A business exit strategy is a strategic plan that business owners use to leave or sell the business. Entrepreneurs, investors, venture capitalists, and individuals use a company exit strategy to sell assets for a profit or limit losses. Having an exit strategy business plan helps protect you, your business, and investors.
When starting a business, you probably are not thinking about selling it. But suppose you decide to leave the company you created. In that case, an exit strategy will enable you to exit the way you want to. If the business is successful, you will be able to sell it for a profit. However, if the business venture doesn’t perform as expected, you can cut your losses and leave.
On this page, you will learn what a company exit strategy is. You will also find out why small business exit strategy planning is crucial for any startup or business venture.
What Is an Exit Strategy in Business?
An exit strategy in business refers to how you plan to transfer ownership of the company when you leave. After investing large sums of money in the new business, an exit plan will help ensure a healthy return on investment. However, exit strategy planning is vital whether the business is successful or not.
Common types of exit strategies include a strategic acquisition, initial public offerings (IPO), management buyouts, and selling to someone you know. Other examples of exit plans are mergers, liquidation, or filing for bankruptcy.
Why a Company Exit Strategy Is Necessary
All types of companies — large and small — need an exit strategy. Planning to leave a business doesn’t mean planning for failure. For example, you may start the business with the intention of selling it when you meet your profit objective. Or an exit strategy is helpful for when you plan to retire.
What about small businesses? Small business exit planning is crucial if you want to secure financing. Along with a business plan, your exit plan will give investors and creditors the confidence that their money is protected. If the business fails, the exit strategy will explain how you plan to limit their losses.
Having an exit strategy business plan is also helpful to ensure a smooth transition. For example, leaving a business that you helped establish can be a stressful time. Emotions can easily affect judgment. So, a strategic exit plan can help you make tough decisions and protect your finances.
There is another reason it’s wise to have a company exit strategy. Knowing the circumstances that cause you to leave the company helps you focus early throughout the business venture. For example, knowing the conditions for leaving can help set goals, make plans, and manage assets wisely. In addition, the exit strategy can help ensure long-term growth with a specific objective in mind.
What to Consider for Small Business Exit Strategy Planning
Business exit strategy options depend on the type of company and objective. However, there are several critical elements in every exit strategy.
- Exit strategy objectives — It’s a good idea for any new business owner to consider individual goals. For example, you may want to have a specific return on investment or leave a legacy. Knowing your objectives helps to prioritize goals to sell the business for a substantial profit.
- Exit strategy timeline — Having a time frame when you intend to leave or sell the business is vital in a company exit strategy. When you know how long you plan to be part of the business, you can plan accordingly.
- Intentions for the business — Include in the exit strategy what you intend to happen to the business. You may want to liquidate it after you leave, merge with another company, or leave it to a family member.
- Market conditions — Another factor to consider is conditions in the industry that could dictate the timing of the sale. For example, if there are many potential buyers, you could implement your strategy to sell for the highest price.
It’s a good idea to revisit your exit strategy business plan every so often. For example, maybe initially, you planned to merge your company with a larger one. However, your son now wants to buy the business from you. If you decide to sell to a family member instead of merging, update your business plan accordingly.
5 Exit Strategy Examples
Now we will look in detail at some common exit strategies to see which one may suit your company or small business. For each of these strategies, you will also see the pros and cons.
1. Acquisition Exit Strategy
Selling ownership of the company is one of the most common exit strategies. An acquisition exit strategy means that you give up the right to run your business. In many cases, you could sell your business for a higher price than it’s worth, especially if you sell to a competitor.
There are a few reasons why acquisition is not an exit strategy for all business owners. First, you may not be ready to let go of the business entirely. Second, you may have to sign a noncompete agreement when selling to a competitor, meaning you can’t start a new business in the same industry.
Pros: You can make a clean break from the business and sell it for a significant profit.
Cons: The process can be time-consuming, and your business may cease to exist in its present form.
2. Merger Exit Strategy
An excellent small business exit strategy is to merge it with a larger company. This type of exit strategy usually increases the value of your business. When merging your business, you typically remain part of the new company—either as an owner or manager. Usually, mergers take place with businesses in the same industry. The result is that your business grows in size and becomes more profitable.
Pros: Your business can increase in value, and you could take on a new role in the merged company.
Cons: Not the best exit plan if you want to retire or cut ties with the business.
3. Sell the Business to a Friend, Family Member, or Partner
If you want to create a legacy, then selling to someone you know is an excellent way to exit a business. For example, you could have plans to transition the company to your son or daughter or another relative. Other options to sell the business could be to a business colleague, partner, or arrange for an employee buyout.
Pros: You can groom your successor to take on the role of owner to ensure a successful transition. Additionally, you could continue in an advisory role.
Cons: There may not be a suitable person to leave the business to. Also, transitioning the business to a family member or friend can cause stress and even jeopardize the relationship.
4. Business Exit Strategy by Initial Public Offering (IPO)
One way to increase the value of a successful business is through an initial public offering—also referred to as “going public.” This type of exit strategy involves selling shares of stock. With this transition, you give up some or all control of the business to stockholders. However, an IPO requires time and a significant amount of money; therefore, it’s unsuitable for a quick exit strategy.
Pros: An IPO can substantially increase the value of your business and boost brand awareness.
Cons: Not usually suitable for small business exit strategy planning. It is also costly, involves scrutiny from shareholders, and requires meeting certain conditions.
5. Liquidation as a Company Exit Strategy
Liquidating your business is a choice many entrepreneurs make if they want to end the business operation completely. Liquidation involves selling the assets, paying off creditors and investors if you still owe money. After the liquidation, your business ceases to exist, and you have no ties to it. In most cases, liquidation is the fastest and simplest exit strategy in a business plan.
Liquidating a business can be a choice if you use the company to finance your lifestyle. You take the funds out rather than reinvesting them back into the business.
Pros: There are fewer negotiations to leave the business, and you never need to worry about it again.
Cons: The business ceases to exist, and you could damage relationships with employees, investors, and clients.
Which Exit Strategy Business Plan Is Best?
The best exit strategy for your business depends on several factors. The two most important things to think about are what is best for you and what is best for your business.
Here are some helpful tips on coming up with the best exit strategy for your needs:
- Involvement — Think about how much you want to be involved in your business in the future. Do you want to cut ties with the company but ensure that the business continues to operate? In that case, a merger or acquisition could be the best idea. Or do you want to keep your current position? If so, then maybe an IPO is best.
- Liquidity needs — It’s vital to know what your future financial needs will be. An acquisition will give an immediate payout. However, a merger could mean you continue to have a role in the day-to-day operations.
- Business valuation — Before putting your business up for sale, it’s vital to ensure it’s in an excellent financial position to maximize profits. It’s always best to speak to a professional business consultant to determine the optimal time to sell.
Need an Exit Strategy? Let’s Talk!
An exit strategy is an essential part of your business plan. From the very start of your business venture, you should know how you plan to leave it.
At Cunningham and Associates, we are here to help you achieve your business goals. Our expert team of consultants has expertise in helping business owners develop profitable exit strategy business plans.