Did you know that an exit plan for businesses is one of the most overlooked strategies of all time?
Not every business seems to take the step before operating in the market. Still, if significant changes are necessary, it is better to consider an exit strategy for a business.
Planning for the future is an integral part of the business-building process. Likewise, it is essential to discuss the strategies for exiting the business, weighing the pros and cons of each scenario.
In this article, we will cover an overview of the business exit strategies for business owners, the need and importance of building the exit strategies, and analyzing the overall plan to proceed forward.
The table of contents is as follows:
• Introduction about Exit Strategies
• Why Do Business Owners Need Exit Strategies?
• What are the five common exit strategies opted by the businesses?
a. Sell to New Owner
b. Liquidate and close business
c. Acquisition and Mergers
d. Offer Initial Public Offer (IPO)
e. Sell the business in the open market or to another business
Introduction about Exit Strategies
An exit strategy is a strategic plan to move a business towards long-term goals and allow a smooth transition to a new phase in the market. In addition, an exit strategy gives a business owner a way to liquidate his stake in the business.
In simple words, an exit strategy gives a roadmap for how you will eventually leave the business and includes details on what will happen to the following enterprise after you have left the stake.
The typical exit strategies include Initial Public Offer (IPO), Acquisitions, and Mergers.
However, the choice of exit strategies depends upon a lot of factors like the level of control demanded in the business, whether the company will run in the same way as before, or will there be a shift?
One of the best things about planning exit strategies is that businesses can work towards their long-term goals and reimagine their business direction by keeping it financially sustainable and pivoting for challenges.
By having a good exit strategy in practice, the businesses can provide more opportunities to optimize their business outcomes.
If the business is making money, an exit strategy will help the business owner maximize profits. Similarly, if the business is struggling, then it is crucial to implement the exit strategy such that the entrepreneur can limit losses at their end.
Why Do Business Owners Need Exit Strategies?
Planning an exit strategy plan in advance helps the business owners to prepare for unexpected circumstances.
This helps them build robust business practices and allows them to focus on long-term goals.
Though it may be a mix of riding emotions for the business owner and stakeholders, a good exit strategy can enable them to address complex challenges that may occur in the future.
Moreover, an exit plan also helps the business owners to benefit in the following ways:
- It helps the business owners protect the value of the business that they have built throughout the years.
- It helps reduce the potential tax impact on the estate, spouse, or family.
- It helps you analyze the finances and gives a measurable value to inform the best-selling situation.
- It helps you to create a strategic direction for boosting business growth.
- It helps you to guarantee a smooth transition by keeping your employee and stakeholders well informed.
- It demonstrates the commitment towards the business vision and goals.
- It helps you to enhance the future worth of the business.
- It helps you analyze the right decision for the business value and potential to prevent the unwanted consequences of exits like bankruptcy.
Overall, a planning exit strategy can help the business owners make decisions supporting the eventual exit and allow the processes to be modified and profitable.
As far as the preparation of exit strategy is concerned, it is important to consider the following points
- The length of the time in which the business owner wishes to be part of the business
- The overall financial situations and expectations with the market
- The investor's and creditors who are associated with your company and who need to be compensated
- The process of compensation
Business owners should note taking and revisit their exit strategies that meet their current situations and goals.
Since the business environment keeps changing, business owners need to adjust whenever necessary.
What are the five common exit strategies opted by the businesses?
If you are a business owner and think to keep your best foot forward, the following are the five exit strategies you should prepare for the future.
These exit strategies are most recommended and preferred by businesses in the long run.
Following are the five common strategies that you should consider for exit plans:
- Sell to New Owner
- Liquidate and close business
- Acquisition and Mergers
- Offer Initial Public Offering (IPO)
- Sell the business in the open market or to another business
Let's discuss these above mentioned five strategies in detail:
1. Sell to New Owner
Selling the business to a new owner, a trusted person, or someone you are familiar with, like a current employee, family member, or manager, gives the business owner an added advantage to transit out the business's day-to-day operations.
It is one of the most common exit strategies opted by the business. The buyer already has a passion for buying the business and continuing the legacy for a more extended period of time.
Here, the business owner and the buyer come into a financing agreement where the buyer can eventually pay off the business. With this, the seller can maintain an income without heavy investment.
The seller also acts as a mentor during the transition to simplify the process, and hence it's a Win-Win situation for both the buyer and seller.
Accordingly, there are sets of pros and cons related to the Sell to New owner exit strategy, which are discussed below:
- Employees feel more committed to the business success because of the long-term buyout
- It allows the seller to remain in the business depending upon their stake
- It leads to less disruption to the business if the buyer knows you well or who is already familiar with the company
- Passing the business to a relative can cause tensions in the workplace
- The seller may compromise on the sale value of the business for the sake of a relationship with the buyer.
2. Liquidate and close business
Liquidation is yet another exit strategy that the business owners opt for by paying themselves until the business finances run dry that will ultimately close the business.
The liquidation process is also referred to as a "Lifestyle Business" where the owner takes out the funds eventually instead of reinvesting them back into the business.
One of the significant benefits of this method is that it helps the business owners to get a paycheck to maintain their lifestyle.
As far as the business closure is concerned, the business owners tend to sell the assets as quickly as possible.
The assets can be current and non-current and whatever money comes from the sale of assets belongs to the company.
