While it’s not ideal to think of failure when starting a business, exit strategies serve as a cushion if a business fails. It cushions the weight of the fall on the entrepreneur and limits the chances of heavier losses in the wake of selling off the business. Though you don’t want to think about failure, you should have a plan prepared — just in case.
Failures aside, maybe you just want to move forward with your life. Perhaps you’ve chosen a new career path, and now you’re faced with either selling your business or handing the reins to someone else. You need an exit strategy in place to ensure the transition process is smooth and to prevent any unnecessary financial losses.
In light of that, let’s flesh out what exit strategies for businesses are and discuss how to implement them.
What is an exit strategy?
A business exit strategy is the owner’s concrete plan to sell off their business to an investor or to another company. If it’s a partnership, then an exit strategy is the entrepreneur’s plan to sell off their stake in the business.
A business exit strategy comes in handy when a business is struggling to stay afloat and the owner wants to sell it. It’s not only important for struggling businesses. An owner may decide to sell their business when the business is thriving, that way, they can get a higher price. This may occur, for example, when the business has met predetermined financial goals or the owner is ready to retire.
So at the fundamental level, a business exit strategy is a plan put in place to sell off a business whenever the need arises. It’s planning ahead and putting things in order to aid the smooth transition of a business from one owner to another.
Why is it important to think about an exit strategy?
Whether it’s a small business or a corporation, an exit strategy should be in the business plan before it even kicks off. Planning an exit strategy when it’s time to get out is like preparing for war on the battlefield — this will most likely lead to failure.
Selling a business or handing it over to someone else is never an easy task. A lot of things come into play, and you can’t plan for all of them in the heat of the moment. Emotions can obscure and obstruct rational thinking causing the transition to go awry. What often happens is that rash decisions are made, and the seller is forced to accept less than they bargained for when it’s time to let go.
To avoid this ugly business situation, it’s better to plan ahead even if you don’t see the point in doing so. Just draft out an exit strategy and you can edit it with time.
- Pro tip. For small businesses, it’s more important to think of an exit strategy at the onset if financial assistance from investors will be needed. These investors need to see an exit plan so they can be sure of where they stand in the event the business fails. They need to be certain that their stake is safe if the business were to fall.
Types of business exit strategies
There are five types of business exit strategies, they include:
- Selling your share to a partner
- Selling to another business (Acquisition)
- Initial Public Offering (IPO)
Let’s take a closer look at each of them below.
Liquidation is an exit strategy where the owner of the business shuts it down entirely and sells off its assets to pay off creditors and investors. The business’s creditors receive payments owned before assets are shared with investors in this type of exit strategy.
There are two types of liquidation:
- The first is the one we already mentioned, where the owner closes the business immediately and sells off the assets or repays investors and creditors. This is a straightforward method, you sell off assets to salvage as much cash as possible.
- The second process occurs by liquidating the business slowly over time — you no longer reinvest into the business. You just let it run its course — until you are out of current stock and you’re forced to close.
2. Selling to a partner or a personal acquaintance
This can be a more comfortable exit route as you are selling the business to a family member (commonly known as a legacy), friend, spouse, or partner. However comfortable this strategy might seem, you still need to be careful and sincere not to ruin the relationship you have with the buyer. Be sincere about the details of the business, list all the assets involved, and be as transparent as possible.
3. Selling to another business (acquisition)
In the acquisition process, the business owner lets another business or competitor buy off the company while retaining the staff of the acquired company and its owner. Staff retention is determined by the buyer in an acquisition, but the business owner, a.k.a. the seller, is often offered a position in the new company.
The acquisition exit strategy can also work if the owner decides to give up their entire stake in the business or ownership to the acquiring company and decides not to be involved in the new company. It can work either way depending on the agreement between the business and the buyer, but the seller is often contracted and obligated to stay on board for a predetermined period of time to ensure a smooth transition of business operations.
Acquisitions are more effective when the seller is larger than the business being bought, otherwise, a merger may be the better option.
4. Initial Public Offering (IPO)
An initial public offering (IPO) occurs when the company’s stocks are first sold to the public. An IPO is used to (hopefully) raise a large amount of funds to fund business operations and can be a strategy used to avoid a bankruptcy filing. However, because the corporation is no longer a privately held company, it will now be subject to more government regulations and be compelled to publish quarterly financial reports.
This process takes longer to achieve and involves much paperwork. The business will need to find an investment bank, register with the Security Exchange Commission (SEC), and go through a few other measures to begin the IPO process. It’s not an ideal option if you are looking at a fast exit route from a business.
The merger exit strategy entails merging with a similar business — preferably a larger business to add value to your smaller business.
A merger works for those who want to continue their business but lack the financial capacity to do so. If you want to exit the business entirely, you might consider the other exit strategies.
A merger can occur between two companies with similar products and services to take advantage of their combined resources. Conversely, two businesses with nothing in common may decide to merge and to form a conglomerate, this allows the two companies to not only form a larger company but also gives each entry into other markets.
Every business needs to plan ahead and prepare for its future. Business exit strategies are there to help businesses transfer ownership to buyers or investors as a way of maintaining financial stability. A well-planned exit strategy can often save a business partner or owner from a road to financial ruin.