Exit strategies are often not thought about when making a business plan. But in the long run, they can come in very handy. That’s why business owners and startups are often advised to have exit strategies for when things go south. There are different exit strategies to explore, and we’ll look at some examples in this guide.
What Is an Exit Strategy?
An exit strategy is a contingency plan implemented by an investor, trader, venture capitalist, or business owner to liquidate a financial asset position or dispose of tangible business assets after preset conditions either have been fulfilled or exceeded.
An exit plan may be used to depart a non-performing investment or to end a loss-making firm. In this scenario, the exit strategy’s goal is to limit losses.
When an investment or commercial initiative has achieved its profit goal, an exit strategy may be implemented. An angel investor in a new firm, for example, may design an exit strategy through an initial public offering (IPO).
Other reasons for implementing an exit strategy include a dramatic change in market conditions as a result of a catastrophic occurrence; legal reasons such as estate planning, liability lawsuits, or a divorce; or simply because a firm owner/investor is retiring and wants to cash out.
Business Exit Strategies
A business exit strategy is a strategy for what will happen when you decide to quit your business. This approach discusses and outlines the transition’s format. You should have a business plan that guides your business to a conclusion, just as you have one that guides it throughout its life.
Your business exit strategy does not have to imply disaster, failure, or even impending action—in fact, many business owners establish their company with the intention of quitting after a set number of years. This does not imply that they are less devoted entrepreneurs. It just indicates they have a strategy in place.
This being stated, as you contemplate which of the business exit strategies to use, you’ll want to consider not only how you’ll leave, but also the following factors:
- Will you profit when you sell your company?
- How much money do you expect to make?
- What happens to your company once you leave?
- Will it continue under new management?
- How long will it take you to leave?
- What is the nature of the transition period?
Examples of Business Exit Strategies
We’ll look at some of the numerous examples of business exit strategies. At the end of the day, there is no right or wrong method to exit your firm, but there are certain solutions that may work better for you, depending on your specific scenario.
So, let’s take a look at these business exit strategies:
#1. Continuing the Family Legacy
Many entrepreneurs desire to maintain their firm in the family for the long term, which entails planning for the eventual transfer of the company to a kid or another relative. This may appear to be an appealing business exit option because you may groom successors over time; however, make sure your family connections can withstand the volatility and stress of business ownership.
Although keeping the business in the family for numerous generations may appear to be the ideal method to retain your reputation in the industry, it is crucial to be pragmatic about who is truly the best person for the task of operating your firm.
#2. Merge or be acquired by another company
A merger or acquisition business exit plan involves your company being purchased by or merging with another company that has similar or aligned goals to yours. Depending on who you merge with or sell your business to, this option may imply flexibility in your involvement or the ability to walk away.
The opportunity to negotiate the price of the sale is perhaps the strongest feature of this exit option since selling to the public (an IPO) would value your company relative to the industry.
This process, if it occurs at all, can take a long period. According to BizBuySell, just 20% of firms posted for sale get purchased. If merging or being acquired is your dream, you should prepare a Plan B just in case.
#3. Participate in an “Acquihire”
Unlike a standard acquisition, this exit strategy business plan involves a company purchasing your company only for the purpose of acquiring its talented or skilled workers.
Although your “legacy” may not live on in name, it will help you take care of your employees. You would need to negotiate conditions with your employees’ special needs in mind in this case: After all, they came to work for you, not for another company.
#4. Employee or management buyout
Although many of these ways may be difficult to plan for in advance, it is possible that when you are ready to depart your firm, people who already work for you may wish to acquire your company from you. This business departure approach may result in a smoother transfer and increased devotion to your company’s heritage because this person knows you and how to manage the firm.
Furthermore, because these people are already a part of your company and know you so well, they may be willing to be flexible in terms of your involvement—perhaps they’ll want to retain you as a mentor or advisor.
#5. Transfer Your Interest to a Partner or Investor
If you are not the only proprietor of your company, you can sell just your portion to a business partner or other investor. Depending on the buyer, this can be a reasonably “business-as-usual” departure strategy.
#6. Use an IPO to take your company public.
Many business owners hope to one day sell their company for a huge profit to the general public. However, in terms of small business exit strategy planning, this solution is not for everyone—enterprise conditions must be ideal for this choice to be viable.
Even if your company is thriving, your industry may not appeal to the public in a way that excites stock buyers, devaluing your company. Not to mention the fact that initial public offerings (IPOs) are extremely rare: Domestic public corporations in the United States peaked at over 8,000 (out of millions) in the late 1990s, but have since dropped to around 3,600. [2]
However, if it is feasible for you and the conditions are favorable, an IPO can be quite profitable.
