An exit strategy is basically your game plan for gracefully bowing out of a particular situation. Business owners, executives, and investors use these strategies to either cut their losses or cash in on their gains. Understanding the various exit strategies and their ideal timing can maximize your gains from business and financial assets.
This article dives into exit strategies, exploring their types and how they’re used in the business realm.
Key Point
- An exit strategy is a game plan for business owners, investors, and entrepreneurs to exit their ventures while maximizing financial returns or minimizing losses.
- Popular exit strategies include liquidation, mergers and acquisitions, IPOs, management buyouts, and legacy transfers.
- Planning an exit strategy early ensures a smooth transition, protects the business’s health, and helps achieve desired outcomes.
- Factors like market trends, financial conditions, and successor options play a critical role in choosing the right exit strategy.
What is a Business Exit Strategy?
An exit strategy is a game plan for business owners, investors, traders, and venture capitalists to cash out their stake in a company and make the most of their financial situation. If the company hits it big, the sale brings in a profit that can be funneled into new ventures. Exit strategies are a smart way for entrepreneurs to cut back on their investment in risky ventures and steer clear of losses.
Understanding Business Exit Strategy
Ideally, an entrepreneur should whip up an exit strategy in their initial business plan before diving into the entrepreneurial waters. Your exit plan can really shape your business development choices. Some popular exit strategies are initial public offerings (IPOs), strategic acquisitions, and management buyouts (MBOs). The exit strategy an entrepreneur picks hinges on several factors, like how much control they want to keep in the business, whether they prefer the company to continue operating as it has, or if they’re open to changes, as long as the payout is right when they sign off.
A strategic acquisition can take the ownership load off the founder’s shoulders, but it also means waving goodbye to control. IPOs are like the golden ticket of exit strategies, bringing in the most prestige and the biggest rewards. On the flip side, bankruptcy is viewed as the last thing anyone wants when leaving a business.
One important part of an exit strategy is figuring out what the business is worth. Luckily, there are experts who can help both owners and buyers take a close look at the company’s finances to find a fair value. There are transition managers who help sellers with their business exit plans.
Why is it Important to Have an Exit Plan?
It’s always better to have a game plan for leaving than to be pushed out by the situation. Planning helps you pick how you want to exit and also prepares the business for that particular approach.
This makes sure the transition goes off without a hitch while getting the most bang for your buck from the business. Equally important, it’s the smartest way to protect the health of the business you’ve invested so much time and effort into.
Don’t risk its future by making a hasty exit!
Types of Exit Strategies
Check out these exit strategies to safeguard your wealth and investment in a company:
#1. Liquidation
Liquidation means shutting down the business and selling off all its assets. It’s a popular exit strategy, especially for small businesses and sole proprietorships ready to chase new opportunities. If the business is thriving and catches buyers’ eyes, liquidation can be one of the quickest and easiest ways to exit. But for business owners, the return on investment can be a bit lackluster since they primarily profit from selling off business assets or inventory. When a business goes into liquidation, any cash generated is used to settle its debts with creditors.
#2. Mergers and acquisitions
An M&A exit strategy means either teaming up with another company or selling a big chunk of your business to a larger, more profitable investor. A company wants to team up with someone keen on nurturing and safeguarding their legacy, as well as that of the business owner.
It’s perfect for any business, but it’s a real magnet for entrepreneurs and startups. In many mergers and acquisitions, the original owner sticks around to help run the show. This strategy gives business owners the upper hand by letting them call the shots on terms and pricing.
#3. Legacy
The legacy exit strategy is all about keeping the business in the family for the long haul, like when a business owner wants their siblings, spouse, or kids to take the reins down the line. To boost the chances of a successful exit strategy, business owners frequently guide their successors in managing the responsibilities of running the company. They really need to pick the most qualified person to take the reins after they leave, ensuring the company keeps growing and thriving.
#4. Acquihires
An acquisition strategy is when a company buys another business just to snag its talented employees. Even though the business owner will lose control after the acquisition, they can still cash in and ensure their employees are taken care of. This exit strategy’s top perk? It hands the seller the reins in negotiations and sets their employees up for a brighter future.
