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A business exit strategy is an essential part of business, whether you own a big firm, a small business, or a startup, you must have a business exit plan to overcome future challenges, and to cope not only with failure but also with success. Business exit doesn’t mean completely shutting down the business and moving far away from being an entrepreneur, rather you can continue to be part of the venture only transferring ownership and sometimes leadership. Though, not many businesses plan their exit strategy. In response to a query about business exit plan from a listener, Jeremy Vine, broadcaster of BBC Radio 2, said,
“My number one piece of advice for entrepreneurs is to plan your exit three to five years in advance.” He further added it might sound obvious but you would be amazed at how many successful business owners neglect to consider what they are eventually going to do with their company.`
He believes businesses leave their exit plans almost until it’s too late. If you are in a business or running a startup, plan your business exit strategy ahead of time.
The most common and best business exit strategies include initial public offering, filing for bankruptcy, selling to stakeholders and partners, liquidation, mergers, selling to someone you know, passing the business to a family member or having managers buy you out. Let’s get a better understanding of what an exit strategy is.
What is an exit strategy in business?
In simple terms, a Business’s existing strategy includes procedures by which owners of privately held companies end a business. It’s a plan that either moves a business towards a smooth transition to a new phase or towards a long-term goal. It’s a change in business direction or leadership keeping business financially stable or pivoting for challenges.
Existing strategies vary from business to business depending on the size, and nature of the business. However, the best existing strategy takes into account all stakeholders, operations, finances, and all details necessary for business closure or sale. As it provides a basic foundation for new directions, and future goals, it must be planned with acceptance and understanding of the true value of the business.
Why do you need an exit strategy?
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Two of the major reasons you must have an exit strategy include maximization of profits and minimization of losses. Let’s suppose your business is doing well. An exit strategy will help to maximize your profit, however, if you are struggling with failure, it will help you minimize your losses.
Therefore, it provides a greater opportunity to optimize your business results.
A business exit strategy will benefit you in the following ways;
Business decisions with the direction
With the next stage of business in mind, you will be more likely to set goals to make progress toward business outcomes. It gives clarity on everything making it easier to make quick decisions.
Commitment to the value of your business
Exiting strategy requires in- depth analysis of finances and other factors of the business. It helps in the understanding of the total value of your business in monetary terms and goodwill.
Attract potential buyers
One of the important purposes of an exit strategy is to be able to attract potential buyers who can negotiate the business while keeping the benefits. If everything is organized well, attracting buyers won’t be a problem.
Smooth transition
Exit strategies help in the smooth transition of the business. Everything is explained and organized so that the business or the person taking over it can find things more easily and that you don’t mess anything up.
Goals after exit
Having exit strategies early also helps you find out what you are going to do next after achieving a successful exit.
Types of exit strategies
There are two main strategies for the exit, either you sell or close it.
- Sell your business – Selling is the best way to make the transition, ideally selling to buyers who have the same passion makes it much easier.
- Complete closure – The second option for an exit strategy is for the complete closure of the business.
Another kind of exit strategy is to transfer ownership to employees or management.
Steps to develop an exit plan
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The whole process of exit must be planned, organized, and identify the purpose and goal of closing or transferring business. You must do the following for exit;
Prepare an accurate account of your finances: To be able to develop an exit plan, the first step is to accurately prepare your finances. You must have a sound understanding of your business’s assets, and expenses. Moreover, negotiate the deal with your business’s real value.
Consider your options: once you prepare your finances, consider your exit options and strategies to determine the best strategy. During the process, you can also consult your business lawyer and financial professionals to seek help.
Speak with investors: Approach stakeholders and investors to share about your business exit. Your exit strategy must be understandable and make it easier for investors and provide evidence to support your plan.
Tell your employees: you must tell your employees that you are planning to exit your business. It will help them to make a smooth transition, and make decisions aligned with business goals and objectives, and the trust remains there.
Inform your customers: customers are an essential part of your business. They must be aware of your decisions, and company plans. It is important to let them know about all the plans.
