Exit strategies are plans made for the succession of the business. It should be part of your initial business plan, even if you’re not planning to exit soon. It’s about preparing for all possible outcomes and ensuring the longevity and success of your business. Creating a good exit strategy involves carefully planning and considering factors such as your business’s value, potential buyers or successors, and potential risks or challenges that may arise during the transition.

In this article, we will discuss five exit strategies for your business, giving the pros and cons of each strategy.

What Is the Exit Strategy of a Business?

An exit strategy is a strategic plan developed by an entrepreneur to sell their ownership stake in a business to investors or another business. It allows the owner to reduce or liquidate their ownership and potentially make a significant profit from the sale. If the business is not profitable, the entrepreneur can cut losses significantly. Like a venture capitalist, an investor may also use an exit strategy to arrange to sell an investment’s holdings to generate cash flow. It is crucial to differentiate between trading exit strategies, which are used in securities markets, and business exit plans, which are used in businesses.

A prospective business owner should include an exit strategy in their first business plan before starting their company. Common types of exit plans include an initial public offering (IPO), a strategic acquisition (SA), and a management buyout (MBO). The choice of exit strategy depends on the entrepreneur’s desired level of control, company and willingness to see it shift as long as they are paid well. IPOs are considered the pinnacle of exit plans due to their reputation and high return while closing a firm through bankruptcy is considered the least desirable option.

Why Having Exit Strategies Is Important for Your Business

An exit strategy is a crucial part of any business plan. It outlines how the business owner intends to sell their ownership or share to investors or another company. It’s important to have an exit strategy for a few reasons:

• Ensuring profitability or limiting losses: If the business is successful, an exit strategy can help the business owner to reduce their stake or completely exit the business while making a substantial profit. If the business is not doing well, an exit strategy allows the entrepreneur to limit losses.
• Guiding future business decisions: The choice of an exit plan can influence business development decisions. Whether the business owner wants to retain any control or involvement in the business or wants the company to be run the same way after their departure can influence the choice of exit strategy.
• Planning for unexpected circumstances: Many business owners often find themselves pushed out of their company not on their terms due to partner disputes, disagreements, stress on the business or other unexpected events. Having an exit strategy in place can help to mitigate these risks.
• Potential for higher business valuation: A well-considered exit strategy can increase your sales price whilst ensuring the business thrives under new ownership.
• Preparing for retirement or new ventures: An effective exit strategy will enable business owners to approach retirement or further career ventures with clarity by properly disposing of assets in advance.

Types of Exit Strategies

The choice of the right exit strategy will depend on the specific circumstances of your business, including its size, industry, and personal and financial goals. Planning your exit strategy early and adjusting it early is crucial as your business and the market evolve. The top five exit strategies for businesses are:

#1. Liquidation

This strategy involves selling all the business assets and using the cash earned to pay off creditors and shareholders. This is often the quickest and most straightforward exit strategy. However, it’s usually the last resort, often used when a business is in financial trouble. This strategy might not be ideal if you want your business to continue after your exit.

Pros and Cons of Liquidation

Pros: This is it if you’re looking for a permanent resolution. When a business goes bankrupt, it disappears forever.
This strategy could be implemented more quickly and with less effort than others, such as an acquisition.
Cons: Liquidation is not a highly lucrative exit option. You could be cutting ties with people who are important to your success, such as employees, business partners, and customers.

#2. Management or Employee Buyout

In this strategy, the business is sold to those already working in the company. This can lead to a smoother transition and increase loyalty to your business’s legacy. Because these individuals are already part of your business, they may allow for flexibility in your involvement.

Pros and Cons of Management or Employee Buyout

Pros: You may rest assured that a seasoned professional handles the company’s operations.
Transferring ownership is more likely to go smoothly than selling to a third party.
Cons: there could not be someone in charge or among the staff who is willing and able to take over.
If management is changed drastically, the company could suffer.