However, it is important to know that if you have any creditors or liabilities left pending, then the money generated from the sale of assets should be used to pay them before you can pay for yourself.
Rest, depending upon your decision, you can go forward to liquidate or close the business permanently.
But it is important to know that the process of liquidation or closing the business involves a series of steps that are as follows:
- Filing the business dissolution documents
- Cancellation of all the expenses related to the industry like registrations and licenses
- Complete payment of employees during the closing
- Payment of the final taxes for the business and keeping a track record for legal requirements, if any.
Accordingly, there are sets of pros and cons related to liquidation and closing of business exit strategy which are discussed below:
It helps you to maintain your lifestyle through regular cash flow.
- It will keep the business growth potential and sale value at a stagnant position
- It may lead to dissatisfaction among the investor's and employees
3. Acquisition and Mergers
Acquisition and mergers are often used synonymously, but both of these terms are entirely different.
Acquisition refers to a situation where a more prominent company purchases a smaller company
Mergers refer to a collaboration between a larger company and a smaller company.
One of the main benefits of merger and acquisition exit strategy is that the company will get valued on a larger scale because of the following:
- You become the ultimate product or a service provider to the buyer by fulfilling their immediate needs
- The seller gets an opportunity to negotiate a higher price, subject to if they wish to sell to a third party
- Multiple buyers can bid against each other increase the value of the business
Accordingly, there are sets of pros and cons related to the Acquisition and Mergers exit strategy, which are discussed below:
- It helps to create the edge that gains a foothold in a market
- It helps to eliminate the competition and close big deals strategically
- If the business owners set a specific acquired target for acquisitions and mergers, then there are chances of collaborating with lesser acquires
- Acquisitions come with a non-compete agreement that makes it unpleasant experiences at times.
- The acquisition is often time-consuming, and mergers are challenging to execute where the cultures and systems clash.
4. Offer Initial Public Offering (IPO)
An Initial Public Offering (IPO) is one of the most common and preferred methods business owners opt for.
IPO refers to selling the shares of stock to the general public.
With the help of this process, businesses can raise additional capital to run their business operations.
It gives the right to the potential investors to buy the business's stock and attain ownership of the company.
But when it comes to going public, the businesses should be prepared for the big step in terms of longevity, bearing expenses, and public reporting requirements.
Accordingly, there are sets of pros and cons related to the IPO exit strategy, which are discussed below:
- IPO is considered very profitable as businesses get right to turn into a public company
- By going public, the company can boost its public reputation and increase the brand awareness
- Going public is a very long, tedious, and expensive process.
- There are a lot of applications that a business should fulfill, like filing SSC reports and providing information about the business operations, finances, statements, and balance sheets.
- It leads to less flexibility in managing the business because of the shareholder's right and says over the company's direction.
5. Sell the business in the open market or to another business
Many entrepreneurs look forward to buying already established businesses. As a business owner, it is recommended to prepare the business in advance and sell the businesses to the potential buyers who are ready in the open market.
The US Small Business Administration (SBA) connects the buyers and sellers by providing helpful information regarding the closing and selling of the businesses.
Accordingly, there are sets of pros and cons related to the sale of business in the open market exit strategy, which are discussed below:
- The businesses in good financial condition and have a brand reputation become the first choice to the buyers.
- The goodwill of the businesses can act as a value by enabling the seller to profit from the years of relationship and branding.
- Finding a buyer for your business in the open market can be long and tedious.
- Evaluation of the businesses is complicated, and it is possible that you might not receive the selling price that you desire.
It is somewhat similar to the open market when it comes to selling to another business. Still, the only difference here is that the seller can continue to work in the chosen industry but with lesser duties.
One of the most significant advantages of selling to another business is that the purchasing business can pay a higher price for the company.
Apart from that, selling to another business may lead to layoffs by the employees and clashes between the cultures and systems of the businesses.
The five business as mentioned above exit strategies are opted by the business owners depending upon many factors and elements present in the business environment.
Whatever business exit strategy you choose is meant to secure the future and prepare the business owner with the uncertainty in advance.
5 Business Exit Strategies at Glance
An exit plan doesn't mean that you are exiting from the business.
It is just a simple matter of being prepared for any consequences that may occur in the future and building a sound business existence in the market.
Every entrepreneur and business owner needs to look forward to the future and act proactively in preparing the exit strategies for the business.
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Business exit strategies are a plan ahead to ensure the smooth transition out of business.
If you don't want your business to suffer from poor health, then get started to prepare with your exit plan today!
Following are the key takeaways of the article:
- An exit strategy is a strategic plan to move a business towards long-term goals and allow a smooth transition to a new phase in the market.
- By having a good exit strategy in practice, the businesses can provide opportunities to optimize business outcomes.
- Planning an exit strategy plan in advance helps the business owners to prepare for unexpected circumstances.
- Preparing an exit plan can help the business owners to benefit in ways like protecting the value of the business, reducing the potential tax impact, all demonstrating the commitment towards the business visions and goals.
- Businesses adopt five common exit strategies.
- Sell to New Owner
- Liquidate and close business
- Acquisition and Mergers
- Offer Initial Public Offering (IPO)
- Sell the business in the open market or to another business.
- Every strategy has its respective pros and cons that businesses need to consider before selecting the best one suitable for them.
- The ultimate purpose of a business exit strategy is to secure the future and prepare the business owner with uncertainty in advance