Small business owners all wonder at one point or another about the ideal exit strategy option for their business. Whether you are currently running a business or are considering buying one, your exit strategy should be part of your planning process. It is your end goal and will help you make numerous decisions — a million little ones and quite a few big ones, too — along your journey to a profitable outcome.
Without exception, every business owner asks us some version of the question: How can I get the most money out of my business when I retire?
We all get there at some point and having a business exit strategy plan in place is the best way to ensure you build your business in a way that maximizes the return on your investment of time and money — maybe of your entire life — so you can retire in the best possible position.
Here are four common exit strategy options for early education businesses:
1. Liquidate the Business
Small businesses that are largely dependent on the performance of a single individual and have few-to-no assets to sell may find this option tempting. The business was primarily an income source, which is all some people want from their businesses. Liquidation is certainly the fastest way to get out of the business. At the end of the school year (assuming leases and other liabilities are taken care of) you can basically clear the space and go home. However, because it provides no post-retirement income we do not recommend this option. If for reasons that make sense to your lifestyle and needs, you choose this as your exit strategy, make sure you save and invest your income properly while running the business so you can retire with adequate income and assets to live as you like.
2. Pass It On to a Child
This is the dream for many business owners, to pass the family business on to a child (or children). You can groom your family successors in the right way and maybe even still keep a hand in the business in an advisory or another capacity. It sounds like a great idea. It is not just a business, it is a legacy!
As a strategy, it’s not one to start with from day one because there is a possibility your children will not be interested in running the business. Statistically, second generations do not run businesses nearly as well as the first (about 70 percent go out of business) and almost all family businesses go out of business with the 3rd generation (almost 90 percent). However, at some point it might seem like the best path for your business and family. If so, make sure your successor has the same dedication to the business, knows the same network of vendors and colleagues, and understands all the intricacies and nuances of the operational, financial, and promotional aspects of the business.
3. Keep Your Business
If your school is in an exceptionally stable market and you have an exceptional system with exceptional management in place — that is, the business can basically run itself — then you might consider keeping the business and the income that comes from it. You will want to tighten up your systems even further to ensure the smoothest possible operation by your management and employees. You also must clarify your own role in the business for your management team so they know without a doubt what they are responsible for and when they should reach out to you for help. A worst-case scenario with this option is where you spend 20 hours a week working during your retirement. For most business owners, it is tough to stay out of the way because they feel like they can do it better themselves.
In addition to the risk of being drawn back into the business regularly, you will not reap the rewards of the single large payout you could get upon the sale of your business. With that said, if you have an amazing system in place which allows the business to run itself, then you are in a prime position to sell your school business and realize the maximum amount of return.
4. Sell Your School Business
For most business owners, selling their business is the preferred exit strategy and it’s easy to see why. With the right planning in place, a business owner can realize a premium marketplace value for their business and related real estate which allows the owner(s) to be set up for retirement. For school owners, there are often two parts of the sales equation: the business and the real estate. If you own both elements, you are starting in the right place sell your business successfully. There are certainly more factors to take into account. Like any business, in an ideal world your school will have certain elements and characteristics in place such as:
- It should be profitable and have strong cash flow
- You should have consistent enrollment
- You are in a stable and growing market
- All of your licensing and requirements are in place and recorded
- You have systems in place for operations, marketing, finances, management, etc.
- You have strong, reliable leadership, management, and employees in place
In summary, buyers prefer to buy a business that already runs itself. They want to buy “the system” and the cash flow it brings in. Ideally, you can hand over the proverbial keys and walk away. With that said, there are plenty of buyers, most actually, who are willing to buy businesses with most of those elements in place. They may already be running a similar business and can bring over what they know works or maybe they will want to do something their own way.
The value of real estate is often overlooked or undervalued by the owner of the school business. If you own the real estate your school(s) is on, then you have even more options for selling your business, especially for the large school business buyers we work with.
The Best Exit Strategy for You
Ultimately, the best exit strategy is the one that fits your hopes, dreams, and goals the best. That might mean being able to walk away quickly or it might mean maximizing the sale amount and earning continued income from the sale of your real estate and business.