#3. Merger and Acquisition (M&A)

This strategy involves merging your business with another company or selling it to another company. This strategy often allows for business continuity and may provide a high return.

Pros and Cons of Merger and Acquisition (M&A)

Pros: This is one of the most successful exit strategies for business owners, as they are able to keep control over pricing discussions and establish their own terms, making it one of the most effective exit strategies. You may be able to drive the price even further if you are selling to a competitor or accepting numerous bids.
Cons: The processes involved in M&A can be time-consuming and expensive, and they frequently fail. Streamline operations and secure a high valuation by using the free tools for preparation and project management

#4. Initial Public Offering (IPO)

In this strategy, the company’s shares are offered to the public for the first time, also known as ‘going public’. Following an IPO, a company’s shares will be listed on a stock exchange, where they can be traded. This strategy requires considerable preparation, and a business must ensure sufficient demand for its shares to IPO successfully.

Pros and Cons of Initial Public Offering (IPO)

Cons: Investors, governments, and the general public will closely monitor your business. The possibility for a high return on investment (ROI) exceeds that of any alternative exit route.
Pros: Mandatory reporting of progress and results is another necessity of an IPO. Conducting due diligence for an initial public offering takes a lot of time, money, and effort. Avoid the potential pitfalls of this procedure by using tools, which provide full monitoring and control.

#5. Selling to a Private Equity Firm

This strategy involves selling your business to a private equity firm. These firms often have a lot of capital to invest and can provide a significant return to the business owner. However, they often require high control over the business and may make significant changes after the purchase.

Pros and Cons of Selling to a Private Firm

Pros: The possibility of a sizable profit can be attained through the use of this tactic. Owners of businesses can keep control of price discussions and determine their own terms.
Con: Selling the property could take a lot of time, and it might be difficult to find a qualified buyer who is ready to pay the wanted amount.

#6. Bankruptcy

Filing for bankruptcy should be considered an option of very last resort. When a firm files for bankruptcy, the government will seize its assets, but the company will receive relief from its debts. Even if a corporation files for bankruptcy, there is no assurance that its creditors will forgive all of its outstanding debts. However, it does not take a lot of time, there is not a lot of paperwork involved, and the company can repair its credit.

Read Also: Capital Resource in Business. 10 Best Examples

How Do You Write a Good Exit Strategy?

Here are some steps to write a good exit strategy:

• Identify your goals: Determine what you want to achieve with your exit strategy. This could be to secure a financial return, ensure the continuation of your business, or protect your legacy.
• Understand your revenue streams: Keep consistent and up-to-date business performance data. This will help you make better decisions and make realistic predictions.
• Define your exit strategy: Choose the most appropriate exit strategy based on your goals and the nature of your business. The strategy could include selling your business to another company, going public through an IPO, liquidating your assets, or a management or family succession.
• Identify potential risks and challenges: Understand the risks and challenges that could jeopardise a successful exit. These could include execution risk, market risk, and competitive risk.
• Develop a plan to mitigate these risks: For each risk and challenge you identify, develop a clear and specific set of mitigants. This could involve building requisite capabilities, creating strong relationships with potential acquirers, or increasing your operating runway.
• Communicate your plan: Ensure your exit strategy is communicated clearly to all relevant parties. This includes your business partners, employees, and customers.
• Prepare for the transition: Document all your processes, especially if you are the only one who knows how to do certain tasks. This will ensure a smooth transition and prevent any tasks from being dropped or forgotten.
• Maintain professionalism and positivity: Even as you plan to leave, it’s important to maintain a professional attitude and emphasise the positive aspects of your time with the business.
• Consider getting professional help: You might need to hire professionals like business valuation experts or transition managers to assist with your exit strategy.

Conclusion

An exit strategy is not only about leaving a business; it’s also about ensuring the continuity and success of the business after your departure. Thus, it’s crucial to consider all relevant factors and make a plan that meets your personal and financial goals and benefits the business and its stakeholders.

References

• Ansarada
• Unbiased
• Wall Street Mojo