Business Exit Research Articles

Selling your company-seven common pitfalls that produce failure, Part II: Getting your premium price while minimizing closing issues.

Prepandemic, small business exits were expected to increase dramatically owing to pent-up supply and the aging business owner population. COVID-19 may have dampened those expectations because of increasing information asymmetries that limited selling options for the small business owner (SBO). SBOs exit for many reasons (e.g., illness, family, retirement), so postponing a sale may not be a viable option. Alternately, SBOs can absorb crisis uncertainty by accepting different deal terms. We propose that one such strategy is to include seller financing as part of the deal terms, thereby signaling to the acquirer the SBOs’ confidence that the purchase is sound. We examine the results of 1,909 exit transactions from both before and after the financial crisis of 2007–2009 and over a 10-year postcrisis horizon. We find that sellers accept a lower price and less favorable terms with increased seller financing in the 24 months postcrisis, and that waiting longer to sell after the crisis improves deal terms for sellers, as this affords SBOs time to exit. Additionally, reduced information asymmetry improves deal terms. Finally, we provide strategies for SBOs to lower information asymmetry in small business exits.

Growth, Private Investment, and the Cost of Doing Business in Tunisia: A Comparative Perspective

In Tunisia's emerging, more competitive environment, the key precondition for accelerated growth and faster job creation is greater investment, compared to other high-growth countries, Tunisia's growth was driven more by public and less by investment. Comparisons with fast-growing countries also suggest that consolidating and further improving Tunisia's human capital assets, and further strengthening the macroeconomic fundamentals are additional conditions for sustained growth. But despite Tunisia's solid macroeconomic fundamentals and generous investment incentives, investment remains compressed at levels below potential compared to other fast-growing countries. Moreover, empirical evidence suggests a loss of momentum of investment since the mid-1990s. Possible reasons include the limited openness of key services to competition, heightened business uncertainty stemming from commercial risks, and weaknesses in economic governance — in particular regarding the predictability and transparency of the regulatory framework — that weaken the investment climate. The analysis examines the quality of the regulatory framework for doing business, a key underpinning of the investment climate. Tunisia ranks well in a number of regulatory areas that affect a firm's operations during its life cycle. But in other key areas regulations are not conducive for doing business: employment termination; credit information sharing; creditor's rights in bankruptcy; and business exit. Well-sequenced reform in these areas would help bridge Tunisia's private investment gap.

Economic Freedom and Economic Growth in South East Europe

Economic freedom, understood as absence of barriers for business entry, business operations and business exit, is a source of economic development. Its impact is indirect: through institutions framework creation and environment that encourages economic development. Primarily, economic freedoms are a reflection of institutional arrangement, which makes business operations and the realization of business ideas easier for entrepreneurs and managers, who are two extremely important groups for economic development. The aim of the paper is to present empirical analysis of interrelation between economic freedom and economic development, expressed through several indicators, such as gross domestic product, income per capita, foreign direct investment per capita.

Making Succession a Success: Perspectives from Canadian Small and Medium‐Sized Enterprises

Introduction The emergence of an aging population in Canada and its impact on the economic growth and social policy development such as health care has been a focal point of public policy research. However, one key aspect that has been overlooked is the impact of an aging small- and medium-sized enterprise (SME) sector in Canada. Focus on SMEs is pivotal in assessing the effects of succession planning. Seventy-five percent of all businesses in Canada employ fewer than five employees, and almost 60 percent of employed Canadians work for a small- or medium-sized business. In addition, the SME sector contributes approximately 45 percent of Canada's economic output and is the catalyst of innovative products and services. Clearly, there is a need for in-depth examination into the aging of SME owners and their preparedness for business succession. To assess the risks and opportunities for Canada's economy, the Canadian Federation of Independent Business (CFIB) carried out an extensive survey on SME succession. (Further details on CFIB's research on SME succession are outlined in the report Can Breed Success [www.cfib.ca]). The survey was completed by 4,311 CFIB members during the period from May 1 to 26, 2004. The survey focused on several key issues, including: when do owners expect to exit their business; how are they preparing for succession--if at all; and what barriers do they face in implementing their succession plans. To obtain another perspective unique to the CFIB survey, questions were asked to those owners who recently acquired a business through succession. Major survey findings are as discussed as follows. Business Exit Timeline Forty-one percent of SME owners intend to exit ownership or transfer control of their businesses within five years, with this figure jumping to 71 percent when extended to the next 10 years (Figure 1). Retirement is the number one reason for business owners who are planning to exit their business, as indicated by 82 percent of respondents. However, 11 percent of respondents indicated that they plan to move to another venture. Although small, this fact is particularly important as they represent the natural churning of businesses whereby resources are shifted to more productive purposes. Succession Planning Only one-third (35 percent) of SMEs have a plan to sell, transfer, or wind down their business in the future (Figure 2). Among these, it is more likely to be an unwritten, informal plan (28 percent) as opposed to a formal one (7 percent). The earlier one expects to exit the business, the more likely that he or she will have a succession plan. Although this finding is intuitive, the issue is the degree at which owners are planning. Among those respondents planning to exit within 10 years, 41 percent have a succession plan, while only 48 percent of those planning to exit within five years have a succession plan. Succession Plan Development The development of a succession plan often requires the input and services of various professionals such as accountants and lawyers; internal stakeholders in the business, such as key managers and employees; as well as family members and the successor(s) if already chosen. The most common types of professional assistance used in developing a succession plan are accountants and lawyers. Use of other professional services is significantly lower. What Is Being Planned? The most commonly cited components of a succession plan are considered to deal with technical and include the legal transfer of business ownership, tax implications of disposing the business, the financing of the successor, and the division of future profits after the transition. However, seldom cited are soft issues such as identifying long-term personal and family goals, the communication of each stakeholder's vision for the business (employees, family, successor) and their anticipated role in the business after succession, as well as the processes foreseen for selecting and training their successor. …

