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What Is a Business Exit Strategy, and Why Is It Important?

, | June 6, 2023 | By
business idea sketch and businessman in arrow exit

A clearly defined business exit strategy can help you navigate difficult decisions, especially when facing external pressure or economic uncertainty. A business exit plan protects business owners, the enterprises they run, the board members they serve, the employees who work for them, and any other individuals who may have invested in the organization. 

What Should a Business Exit Strategy Include? 

Your ideal business exit strategy depends on the type of business you run and your long-term objectives. Here are several critical elements you should consider: 

What Are My Goals? 

Even new business owners should define their long- and short-term goals. Maybe you want to invest in the community or sell your business for profit in the near future. Or perhaps you hope to achieve a specific return on investment or build a financial legacy that will be passed on to your family members.

Regardless of your purpose for creating a business, understanding your objectives can help you sell it for a substantial profit.

What’s My Timeline?

Establishing a general time frame to leave or sell your business is an important part of the business exit framework. When you have a clear idea of how long you wish to be part of the business, you can plan accordingly. Remember to revisit your exit strategy regularly, as your goals and objectives may change over time.

What do you hope to achieve with your business? Do you want to liquidate it after you leave, merge with another company, or leave it to a family member? Additionally, what are the current market conditions? How will the current or future state of your industry impact your company's value? In an ideal market, you could sell for the highest price and consider numerous buyers. However, you may be forced to sell for less than desired if you’re facing a recession or economic instability. 

What Are the Different Types of Exit Strategies?

Now that you have an idea of what an exit strategy is, let’s look at some common types of business exit plans: 

1. Acquisition 

An acquisition is a profitable option for business owners, allowing them to sell their company for more than its value, especially if selling to a competitor. 

However, this method is not ideal if you wish to keep part of your company. You’ll likely also have to sign a non-compete agreement, meaning you can’t start a new business in the same industry for a certain amount of time. Additionally, the acquisition process can be time-consuming, and may ultimately result in fundamental changes to your original business. 

2. Merger

Mergers typically occur between businesses in the same industry, allowing your company to increase in size and become more profitable. Merging with another company may increase the overall value of your business while allowing you to remain part of the new company. However, this may not be the best strategy if you wish to retire or leave your current industry. 

3. Sale to a Friend, Family Member, or Partner

If you wish to establish a legacy, selling to someone you know is a great business exit strategy. Successors can include a family member, business colleague, partner, or even key employees. You can train your successor to become the owner before your departure, ensuring a successful and smooth transition. 

As the original business owner, you may even stay on as an advisor to provide additional advice or training when necessary.

4. Initial Public Offering (IPO)

An initial public offering (IPO) involves selling any shares of stock you currently own. With this type of transition, you must give up some or all control of the business to the remaining stockholders. An IPO is typically not the best option for small businesses because it requires significant time and money. This option also involves scrutiny from shareholders and a list of specific requirements.

5. Liquidation

If a business owner wants to end their business operations, liquidating is a viable option. Liquidation involves selling your remaining assets and paying off all creditors and investors. Following the liquidation, your business will no longer exist.

If a business is no longer profitable, liquidating is ideal, allowing business owners to free up money and resources they can spend on other ventures.

What Are Your Business Goals?

Whether you plan to launch a new business or sell your company, Cunningham and Associates can help you achieve your goals.

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