Keeping your customers, employers, and investors informed about your business gives them confidence and trust that will help both your business and your personal life. These are the people who will make the whole process a lot easier for you. Your employers will assist in developing strategies and plans, analyzing financial data, and creating a business that is valuable to investors. Letting them know ahead will make their tasks more reliable, flexible and convenient. Moreover, letting the investors know about your plan will attract them to your business, and they will use the time to understand the business’s function and how to takeover.
Best business exit strategies
Leaving your business can be emotional and overwhelming. It must be dealt with care and diligence. Leaving something that you have put your heart and mind into isn’t always great. It’s not easy for most people. Despite the hardships, one must have a proper plan to exit their business smoothly. If you wonder how you can sum up your business or years of hard work, the following options below will help you in the process:
Pass the business along to a family member
This is one of the best existing strategies if you want to stay in some transitional or ongoing role in the business. You can keep the business in the family for the longer term, and make sure your family can handle the business. Meanwhile, it is the best way to preserve your name and family legacy. However, be aware that it can bring emotional, and financial stress to your family.
Explore a merger or get acquired
You have two options, either explore someone who can merge your business into their existing business or seek for acquisition. Mergers are considered friendlier, as it benefits both companies. However, in acquisition one company completely takes over another.
Pursue an ” acquihire”
If this is a new word for you, let’s understand what it means. Acqui-hiring is a process of acquiring a company primarily to recruit its employees. The acqui-hiring firm is not interested in the products or services. At this time of acquisition, you will likely get profit as the terms of this special acquisition can be negotiated. Although, the process is a bit costly and time-consuming. Also, it is difficult to find a firm interested in “acquihire”.
Existing managers buy you out
No one knows more about your business than those working for you as part of your team. These people might be interested in taking over the business. Therefore, this can be a good exit option, flexible and can be negotiated on good terms. Also, your business legacy will remain intact. But again, it is hard to find someone in management or your team who can acquire the whole business.
Sell your stake to a partner /investor
This can be another less stressful exit strategy, since you are going to sell your business to an investor there is a good chance of having a reliable deal with them. People who are looking to run a business can be easily found and most of the time, they pay a good lump sum amount. Moreover, you don’t have to worry about finances and other business-related issues.
Plan an initial public offering
An initial public offering (IPO) is a public offering of company shares for the first time. Any private company to raise capital looks for public trade and offers company shares to the general public. It is a great option to consider for those having trouble with their finances. Both big and small firms offer shares to the public. However, it requires regulatory efforts, proper marketing and due diligence.
Liquidate the business
Liquidation occurs when the company is going at loss and cannot pay its debts. In this process, the assets of the business are sold to pay off the debts. Though it’s not a great strategy to exit the business, it’s better than going bankrupt and not being able to cover the losses.
File for bankruptcy
Bankruptcy helps businesses to get a fresh start, it helps businesses who are no longer able to pay their debts. Bankruptcy laws help businesses with financial troubles. However, in the case of a sole proprietorship, your assets will be frozen and used to pay debts. In the case of a public company, your assets remain safe.
Few questions you must answer for business exiting strategy
The business exit strategy is a crucial process that requires strong analytical and critical thinking. You must be asking these few questions before going for an exit strategy;
- What do you want from your business?
- When do you want it?
- And how?
The stronger your motivation, the clearer and easier it would be to choose an exit strategy. Asking these questions helps you to determine your goals and provide clear guidance and guidelines for existence. Whether you want to sell or complete closure. When do you want to sell your business? What will you do next? How will you conduct the whole process of transferring your ownership? All these questions are important for a business’s existing strategy.
Final thought
A business exit strategy is a way to reduce or liquidate a stake in a business. If a business is successful, there is potential profit involved in the exit strategy. Meanwhile, if your business is a failure, it will help to minimize potential loss. Some entrepreneurs exit from business to make money out of it, and start a new business. However, some exit due to the struggling nature of the business to limit the loss. It completely depends on individuals to make their decision about their business. Above all, it’s important to have an exit strategy ready so that when the time comes you don’t have to thinking about different exit strategies and face a loss in the business.
Having everything organized helps you find potential buyers, and investors and also keep the trust of your customers and community. Meanwhile, it helps you to overcome your financial as well as personal stress. We would recommend you plan your exit strategy ahead of time even if you are not thinking about selling or exiting your business.