Macro Economic Instability and Business Exit: Determinants of Failures and Acquisitions of Large UK Firms

Using data over a thirty-four year span on UK quoted firms, this paper seeks to identify the factors that increase the likelihood of exit of firms. Firms may disappear through the mutually precluding events of bankruptcies and acquisitions. We use a competing-risks hazard model to determine characteristics leading to each outcome. Hazard models make use of the data on the timing of these alternative outcomes and we exploit this to focus attention on how the hazards change over the business cycle, conditional on the post-living age of the firm. We find that the volatility in the macro environment has a role in determining, in different ways, the hazard of firms going bankrupt or being acquired.

Saving to Overcome Borrowing Constraints: Implications for Small Business Entry and Exit

This paper shows how a dynamic analysis of entrepreneurial choice, in which inter-temporal savings plans can be adjusted to build up capital, allows agents to overcome borrowing constraints. This casts fresh doubt on the notion that borrowing constraints deter entrepreneurial entry in the long run. Impatient agents are shown to voluntarily remain constrained indefinitely, whereas patient agents become entrepreneurs. The model also explains temporary and permanent closures of viable businesses. The model's predictions are consistent with evidence of greater savings behaviour by entrepreneurs.

Small Business Failure and External Risk Factors

Unlike much of the previous literature, which has generally focused on internal risk factors, this study seeks to explore the impact of macro-economic factors on small business mortality. The results suggest that economic factors appear to be associated with between 30% and 50% of small business failures, depending on the definition of failure used. As expected, failure rates were positively associated with interest rates (where failure was defined as bankruptcy) and the rate of unemployment (where failure was defined as discontinuance of ownership). However, somewhat unexpectedly, failure rates were found to be positively associated with lagged employment rates (where failure was defined as to prevent further losses) and with current and lagged retail sales (where failure was defined as either: failed to "make a go of it"; discontinuance of ownership; or discontinuance of business). This indicates that a strengthening economy may provide the trigger for an increase in voluntary business exits as individual proprietors seek to maximize the returns available to them on both their financial and human capital.

Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments

Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments

Modeling the timing of business firm exits

The previous theoretical studies of the timing of business exits have employed two different approaches. They have either developed sequential decision-making models or models based on gambler's ruin. The purpose of this paper is to evaluate both approaches. For this task some simple models of the exit process are developed and it is shown that both types of models are capable of generating the observed patterns of firm mortality. The reasonableness of the assumptions and the importance of key variables in the two models are tested using a case study of restaurant exits. We find that the sequential decision-making model would have to be rather complex to serve as a realistic descriptive model of the exit process. Gambler's ruin models, on the other hand, provide a realistic descriptive model not only of the environment in which a large portion of this industry operates, but of the decision process as well. Models based on gambler's ruin may, therefore, provide a potentially useful approach for modeling exit process in other industries dominated by small firms.

BUSINESS EXITS AND ENTRIES: THE EDMONTON, ALBERTA YELLOW PAGES EXPERIENCE

ABSTRACT Economies throughout the world are searching for avenues to enhance economic diversification, economic growth and maintain economic stability. It is very clear that many are turning their attention to entrepreneurship and small-business development as vehicles to assist them in reaching their goals. From a public policy perspective, a mitigating factor to the successful promotion of business formations may be existing public perception. More specifically, overall public attitudes appear to reflect that being self employed is inordinately risky and failure rates are high. Through a search from yellow pages of regional telephone directories, the authors of this paper attempt to provide some evidence of business exits and entries in accordance with industrial listing, hoping further research interest on the issue may be generated as a result.