#7. Close Your Company
This is the most definitive exit strategy company plan. If you liquidate, you will shut down your company and sell your assets. However, liquidation does not have to entail defeat—it can simply mean the end of a chapter.
If you decide to go this route, keep in mind that you’ll need to spend the money you make to pay off any obligations and pay out any shareholders. You should also consider how this option would influence your employees, as well as clients or consumers that rely on your services.
#8. File for Bankruptcy
This is the alternative that you can’t truly plan for when it comes to small business exit strategy planning. No one wants to declare bankruptcy, but it may be your only option if anything goes wrong (or you never managed to plan ahead with any of the other exit strategies listed above).
In fact, the need for a bankruptcy filing may arise before you are ready, but it is not the end of the world in the business lifecycle. Although you may have assets confiscated and troubled credit that must be repaired, if things get truly bad, you will be liberated of debts and the responsibility of the firm.
Unfortunately, one of the many hazards associated with starting and operating a business is the prospect of bankruptcy. As a result, if bankruptcy becomes a viable choice for you, you’ll want to ensure that you understand exactly what happens when you file for Chapter 7, 11, or 13.
Exit Strategies For Startups
What are your possibilities as an entrepreneur, small business owner, or startup founder?
Most startup founders and small business owners are fully aware of some of the more flashy options to sell a firm, such as the initial public offering (IPO) and acquisition. However, these are not the only business exit strategies available for startups, and they may not be suitable for every entrepreneur.
We’ll see some examples of exit strategies for startups in this section.
What Are the Best Exit Strategies For Startups?
The best exit strategy for a startup is one that is unique to the firm and the owner. Because the company you leave behind (or don’t leave behind if you liquidate) is part of your professional legacy, the exit strategy you choose should represent your ideals.
So, consider what is most essential to you. Is it the pride of a large-ticket third-party acquisition offer? Is it witnessing members of your own family at the helm? Also, is it abandoning a healthy firm that is still providing jobs and contributing to your community’s financial stability?
There is no single correct answer, but it is critical to confront these concerns honestly in order to select the optimal exit strategy for your startup or small firm.
And, after some thought, you can compare possibilities depending on how well they fit your replies. Let’s see some examples of exit strategies for startups below.
Exit Strategies For Startups
#1. Insolvency
Many small business owners opt for liquidation as a “glide road” out of ownership. It allows owners to dodge unpleasant decisions and gradually wind down the business. Thus, living off revenues rather than reinvesting them and closing down when the business no longer produces a profit. Assets are subsequently sold, obligations are settled, and any remaining funds are returned to the previous owner.
The potential loss to employees, vendors, consumers, and communities is an evident disadvantage of liquidation.
#2. Amicable Purchase
Family succession frequently entails selling the business to children, and this is a common decision among small business owners. Close friends are no exception. When those ties are combined with discussions about price, timetables, management succession, and other topics, things may turn sticky. Additional issues can develop when not all siblings are interested in starting a firm. And it’s not uncommon for family members to take control solely to damage a firm.
#3. Management Takeover
Occasionally, a rising generation of company leaders successfully takes over the organization — but this departure strategy needs extensive succession planning and can be hampered by employees’ ability to front the money or secure the credit for the acquisition. There are certain advantages to structuring the transaction over time. However, financing can be difficult if one of the involved parties wants to back out.
#4. Mergers and acquisitions
Mergers and acquisitions are two completely different transactions that are frequently cited in the same sentence. A merger occurs when two or more organizations unite to form a new entity, which can be as complicated as it sounds and can even include stipulations such as requiring leadership to remain in place for a set length of time.
An acquisition occurs when an outside company purchases your company. You bargain the price, take your money, and walk away. That may sound appealing to many entrepreneurs, but if your company’s future vision is crucial to you, an acquisition may be a bitter pill to chew.
#5. Third-Party Purchase
Many business owners dream of selling their firm to a third party on the open market. After all, it produces an immediate successor with a strong desire to succeed, a potentially lucrative selling price, and negotiated terms. Having said that, the current corporate sector is experiencing a generational shift as baby boomers prepare to retire. This may result in lower prices.
The timing element is another important problem of third-party sales. Finding a buyer might take years, and once you do, the discussions begin.
#6. Initial Public Offering (IPO)
Although it is the ambition of many company entrepreneurs, the IPO is not always the greatest fit for every organization. They’re normally designated for larger enterprises that can attract institutional investors; this means exposing your company to extensive outside scrutiny and meeting Sarbanes-Oxley Act regulatory obligations.
