Why All Business Owners Should Have a Business Exit Strategy

PESTLEanalysis Team
PESTLEanalysis Team
Table of Contents
Table of Contents

Whether a business is successful or a failure, a business exit strategy allows the business owner to reap the most reward or reduce the greatest impact.

Do you have a business exit strategy? Was it included in your business plan? Or now you’re looking to make a graceful exit from your business and you’re not sure where to start? I’ve got you covered. In this article you’ll find out:

  • What a business exit strategy is
  • The common type of exit strategies
  • A brief introduction to liquidity
  • Which strategy is best for you

And several other key pieces of information about your business exit strategy.

What is a business exit strategy?

A business exit strategy (or “exit plan”) is mostly used by entrepreneurs who may sell their company ownership to another company or investors. The plan explains how the owner will liquidate or reduce their stake in the company. If the company ends up being successful, the owner will make a nice profit. On the flip side, if the business fails, the business owner will have reduced loss because of their exit strategy.

The business exit strategy isn’t something to be left until the business is doing well or poorly. It should be completed long before. In fact, it should be included in the business plan before starting the business.

3 common types of exit strategies

There are different types of exit strategies, such as initial public offerings, management buyouts, and strategic acquisitions.

  1. Initial Public Offerings (IPO). Entrepreneurial and startups in need of capital use the IPO method to offer shares to the public. However, older businesses use the IPO method to sell ownership shares and exit the business.
  2. Management Buyouts (MBO). An MBO strategy allows the management team of a business to purchase assets of the company. This allows management to become owners of the company if they buy enough of the shares. It also allows the current owner to sell their shares directly to employees. The employees pool financials together, either using personal income, equity, or seller-financing to obtain enough shares.
  3. Strategic Acquisitions. Acquisitions are the most common type of buyout. It involves at least one other company buying part or all of the company shares to own that company. This is complete when the buying company holds more than 50 percent ownership of the selling company.

What about liquidity?

Liquidity, in general terms, refers to how much an asset can be bought or sold on the market quickly, without affecting the price of the asset. There are different levels of liquidity and the amount can change, depending on which exit strategy you choose.

One of the reasons why strategic acquisitions is a popular exit strategy is because it can give a business owner the largest amount of liquidity in a small time frame — so long as the company is well sought after, and other factors are aligned.

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Which strategy is best for you?

One business strategy isn’t better than another. It all depends on the market conditions, economy, and company valuation. What works for you might not be the best choice for a startup or a brand like Wal-Mart.

The right exit strategy for the business owner depends on:

  • How much involvement the owner wishes to have
  • Whether the owner wants the business to stay the same
  • Who has an interest in the company (investors, management, etc)
  • The evaluation of the business

This last point is key. If the owner doesn’t know the valuation of the company, they may choose the wrong exit strategy. It’s best to consult a business valuation expert (and someone trustworthy) since the expert will need to assess the financials of the company to suggest an accurate value.

You also need to think about your goal.

If from the beginning you’ve intended to create this business to sell, then you likely don’t care what happens to its future or whether the foundation of it will be changed. But if you’re a one-person show, then the management buyout strategy won’t work for you.

Initial public offerings might not be the smartest if you have one or two great offers from another company. Instead, a strategic acquisition — where you give up most of your ownership —may be the ideal exit strategy.

But, the strategic acquisition method isn’t foolproof. If you’re the owner of a startup and have given several pieces of equity to investors, then handing over your shares for a strategic inquisition might not fair well. You have to consider the input of the investors (and other shareholders) and come to an agreement with the buying company before leaving.

Why include your business exit strategy into your business plan?

If you plan to ask for financial assistance from investors, it’s best to have your business exit strategy included in the business plan. This way everyone is on the same page about the business owners’ plan and role for the future of the company, whether the company is a success or less successful.

Likely, you’ll run into issues if you suddenly decide on an exit strategy while the company is taking financial hit after financial hit. And the more people involved with the company — employees, shareholders, investors — the important it is that everyone knows the exit strategy ahead of time.

That doesn’t mean you can’t change it later. You can. The optimal exit strategy for you now may change as your business grows. If the strategy needs to be changed, try to do so as early as possible.

Business exit strategy: Conclusion

Whether a business is successful or a failure, a business exit strategy allows the business owner to reap the most reward or reduce the greatest impact.

The common exit strategies include strategic acquisitions, initial public offerings, and management buyouts. Each one offers its own set of pros and cons, depending on the business owner’s goals, intentions, and the company’s valuation.

It’s recommended to choose a business exit strategy before operating the business. This also means including the strategy into your business plan. If you’re not sure where it should go or what the exit strategy should look like, take a look at some business plan samples. The owner may need to change the business exit strategy at a later date, though.

Image by LEEROY Agency

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