Business exit strategies protect your organization, your investors and yourself. In the event of market or technology fluctuations, sudden disease, or an accident, planning your exit will ensure that you have thought about how to protect what you have worked so hard to build.
An exit strategy gives a business owner a way to reduce or liquidate his or her stake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy enables the entrepreneur to limit losses.
Ideally, the business owner will develop an exit strategy in their initial business plan before going into business. As you think about your business exit strategy, you’ll not only want to consider how you’ll leave but also other factors that are involved with this process, such as: will you make money when you exit your business, how much money you’ll make, what will happen to your business after you leave, will it continue under new ownership, how long will your exit take and what kind of transition period is involved.
Different business exit strategies also offer business owners different levels of liquidity. Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well. For example, an IPO may not be the best exit strategy during a recession, and a management buyout may not be attractive to a buyer when interest rates are high.
Let’s explore some of the different options business owners have in terms of a business exit strategy. At the end of the day, there isn’t necessarily a wrong or a right way to exit your business, but there are certainly options that may work better for you, depending on your situation.
Merger or acquisition
A merger or acquisition is a strong exit plan option for any company with their business for sale, and a particularly attractive option for start-ups and entrepreneurs. You’ll be selling your business to another company, that may want to increase its geographic footprint, eliminate competition, or acquire your talent, infrastructure or product. The pros of such an exit are that you’ll be able to have a clean break from your business (if that’s what you want), and you can negotiate the terms, price, and other details of your merger or acquisition. Some cons of such an exit are that it can be time-consuming, costly, and perhaps even an unsuccessful process or your business may cease to exist as it once did; there is a range of possible consequences associated with this action such as causing the employers to seek other employment options due to the risk of reorganization or an option of acquisition by a bigger company.
Selling your stake to a partner or investor
If you are not the sole business owner, you can sell your stake to a partner or venture capital investor while the business continues to run as usual. The term ‘friendly buyer’ is often used in this type of exit strategy, as it’s likely that you would sell your stake to someone known and trusted. The pros of such an exit strategy are that the company can continue to run with minimal disruption to business as usual, and thus keeping revenue streams steady. Additionally, it is likely that this person already has a vested interest in the business and is committed to its success long term. Some cons to such a strategy include that finding a buyer or investor for your share of the company can be difficult, and the sale may be less objective and therefore not as lucrative; you may lower the asking price if the buyer is someone close to you.
Take your business public with an IPO
Many entrepreneurs dream of one day selling their business to the public for a large profit. However, in the realm of small business exit strategy planning, this method certainly isn’t for everyone—business conditions need to be just right for this option to be possible. If it’s possible for you and the conditions are right, an IPO can be very lucrative. The major pro to such an exit strategy is that the potential to earn a substantial profit is higher than any other exit strategy. However, some cons related to it are that there is usually intense and ongoing scrutiny from stockholders, regulatory bodies and the public, IPO due diligence is difficult, costly, and labour-intensive, and IPO’s often have additional requirements such as mandatory progress and performance reporting.
Management and employee buyouts
Although it may be difficult to plan for many of these methods, it’s possible that when you’re ready to exit your business, people who already work for you may want to buy your company from you. As the management team is already familiar with your business, they should be well equipped to manage the company. Moreover, because these individuals are already part of your business and they likely know you so well, they may allow for flexibility in terms of your involvement—perhaps they’ll want to keep you on as a mentor or advisor. The pros of such an exit are that you can hand off your business to someone who has experience within the organization—and that you hopefully know and trust. Additionally, as you’re still selling the business, you should be able to make some money off the deal. Also, if you want to remain involved in some capacity, the employees who are buying your business will more likely be willing and able to make something work. Some cons to such a strategy are that there may not be a manager or employee who is interested or ready to step in and you may find that such management changes are difficult to implement and may have a negative effect on existing clients.
Continuing the legacy in the family
Many entrepreneurs want to keep their business in the family long term, and that means making plans for transitioning the company to a child or another relative. It’s worth noting that business exit planning for a family succession is no less important than any other type of exit. This is an appealing option but it’s important to ensure that the person is up for the job. Some advantages of such an exit are that, as a family member, it is likely this person will have in-depth knowledge of the business and a good understanding of how it is run. Also, it means that you don’t have to separate yourself from your business and may be able to stay on in some sort of transitional or ongoing advisory role. Some disadvantages of such an exit are that you may not find a family member who wants to or is capable of taking on the business. Moreover, employees, business partners, or investors may not support the individual in your family you choose and lastly, blurring professional and personal lines could lead to unnecessary financial or emotional stress for the family.
This is a common exit strategy for failing businesses. Liquidation is the most final exit strategy, whereby the business is closed, and all assets are sold off. Any cash earned must go toward paying off debts and any shareholders. However, liquidation doesn’t have to mean defeat, it can simply symbolize just an ending to a chapter. The best things about this exit strategy are that you’ll never have to worry about the business again and be free of the chains involved in trying to preserve a legacy. But this method can also be simpler and faster to execute than other methods, such as an acquisition. Unfortunately, though, you likely won’t get the biggest return on investment with this option and could be breaking ties with employees, partners, and customers.
As far as small business exit strategy planning goes, this last method is the option that you can’t really plan for. Ultimately, no one wants to file for bankruptcy, however, this could be your last resort if something goes wrong (or if you never managed to plan with any of the other exit strategies listed above). Although you may have assets seized and troublesome credit that will need to be rebuilt, you’ll be relieved of business debts and responsibilities, which will allow you to move on from your business and start fresh. Sadly, however, you may struggle to borrow credit in future business endeavours and this process will likely mean the untimely end of relationships with anyone involved with running your business, as well as clients and customers.
You've worked hard to build your business. And you deserve to be well compensated for your time and energy upon retirement. Expertise and planning are key. It is best that any expert you choose to consult works with you to identify options that will give you flexibility and control over how and when you leave the business while ensuring that all stakeholders’ interests are respected.
Written by Yulia Levi, CEO and Owner of FINALLY FINANCIAL CONTROL LTD