#5. Management or employee buyout
In this case, the employees or management scoop it up when the owner decides to sell the business. Planning to leave a company with this strategy can be tricky right from the start because the owner has no clue how successful the business will turn out to be down the line.
But hey, it can totally smooth out the transition and set up a more secure future for the organization since the buyers are already in the mix and both sides get along just fine. The former owner might even get to play a bigger role in running the company.
#6. Sell stakes to an investor or partner
Handing over stakes to an investor is a smart exit move for anyone who’s not the owner or sole boss of a business. Many investors find this strategy appealing since it lets the company keep operating without major changes. This exit strategy helps business owners and investors keep their legacies intact, and negotiating becomes a breeze!
#7. Initial public offering (IPO)
An IPO is how a private company goes public. It’s all about selling stock shares to the public, turning them into stockholders of the company. Get it right, and IPOs can be a goldmine for both business owners and investors. Keep in mind that IPOs can be pricey to set up, take a lot of time, and have to follow strict federal rules.
#8. Bankruptcy
Bankruptcy is like the final card you play when all else fails. When companies go bankrupt, the authorities swoop in to grab their assets, but the businesses get a break from their debts. Filing for bankruptcy doesn’t mean creditors will wipe the slate clean on all the company’s debts. It’s fast, needs hardly any paperwork, and helps the business get its credit back on track.
When to Use an Exit Strategy
Check out these scenarios where folks can whip out an exit strategy:
#1. Turn a profit
Investors can have an exit strategy to cash out of their investment in a company once they hit their profit target. For example, a lot of online publishers cash in on their websites once they hit a specific profit milestone.
Angel investors often do the same thing when they back tech startups. The sale can boost the investor’s profits, paving the way for exciting new projects ahead.
#2. Limit losses
A business can start losing money due to legal troubles, bad management, or market shake-ups. An exit strategy is a smart move to cut your losses when a business isn’t raking in the profits. This way, investors can dodge a complete wipeout of their investment in the company.
#3. Boost the company’s future
Even though they’re leaving, an owner or investor probably wants to make sure the company keeps thriving. A company that can keep making money or bounce back from bad management helps the owner or investor maintain their reputation. An exit strategy makes it easy for new stakeholders to step in and carry on the entrepreneur’s legacy without a hitch.
How Could I Exit My Business?
You’ve got plenty of ways to exit a business, such as:
- Selling it
- Passing it on to a family member
- Negotiating a management takeover
- Winding the business down
- Agreeing to an ‘acqui-hire’
- Completing an M&A deal
- Undergoing an initial public offering (IPO)
- Bankruptcy or liquidation
Your plan should include a section on exit strategies, ideally featuring both a Plan A and a Plan B in case your first choice hits a snag.
These plans will help you craft your overall business strategy.
First up, figure out what you want to get out of your exit.
Are you all about raking in the cash, or are you more interested in building a robust business? Are you planning to hand it down to your family, or would you be okay if it just disappeared?
All these factors should play a role in your decision-making.
How Can I Get the Best Value When I Sell It?
Your exit plan should definitely include ways to increase your business’s value before you leave and ensure you get the best return when you do exit.
One crucial piece of the puzzle is figuring out when to make your exit. Keep an eye on market trends, the financial landscape, and the pool of potential buyers or successors.
When valuing your business, an adviser will look at its history and future potential, how similar companies are doing, and any recent sales trends.
They’ll keep a sharp eye on cash flow, turnover, efficiency, and profitability.
How Do I Get Started?
Why wait? Start plotting your business exit plan now!
First things first, think about what you’d like to tackle next!
Should I dive into a new adventure or hang up my boots? Next, consider how much cash you’ll need for those plans. Having a clearer idea of your next steps can really help in planning your business exit, and that’s where financial advice comes into play.
To help you kickstart your exit planning process, here’s a comprehensive checklist to ensure you leave your business on the best terms possible.
How to Exit a Business.PDF
Conclusion
The ideal exit strategy really hinges on the type and size of the business. A partner in a medical office could find it advantageous to sell their share to another partner, while a sole proprietor might aim to rake in as much cash as they can before shutting up shop.
If a company has several founders or significant shareholders besides the founders, it’s important to consider their interests when picking an exit strategy too. So pick which works for you best and go for it. Goodluck!