A business exit strategy is a plan formulated by business owners regarding how they intend to sell, close, or otherwise reduce their stake in a business they own or operate.
This strategy is critical for defining the long-term goals and sustainabilities for both the business and the owner.
Planning an exit strategy ahead helps you set the tone for your long-term goals
When you’re in the process of kickstarting a new business, an exit strategy is probably the last thing on your mind. Some might argue that the very idea of thinking of an exit process during such early stages is akin to setting ones’ self up for failure.
The thing is, a savvy entrepreneur will recognise that the decisions you make on day one can have major implications down the line.
Having a market exit strategy mapped out will allow you to build and structure your business with an end goal in mind. And when the time comes, it allows you to bow out as gracefully (and as profitably) as possible.
Firms must have the foresight to develop a business exit plan
Here are some of the reasons why exit planning strategy is integral to the success of any business.
Provides business owners with a framework for the company’s future
An exit strategy allows ambitious businesses to visualise their future goals, plans, asset management, etc. It provides businesses with a focused trajectory towards their long-term growth.
Provides insight into your company’s worth
Planning your exit strategy involves a thorough evaluation of your business assets, market conditions, financial records, etc.
Doing this ahead will give you more clarity over your performance thus far and will help you understand whether you’re on track with your goals and if you need to make any changes to meet your expectations.
Creates a smooth transition for management, employees and stakeholders
Having an exit strategy prepared minimises the risk of being blindsided amidst sudden changes to the business.
Enhances the value of your business
An exit strategy shows potential buyers that you have a clear vision in place for your future and that you’ve made plans to ensure the strategic direction for its growth.
Allows you to take advantage of new market opportunities
An exit strategy provides businesses with the foresight to capitalize on potential opportunities in an active market.
By having a business exit plan in place, firms don’t have to waste valuable time organising their affairs and can quickly jump on opportunities to sell at maximum value.
Prepares you for the emotional and mental impact
The emotional experience that comes with exiting a business you’ve nurtured is often overlooked. Having an exit strategy framework prepared allows you to stay on course and maintain equanimity when stakes are high, and emotions are heightened.
When to consider exiting the business
There are various motivators behind the decision to exit a business. We highlight some of the most common reasons below.
Uncertainties in the market
A declining industry can adversely affect your income stream. Political or economic crises, disruptive competitors and changes in regulations can create a lot of uncertainty about a market’s future development.
Many entrepreneurs opt to sell their business during such circumstances so that they can exit while they’re still ahead.
Compromised economic freedom
Financial uncertainty amidst constantly changing business models can take a huge toll on business owners who often forsake the comforts of a fixed salary in order to realise their vision.
In some cases, business owners recognise that too many of their commitments are tied into their business. In these instances, they may choose to liquidate some of their assets and seek investors with resources to nurture the business and give it a chance to thrive.
Your heart is no longer in it
This can be due to various reasons, but the reality of the situation cannot be denied.
When the business is no longer a priority, the thrill of the challenge has diminished, and the tenacity behind decision-making has dulled, this is a clear signal that it might be time to exit and place the business in the hands of another.
The last thing you want is for indifference to set in and affect your well-being as well as that of your employees and partners.
Gaps within the business
Gaps in performance, skills, product and profit can hold back your business from growing to its full potential.
Recognising that you don’t currently have the necessary resources to advance your business can compel businesses to seek out new investors/management who have the tools needed to fill in these gaps and transform the business.
The five Ds (death, disability, divorce, distress, disagreement)
Known as the five Ds within the exit planning industry, these factors tend to be the reason behind most unplanned exits.
In an ideal situation, most businesses will already have a succession plan waiting in the wings in the face of either of these unforeseen circumstances.
To lower the risk of having to make any last-minute calls that can result in a loss for your business, planning ahead and working closely with a team of trusted professionals can help you ensure the best possible outcome for you and your business.
Information from UBS.com
Common types of exit strategies
The list below features seven of the most common exit strategies. The one you choose will depend on your personal and business goals.
Opting for a liquidation strategy entails shutting down business operations entirely and selling off all of the company's assets. This exit strategy is often the recourse in situations of poor performance, insolvency, or when other methods of selling or transferring the business prove to be unfeasible.
In a liquidation scenario, assets such as real estate, equipment, inventory, and intellectual property are sold to pay off creditors, and any remaining proceeds are then distributed among the shareholders. The process can be voluntary, initiated by the business owner due to financial strains or a desire to move on, or forced, instigated by creditors or court orders in cases of bankruptcy.
The primary drawback of liquidation is that it typically yields the lowest returns compared to other exit strategies. The hurried nature of asset sales, often at auction or through distress sales, may result in fetching prices significantly lower than market value.
Besides the financial downside, liquidation can also have negative repercussions on the company's reputation, employee morale, and stakeholder relationships.
One recommendation to salvage more value from a struggling business is considering a restructuring or turnaround strategy before resorting to liquidation.
Restructuring business operations, reducing debts, or altering the business model can potentially prime it for a more lucrative sale, either as a going concern or in parts, thereby averting a total liquidation. This route may preserve some value for shareholders, save jobs, and in some cases, enable the business to continue operating under new ownership or a revised business model.
Moreover, engaging with financial and legal advisors to meticulously plan and execute the liquidation or restructuring process can help in navigating the legal complexities and maximising the returns from asset sales.
While liquidation is often seen as a last resort, with careful planning and execution, it can be managed in a manner that mitigates losses and adheres to legal and financial obligations.
Family or Legacy Continuation
Transferring the business to family members or trusted employees is a method adopted to ensure the longevity and continuity of the business's legacy. This strategy is often deeply personal and rooted in the desire to see the business thrive through generations.
