5 Small Business Exit Strategy Errors You Must Avoid

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Small business owners generally devote a large part of their attention on development and growth plans. As an idea takes off, it's logical to focus all your energy on increased turnover, but you also need to think about what happens next. A robust business exit plan sets out the options available to you when you decide to get rid of your business and move on to something new, but a flaw in your plan could cost you a lot of cash in the long run. Learn from the mistakes some of your peers and competitors have made, and consider the five following profit-eradicating exit strategy errors.

Leaving it too late

Some small business owners turn to outside investors to help them develop their ideas. This type of investment can help inject cash into the business quickly, but this financial situation also puts pressure on you to evolve your business within a certain timeframe.

Cash investors need to see a prompt return on their investment, and equity investment will often only deliver the cash when you sell on the business. As such, timing is crucial. Develop an exit strategy that allows you to cash in the business when it is at its most profitable. If you leave it too long, you may erode the profit available to you.

Failure to consider tax implications

Each exit strategy poses a different tax implication because the way you make an income from your small business will vary. For most small business owners in Australia, the biggest concern is capital gains tax, which the government will normally apply to the profits you make from the sale of your investment.

When you dispose of a small business, capital gains tax will apply to the proceeds you make minus the cost base of the company. This value can vary significantly according to your exit strategy, so professional tax advice is crucial. Without the right tax strategy, you could see your investment go straight into the hands of the government.

Failure to consider your long-term business reputation

If you're under pressure to make cash or cut your losses, it's easy to rush into the wrong exit strategy. While few small business owners would have a long-term plan to liquidate their company, this outcome is still relatively common. The state of your business at the point of liquidation dictates whether your company is solvent (you can pay your debts) or not.

Your company accounts at this stage will almost certainly affect your long-term reputation, and you may also become personally liable for debts. During a crisis, these issues may not seem insurmountable, but a rushed exit strategy could damage your future earning capability and reputation. In many cases, better long-term planning could avoid the need for liquidation.

Making emotional decisions

An emotional connection to your small business isn't a bad thing. After all, if you care about the product or service you sell, you're more likely to do a good job. Nonetheless, emotional attachment could also cloud your exit strategy, meaning you end up with less profit.

Selling to a friendly buyer (such as a family member) can allow you to have more confidence the business is in good hands. The right buyer will almost certainly keep up the most important principles behind your small business. Unfortunately, in your quest to find the right buyer, you may relinquish too much cash, which will make it harder to negotiate the right deal. If your business has a strong brand, the right buyer will pay the right market price.

Narrowing your options too far

Some niche small business owners develop an exit strategy around a very specific buyer. These entrepreneurs know who will want to buy the asset and will focus their energy on a strategy that leaves the business in the most desirable state possible. This approach can deliver significant returns, particularly if you have something that nobody else can offer.

This approach can also backfire. If you set your sights on one buyer, things can quickly turn sour if your business loses its unique selling point or customer needs change. Once you organise your company to cater for a specific buyer, it's hard to widen the appeal if the market suddenly changes. Aiming for a niche can work, but it's important to have a contingency plan.

It's important to understand that a long-term exit strategy is a vital part of your business plan. Make sure your strategy offers as many options as possible, and aim to avoid the problems that some of your competitors will come across.  If your strategy is to eventually sell the business, you may want to consider getting help from a good business broker.

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