Exit Option 8: Liquidation

Liquidation is the eighth and final Exit Route option for businesses. There is only one situation in which this exit route is appropriate: the owner wants to, or must (usually for health reasons) leave the company immediately and has no alternative exit strategies in place. Liquidation offers then, the two benefits most important to the owner in that position: speed and cash. Not surprisingly, the disadvantages to this exit route are numerous.

First, liquidation yields less cash than any other exit route primarily because no buyer pays for non-existent goodwill.

Second, owners who liquidate often must allocate a greater proportion of their proceeds to taxes than do owners in any other type of sale or transfer. Finally, owners considering liquidation must anticipate a devastating effect on employees and, to a lesser extent, on customers.

Given these disadvantages:

  • Minimal proceeds,
  • Significant tax consequences, and
  • Effect on employees/customers

For these reasons, few owners pursue liquidation unless they have no alternative or unless they operate in an industry that is clearly in decline. In that case, however, if owners engage in significant tax planning years in advance of their exit dates, they can accomplish significant income-tax savings.

In this blog series, we have highlighted each of the eight Exit Route options available for business owners. Which exit route is best for you? Which one meets your Exit Objectives? Which path is best for Ben, Tom and Larry in our case study?

Comparing the advantages and disadvantages of each path is a good way to start making that determination. Make this comparison through the lens of your objectives is the basis for your Exit Planning process: your exit objectives and your company’s value. Owners need to establish their objectives (financial and personal) before they can identify the best buyers for their businesses. Once established, objectives (the timing of your exit, the amount of cash you need, and the type of future owner you prefer) become standards by which you can evaluate the various exit routes. In determining company value, you learn important information about what you can expect to receive in a third-party sale or through an IPO, for example. An accurate valuation will also tell you how much, in a sale to key employees, co-owners or family members, you will leave on the table. For all owners, valuation indicates the distance they must travel to reach financial security. How they reach this and other exit objectives depends on the exit path they choose.

For all owners, valuation indicates the distance they must travel to reach financial security. 

In creating the best road map for your exit, use your objectives and the value of your business to carefully weigh the benefits and detriments of each path. Armed with this analysis and at least advisor skilled in exit planning, you can map out the most appropriate exit path for you.

Start thinking about your exit before you are ready to exit. Owners who give themselves time to plan give themselves the greatest number of exit path options.

In our next blog, we’ll revisit one of these Exit Strategies (Selling to Key Employees) by examining what makes a Key Employee and what a business owner can do during their tenure at a company to foster those relationships as part of an eventual Exit Plan.