It also makes all of those stockholders the company’s new bosses.
#7. Employee Stock Ownership Plan (ESOP)
This is one of the most effective exit strategies for startups. An ESOP provides a one-of-a-kind route for a business owner to sell, transferring ownership of all or part of a firm by establishing an ESOP trust, which becomes the legal organization that holds shares of company stock on behalf of employees. The sale can be organized with borrowed funds, seller financing, or some combination of the two.
An ESOP provides the seller with liquidity, a substantial tax benefit, and the flexibility and choice to continue being involved in the business as a leading employee, assuring a smooth transition and succession plan.
Setting up an ESOP can be complicated, and because they are a qualified retirement benefit, ESOPs require specialized counsel from experienced consultants, a designated fiduciary ESOP trustee, and long-term, skilled third-party administration.
However, selling your company to an ESOP ensures a predictable schedule for the sale as well as control over your exit and succession planning choices. Aside from that, ESOP sales have processes in place to ensure that you receive a fair price for your business.
Why Is An Exit Strategy Important?
An exit strategy allows a business owner to reduce or liquidate his ownership in a company while still making a significant profit if the company is successful. If the company fails, an exit strategy (or “exit plan”) allows the entrepreneur to reduce losses.
What Is A Good Exit Strategy?
The best exit strategy depends on the type of business. While declaring bankruptcy might be good for a business without a successor, handing it down to a successor might work well for another.
What Is An Exit Management Plan?
An exit management plan is a written plan agreed upon by the parties to smooth the transition of Services to the Charity or replacement supplier.
What are some common exit strategies for a business?
Some common exit strategies for a business include selling to a strategic buyer, selling to a financial buyer, passing the business on to family members or key employees, or going public through an initial public offering (IPO).
What are some common exit strategies for an investment?
Common exit strategies for investment include selling the investment, holding the investment for a certain period of time, or using stop-loss orders to limit losses.
What factors should be considered when developing an exit strategy?
- The current market conditions and the prospects for future growth
- The financial and legal aspects of the sale or transfer of ownership
- The tax implications of the chosen exit strategy
- The personal goals and objectives of the business owner or investor
Can an exit strategy be changed?
Yes, an exit strategy can be changed as circumstances change. It is important to review and update the exit strategy as necessary.
How do I know when it’s the right time to execute my exit strategy?
The right time to execute an exit strategy will depend on the individual circumstances of your business or investment. It is important to consider factors such as market conditions, the financial health of the business, and your personal goals and objectives. It may be helpful to consult with a financial advisor or business valuation expert to determine the best time to execute your exit strategy.
How do I value my business for an exit strategy?
There are several methods for valuing a business, including the income approach, the market approach, and the asset approach. Each method takes into account different factors such as revenue, earnings, and assets. It is important to consult with a business valuation expert to determine the most appropriate method for valuing your business.
How do I find a buyer for my business in an exit strategy?
Finding a buyer for your business can be a complex process, but there are several options to consider. You can hire a business broker to find potential buyers, advertise the business for sale, or reach out to strategic buyers directly. Networking and building relationships with other business owners in your industry can also help in finding potential buyers.
In Conclusion
As with many aspects of running a business, there is no one-size-fits-all business exit strategy. The exit strategy that is best for you and your organization will depend on a variety of criteria and may vary or evolve as your business progresses through its lifecycle.
However, the best thing you can do in terms of an exit strategy business plan is to plan ahead of time. Even before you start your firm, you should think about how you would exit it if and when the time comes. If you think about this process ahead of time—what it might look like, how it might be carried out, and what the consequences will be—you’ll be more likely to succeed when the time comes to part ways.
FAQs On Exit Strategies
What is the most common exit strategy?
One of the most common exit strategies is selling ownership of the company.
What is a project exit strategy?
A project exit strategy is a plan of action that describes how an existing project or program will withdraw financial and people resources while maintaining the quality and continuity of the specified goals and objectives.
What is an exit policy in HRM?
In HRM, an exit policy covers the activities that occur when an employee voluntarily resigns or is fired by the company. This strategy benefits all parties involved in order to avoid misunderstandings during the separation process.
Related Articles
- Employee Stock Ownership Plan (ESOP): How it Works
- EXIT STRATEGY IN BUSINESS PLAN: How to Prepare an Exit Strategy for Your Business
- EXIT INTERVIEW: Tips for Conducting an Exit Interview (+Example questions)
- BUILDING A BUSINESS WEBSITE: 2023 Best Practices & What You Need!!!
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