An exit strategy, sometimes called an exit plan, is an entrepreneur’s strategic plan to sell a business property to investors or another business. An exit strategy provides an opportunity for an entrepreneur or business owner to liquidate his stake in a company and make a significant profit if the business is thriving.
An exit plan allows an entrepreneur to limit losses when the business is unsuccessful. An investor can also use an exit strategy to plan a payoff on investment as a venture capitalist. Trade exit strategies should not be confused with trade exit strategies used in equity markets.
Understanding Business Exit Strategy
Business owners or entrepreneurs should include exit strategies in their original business plans before starting a firm. The choice of an exit strategy can have a significant impact on company choices. Common exit strategies include acquihires, initial public offerings (IPOs), and management buyouts (MBOs). A business owner’s exit strategy depends on many factors; for example, you are willing to change it if you are paid well to sign it.
A strategic acquisition, for example, releases the founder from his obligations and means that the founder surrenders control. IPOs are often viewed as the holy grail of exit strategies as they often bring the most prestige and reward. On the other hand, bankruptcy is considered the least desirable way out of a company. A significant aspect of an exit strategy is the valuation of the business, and some specialists can help business owners (and buyers) review the company’s financial data to determine fair value. There are also transition managers whose job is to help salespeople with their business exit strategies.
Every business needs an exit strategy at some point, even if that only means transferring ownership of the business if an owner decides to retire. Leaving a company can be stressful, and emotions can often cloud your judgment. In this case, a good exit strategy that you have devised beforehand will help you deal with difficult situations rationally.
The following are some things to keep in mind when creating your exit strategies:
- The length of time you plan to be part of the company
- Your financial situation and expectations
- Any investor or creditor who needs to be compensated and what that process will be like
Creating Your Exit Strategy Business Plan
The process of creating an exit strategy plan includes the following:
Create a List of Potential Acquirers
If you are interested in a later stage acquisition, identify the companies that you think are ideal.
Determine How You Will Be Valued
Review the ten winning strategic concepts presented below and identify which of them would be most valuable to any potential buyer.
In your strategic exit plan, identify each of the ways you are creating value (for example, by developing new systems).
Create Your Strategic Exit Plan
In your strategic exit plan, identify each of the ways you are creating value (for example, by developing new systems). Provide a schedule, financial needs, and the names of those in charge for each new asset created.
As an entrepreneur, you must devise and implement a business exit strategy that allows you to sell your interest in your company for the highest possible profit. A successful exit strategy requires careful planning and should be reviewed periodically to better reflect current terms and conditions.
10 Winning Strategies To Maximize Your Exit Plan
Liquidation means exiting a business and selling its assets or redistributing it to creditors and shareholders. There are two ways of doing this:
Close and Sell Assets as Soon as Possible
One way is to close the deal and sell the assets as soon as possible. This is often the last resort for a business as it only makes money on purchases it can sell while losing valuable items such as customer lists or long-term business relationships.
Before liquidating a company, you should work with liquidation professionals to ensure that you follow the proper procedures to sell your assets, pay off all debts, keep track of employees, and meet all legal and financial obligations.
Liquidating Your Business over Time
The other standard settlement option is to pay yourself until your company’s finances are depleted and then finally close the deal. This is often referred to as the “lifestyle business.” The owner withdraws the funds over time rather than reinvesting them in the business.
2. Sell the Business to Someone You Know
You may want to let someone else own your business. In many cases, your exit strategy may be to sell to someone you know.
Some of the people you can sell your business to:
- Family member
- Business colleague
Before selling your business to anyone you know, consider the downsides. You don’t want to jeopardize your relationships. Reveal things like liabilities and the profitability of your business before a family member, friend, or acquaintance buys it from you.
Usually, during a financing agreement with the seller, the buyer can gradually liquidate the deal. This allows the seller to keep an income while the buyer starts the business without making a significant initial investment. The salesperson can also act as a mentor during the transition, helping to make the process easier for everyone.
Keep in mind that when selling to a family member, the issues of valuation, business transfer, and estate planning can be complex. It would help if you involved attorneys, accountants, and family successors in transition planning.
3. Sell the Business in the Open Market
Buying an established company can be an attractive option for business owners or entrepreneurs. This is because it is less risky than starting a new business, and seller financing makes it easier to finance the purchase than financing a start-up. Buyers also benefit from adopting existing systems; sales flow, cash flow, established customer base, and brand reputation.
For these reasons, it is best to make an effort to prepare your business in advance and make it attractive to potential buyers. The United States small business administration can also be beneficial, as it provides helpful information about the closing or sale of your business.
4. Sell to Another Business
In some cases, a competitor or similar company may want to acquire your business.
Your business could be a strategic fit for a competitor who might want to eliminate the competition. This is essential for someone who wants to continue working in his chosen industry but with less responsibility.
As a general rule, the business owner or entrepreneur is offered a position in the new company in the case of acquisitions. If so, make sure you are familiar with the position and fully understand the dynamics and culture of the new job. It would be fine if you worked with an attorney to draft the sales contract.
5. An IPO (Initial Public Offering)
An initial public offering (IPO) generally refers to the sale of your shares by a company to the public. Businesses often go through this process to raise additional capital. Going public is a big step for any business – it’s a long and expensive process, and after that, the industry is subject to public reporting.
Unlike a private company, a public company gives part of its ownership to shareholders of the general public. Public companies tend to be larger, and they also (generally) go through a high growth phase. By taking your business public, you can get more funds to pay off your debts.
