When starting a business, the last you think about is creating an exit strategy. But having a well-thought-out plan for exiting your business can help you maximize the return on your investment and prepare you for anything unexpected.
Creating an exit strategy is not just something that you should do when it’s time to leave your business but also as part of your long-term planning. By creating one in 2023, you can ensure that your business is ready for any changes or challenges that may arise.
In this blog post, we’ll explore creating an effective business exit strategy in 2023. We’ll look at defining, identifying, and the step-by-step process of creating an exit strategy and the various options you can consider for exiting your business.
What is an Exit Strategy in Business?
An exit strategy in business refers to the plan for transferring ownership of a company when leaving. It serves as a contingency plan for exiting a business in case of substantial profit or lack of profitability. Essentially, it’s a way of protecting yourself and your business should you ever need to leave.
Whether the business is successful or not, exit strategy planning is vital.
Even if you’re a small business owner, a plan for the future is a must because no exit strategy will leave you with little or no return on your investment. A complete exit strategy considers stakeholders, finances, and operations. It outlines the necessary actions for selling or closing.
Remember that the best exit strategy acknowledges a business’s value and establishes a foundation for future goals and new directions.
5 Common Business Exit Strategies
When it comes to nature and operating style, no two businesses are cut from the same cloth. This is why it’s important to review the common exit strategies available and consider all of the options as part of your long-term planning.
Below are five types of exit strategies:
1. Merger and Acquisition
The merger is like an intricate dance, where the business owner gracefully liquidates part of their ownership to form a new company that shares control. On the other hand, an acquisition exit strategy is like passing the baton, as the existing business owner hands over their thriving business to another, transferring ownership in the process.
Merger and acquisition refer to the consolidation of companies, either by merging with a similar entity or being acquired by a larger corporation. This approach allows large companies to increase profits without starting from scratch. Negotiations are extensive, and there are no limits on purchase considerations.
Pros:
- Eliminates most of the risks of starting a new business
- Create lucrative returns for the owners
Cons:
- Time-consuming and complex process
- Acquisitions cause conflicts with different work cultures
2. Initial Public Offering (IPO)
An effective strategy for enhancing the worth of a thriving enterprise is by conducting initial public offerings, commonly known as “going public.” This exit strategy involves selling stock shares, resulting in a transfer of control to stockholders.
Among the several different exit strategies, one that many entrepreneurs dream of is selling their business to the public through an IPO, hoping for a bigger profit. It’s a popular option, although not always practical for small businesses.
Pros:
- Boosts business value
- Capital market growth facilitates access to affordable funds
Cons:
- Can be overwhelming for small business owners due to the formalities involved
- Success rate of an IPO is low for small and medium businesses
3. Liquidation
For small businesses, liquidation often becomes the doorway to new beginnings and fresh opportunities. It’s a choice many entrepreneurs make when they want to close the chapter on their business operation completely.
Liquidation is a strategy business owners use to wind up their businesses and settle debts by selling all assets. This can be a voluntary decision or forced by adverse circumstances. In any case, the proceeds from asset sales are used to pay off creditors.
Pros:
- The simplest exit strategy
- No transfer of control
Cons:
- You sell assets at a lower price
- A business’s reputation can be damaged
4. Management Buyout
Consider passing on your business legacy to your employees if you desire its continuity. Selling your business becomes easier when there are interested parties like employees and vendors who are familiar with the company’s operations and can effectively manage it.
Management buyouts are an effective way to leave the company in good hands while ensuring a suitable return on your investment. This exit strategy can result in a strong business legacy and a seamless transfer. With simplified selling norms, it offers convenience to both parties.
Pros:
- Owners can negotiate favorable terms
- Business is transferred to an experienced and familiar individual
Cons:
- Finding potential buyers can be challenging
- Legal restrictions may prohibit the transfer
5. Bankruptcy
Declaring bankruptcy is the last resort when it comes to getting rid of unprofitable businesses. It’s usually done only when there’s no potential for future earnings or when one can’t repay debts.
Basically, it’s the final stage of the exit strategy.
Pros:
- Release business owners from liabilities
- Move on and start a new business
Cons:
- Some debts remain unpaid or only partially paid
- Future credit borrowing capacity may be impacted
Now that you know the most common exit strategies, you may be wondering what’s the best one for you. It all depends on your situation and the type of business you own. Hence, we provide you with a step-by-step guide to help you create an effective exit strategy for your business in 2023!
6 Steps to Create an Exit Strategy this 2023
Leaving your business can be an emotional rollercoaster. That’s why planning a solid business exit strategy takes time and care.
If you want to plan an exit strategy that gets you maximum gains for your business, here are six simple steps you can follow:
1. Get your finances in order
When it comes to developing an exit plan, the first step is to get a clear picture of your finances, both personally and professionally.
Strategists specializing in business valuation can assist you in conducting thorough due diligence for a business appraisal. This way, you can determine the true worth of your company and set realistic expectations for potential buyers.
2. Consider what you want for your exit strategy
Your exit strategy business plan should reflect your vision for the business’s future. Consider what you want to accomplish and how you plan to do it.
Ask these questions:
- Do you still want to have some control over the business?
- Are you looking for a quick sale or prefer keeping your options open?
- Would you be willing to invest in the business after the sale is done?
These questions will give you a complete picture of what you want from your business exit strategy and how soon you plan to get it.
3. Meet and talk to your investors
Reach out to your angel investors and stakeholders to let them know about your plans to exit the business. Come up with a strategy to inform the investors about how they will be repaid.
Since you already have a good grasp of your finances, the investors will help you have a successful transition according to the terms and conditions agreed upon.
4. Find the right buyer
When everything is settled, you can start searching for the right buyer. The search should begin with your immediate contacts, like employees or vendors. Or family members who are interested in taking over.
When you’re ready to bid farewell to your business, pass the torch to the new owner while you put the finishing touches on your plans. If you’ve already got a well-documented playbook in place, delegating those responsibilities will be a piece of cake.
5. Tell your employees
Unless it’s an employee buyout, your business exit plan should involve talking to your employees. This is especially important if you’re selling the business to someone outside the company.
When succession plans are finalized, communicate with employees, address their queries, and demonstrate empathy and transparency. Informing them of any changes in advance allows for better preparedness during the transition.
6. Keep your customers in the loop!
Finally, make sure to communicate with your valued clients and customers. If your business is carried forward under a new business owner, take the opportunity to introduce them and ensure a smooth transition.
On the other hand, if you are closing your business permanently, inform your customers of alternative options to ensure their continued satisfaction. Your proactive approach will strengthen relationships and leave a positive impression.
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