the family members 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 parents in a family, their children will generally be involved. This is true if they are old enough, even at basic levels.

Family business also permeates the family through numerous breakfast and dinner conversations, as well as the challenge of attending or not attending business meetings. Transitioning the company 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 company to the next generation may eliminate legal and tax uncertainties that can occur with gifting the business.

Key employees

Many business owners are deeply grateful to the employees who help build and run the business on a day-to-day basis. To demonstrate gratitude, selling the company to the employees, or perhaps one or two key employees, makes good business sense.

Selling the business to key employees has many advantages. The employees are familiar with the industry, as well as other employees, suppliers, and customers. They should also understand the financial performance of the business, including the company’s bank accounts, machinery, and equipment, as well as the status of 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 and working in it. The owner, by definition, is required to make every major decision, whether they like it or not. Many employees prefer making small decisions but are uninterested in making the bigger and more complicated decisions that are often more important.

Another challenge for an employee is raising the funds to deposit to purchase 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 company, 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 revert to the Seller and not be in the same condition as when the Buyer acquired ownership.

Investors

Additionally, investors tend to prefer investing in publicly traded companies. They can 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. This makes them very unattractive to investors.

Additionally, investors tend to prefer investing in publicly traded companies. This allows them to 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. For this reason, they are very unattractive to investors.

Competitors

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 be familiar with your suppliers, types of customers, and the industry in which you operate.

Part of the downside is that if you carry Seller financing and the Buyer defaults, it can be challenging for you to recover your investment in the business. This occurs as it will be well and truly intertwined with their previous operation.

The other tricky part is in the selling process. The Buyer will want to know everything about your business. It becomes challenging to determine how much to disclose and when. This ensures the Buyer will close the sale rather than simply taking all the information you shared with them.

Do nothing

As I mentioned earlier, there are four primary options for exiting your business. There is also a fifth option: to do absolutely nothing and let someone else take care of it. However, this does not seem like a good option at all.

Exiting Your Business With Commercial Property In California

Once you locate a qualified Buyer, you can provide them with a selling memorandum and prepare to receive an offer. The exchange of information can cease when you ask to receive an offer. This may be a non-binding letter of intent or a term sheet that outlines the significant terms of the 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 who also own real estate simply prefer to keep the Real Estate and offer a lease to the Buyer of the business. If a final decision about offering the commercial property for sale has not yet been made, the following are important items to consider.
How critical is Real Estate to the operation of the business? For example, if the company operates a gas station or car wash on the real estate it owns, it may be challenging to sell just the business and offer a lease to a Buyer. This is because the company cannot be moved easily and readily.
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 necessary, is the Seller willing to pay those costs?
The Buyer will probably want a lease for the Real Estate. If the Buyer wants a three- or five-year lease with options but only stays for the initial lease and then leaves, would the Real Estate owner easily find a replacement tenant? If the Buyer is obtaining an SBA loan, they will require a lease that matches the loan’s typical 10-year term.
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 business owner has not been paying property taxes, building insurance, or maintaining 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 estate? If so, this may lower the value of the Real Estate and the business.
When was the last time local zoning ordinances were checked? If the Real Estate is put on the market, is it ‘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?

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Are you looking to sell your commercial property and business in California?

A crucial first step is to get an accurate business valuation.

This is not only important for you as the Seller, but also for potential buyers and lenders if the Buyer needs financing.
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Other Commercial Real Estate topics to consider.

How To Exit Your Business: Discover These 5 Ways