However, going public can be demanding for small businesses because it costs a lot of time and money. If you want a quick exit strategy, an IPO may not be the way to go. To get started with an initial public offering (IPO), you need to find an investment bank, gather financial information, register with the Securities and Exchange Commission (SEC), and calculate the share price.
An acquisition happens when a company buys another company. With an acquisition exit strategy, you give ownership of your business to the company buying it from you.
One of the advantages of an acquisition is that you can indicate its price. A business can potentially pay a higher price than the actual value, especially if it is a competitor. On the other hand, an acquisition isn’t the best exit plan if you’re not yet ready to shut down your firm.
For example, a non-compete agreement may be required if you intend to work for a competitor you recently sold. The two types of acquisition are: friendly and hostile.
When you have a friendly takeover, you agree to be taken over by a larger company. However, a hostile takeover means you disagree. The acquiring company acquires a stake to complete the acquisition. If an investment is your exit strategy, your acquisition should be friendly. You are likely trying to find an acquiring company to sell to.
7. Become Part of an “Acquihire”
Unlike a traditional acquisition, this exit strategy business plan is a business plan in which a company buys its business to attract talented or qualified employees. While this means that your “legacy” may not last in name, it will help you take care of your people. In that case, you’d have to negotiate the terms with your employees’ specific needs in mind – they came for you, after all, not another organization.
In a merger, two companies are combined into one. Mergers add value to your business, which is why investors like them. To merge, you must still be part of the company. A merger will make you the owner or manager of the new company. His employees could be employees of the newly merged company. However, if you want to separate from your company, a merger is not the best exit strategy.
There are major five types of mergers:
- Horizontal: Both businesses are in the same sector
- Vertical: Both businesses that are part of the same supply chain
- Conglomerate: The two businesses don’t have anything in common
- Market extension: They sell the same products or services but compete in different industries
- Product extension: Both businesses’ products go well together
Before merging companies, make sure the new company is compatible with the current one. Otherwise, you could lose income.
9. Management or Employee Buyout
While many of these methods can be challenging to plan, people who already work for you may want to buy your business from you when you’re ready to go.
Because these people know you and know how to run the business, this business exit strategy could result in a smoother transition and increased loyalty to your company’s legacy.
Also, because these people are already part of your company and probably know you well, they can give you flexibility in your commitment; they may want to keep you as a mentor or advisor.
10. Declare Bankruptcy
When it comes to strategic planning for small business outings, the latter method is the option that you can’t plan for.
Majorly, no one wants to file for bankruptcy, but this may be your last resort if something goes wrong (or if you’ve never managed to plan using any of the other exit strategies listed above).
Sometimes the urge to file for bankruptcy comes before you’re ready, but in the business life cycle, that’s not the end of the world.
While you may have assets seized and troubled loans to rebuild, you’ll be freed from debt and business stress when things get bad.
Unfortunately, the probability of bankruptcy is one of the risks associated with starting and owning a business. Therefore, if the possibility of bankruptcy becomes a reality for you, you must know exactly what happens when you file for corporate bankruptcy.
Essential Questions to Ask for Your Business Exit Strategy
So, how do you start when it comes to planning your small business exit strategy? While much of what ultimately has to do with your exit strategy is unique to your organization, there are a few questions to ask yourself to prepare to develop your exit plan:
Do you want to stay involved in the business forever?
If you are starting your business, this question may seem almost counterintuitive. But even at an early stage in your business, it’s essential to be realistic, which means thinking ahead and considering your strategic exit plan for going out of business. Even if you’ve spent your entire career running the same company, at some point, most people plan to retire at a certain age.
Have you set up your business to make that a possibility down the line?
You may know that corporate ownership can only last up to 10 years. In your opinion, what would you ideally let happen right now? Would you like to participate in the business even without an owner? These are essential questions to answer yourself to make the right plans. It might even be a great concept to keep reviewing how you feel about these questions year after year as your life and plans progress.
What are your financial goals?
Of course, it is quite different for everyone. As much as you love the concept of your business or the good it does globally, almost all entrepreneurs have financial needs and goals included in their business plans (unfortunately, nearly 70% of entrepreneurs do not save for retirement regularly). Whatever your financial goals, this question will significantly impact the outcome of your exit strategy.
How do you plan for an exit plan?
Some business owners work with consultants or professionals to help them make the best decisions, such as with an accountant or business attorney. However, after you’ve asked yourself the first two questions, you can work with a professional to develop an exit plan as part of your business plan.
The exit strategy planning process is about crystallizing your personal and business goals to make the best decision for your company at the right time.
At this point, you need to deal with “executable items like taxes, investors, deal structure,” and many more. Also, you need to understand the total value of your business to understand what options you may have. Thus, the exit strategy planning process is about crystallizing your personal and business goals to make the best decision for your company at the right time.
However, if your departure is in the immediate future, you must decide on a plan and follow it. If you have time to plan (and, as mentioned above, consider this early on), it’s a good idea to be prepared for several options. Fortunately, there are numerous exit strategy options to choose from when thinking about the future of your business.
The Fact Of the matter
In the end, as with many parts of corporate governance, there is no one-size-fits-all strategy for getting out of a business. Ultimately, the right exit strategy for you and your business depends on several different factors which can change or develop throughout the life cycle of your business.
However, the best thing to do with an exit strategy business plan is to… plan. When starting your business, you should already think of ways to leave your company in due time. If you believe proactively about this process, what it would look like, and the consequences, there is a tendency to be more successful when it comes to part ways.