Succession planning may involve a family business owner passing on the reins to either:
heirs who have been groomed to take over
devoted employees who have demonstrated the capability and loyalty to lead the business venture forward.
This ensures the business remains in trusted hands and that its values and ethos are carried forth. Preservation of the business's heritage and culture can provide a sense of continuity for employees and stakeholders. It also allows for a smoother transition as the successors are usually well-acquainted with the operational dynamics of the business.
However, a major challenge arises when the successors are inadequately prepared or capable of handling the business's demands. There's also a risk of family succession disputes or employee discontent if the transition is not managed carefully and transparently.
This approach often involves meticulous grooming of the successors, establishing clear succession plans, and possibly setting up advisory boards to provide ongoing support and guidance.
The exit also requires careful legal and financial planning to address any inheritance tax implications and to ensure the financial sustainability of the business.
Initial Public Offering (IPO)
An Initial Public Offering (IPO) signifies a pivotal moment for a company, marking its transition from a privately held entity to a publically traded one on a stock exchange. This process involves offering a portion of the company's equity in the form of shares to the public for investment.
Companies often opt for an IPO for several reasons.
Burgeoning, smaller enterprises might seek additional capital to fuel their growth ambitions, enabling them to invest in new projects, expand operations, or enter new markets.
A growing, privately owned company might have owners or early-stage investors keen on capitalising on their initial investments, providing a lucrative exit route for these stakeholders.
The journey towards an IPO necessitates meticulous preparation. This includes rigorous financial auditing, adhering to the regulatory requirements of the Securities Commission, and crafting a compelling narrative to attract potential investors. Moreover, a company considering an IPO must also prepare for the increased scrutiny and disclosure requirements that come with being a publicly traded entity.
Post-IPO, the existing business owner and management team often retain their positions, albeit with enhanced responsibilities towards the new shareholders and regulatory bodies. They are now accountable for delivering shareholder value, which includes regular reporting, financial transparency, and striving towards sustainable growth and profitability.
One of the substantial benefits of an IPO is the substantial influx of capital, which can significantly bolster the company's financial health, enabling further growth and development. Moreover, the enhanced status and visibility can help in fostering trust and credibility among customers, suppliers, and potential investors.
However, an IPO also introduces a set of challenges, most notably the additional regulatory compliance and the pressure to maintain a favourable stock price. The cost of going public, both in terms of monetary expense and time, is substantial, with significant fees for underwriters, legal and accounting services.
Sale to an open market
This exit strategy is typically favoured by small businesses, involving the listing of the business for sale at a pre-determined price based on a professional valuation.
It is an especially viable option when the business is in high demand, which can significantly drive up the price. The valuation for the sale includes the company's assets, which aids in maximising return on investment to the owner.
The disadvantage to this method lies in the fact that it can be a time-consuming and complex process to negotiate the sale and find the right buyer.
The negotiation phase can be particularly drawn out, and finding a buyer who is willing to pay the desired price can be challenging. The process requires a significant amount of patience, effort, and, often, a willingness to negotiate on terms.
Strategic acquisition entails the sale of a company to another entity such as
a business operating in a complementary market
The goal of this approach is usually to bolster the buyer's strategic position in the market. The payment can be structured through cash, stock options, or a blend of both, based on the negotiation between the selling and buying parties.
The buyer may decide to retain you and your management team or opt to make operational changes.
The primary benefit of a strategic acquisition is that it can result in a quick sale and instant liquidity and profit. Especially if the buyer is a competitor who wants to acquire your business to establish a stronghold over the market.
The disadvantage to this is that you stand the risk of losing control over the decision-making of the company. Your employees can also be affected if the buyer decides to replace them with their own people or chooses to fold the business upon purchase.
Management buyout (MBO)
Selling your company to your current team of managers or employees is known as a management buyout (MBO). This type of transaction provides the owner with almost instant liquidity and allows the business to continue as a private enterprise.
The current owner has the option to retain a portion of the company's shares, allowing them to maintain some degree of influence or decision-making power within the business. This aspect can be reassuring for the owner, especially if they have a strong emotional or legacy attachment to the business. It also allows for a phased exit, which can be less abrupt and potentially more financially favourable depending on the structuring of the deal.
The benefit of an MBO is that it provides a smoother and less time-consuming transition without potentially putting any employees at risk of having their roles replaced such as in the event of a strategic acquisition. The company will also transition into the hands of those who are already familiar with the inner workings of the business.
This familiarity can lead to a quicker closure of the deal and less time spent on due diligence, negotiations, and the transition process itself.
Moreover, a management buyout can be motivating for the acquiring team, as it provides them with a unique opportunity to become business owners and have a direct influence on the future success of the company. This sense of ownership and potential financial upside can lead to increased dedication, morale, and performance, ultimately benefiting the business in the long term.
However, a management buyout is not without challenges. It can potentially strain the relationship between the owner and the management team during negotiations, especially when it comes to agreeing on the valuation and terms of the deal.
Additionally, securing financing can be a hurdle for the management team, as they may not have the personal resources to fund the purchase and may need to seek external funding. This can extend the timeline of the buyout and add a layer of complexity to the transaction.
Merger and Acquisitions (M&A)
Merger and Acquisitions (M&A) are strategic moves that involves the consolidation of companies or assets through various types of financial transactions, including
purchase of assets
Typically, a larger company acquires a smaller company, integrating their operations, which often results in synergies such as increased operational efficiencies, entry into new market segments, or gaining a competitive advantage.
The biggest advantage to an M&A is that your company is likely to be highly valued for multiple reasons. Multiple buyers may bid against one another and as a result, drive up the value of your business.
Companies in high-demand sectors or with unique technologies are often able to command higher valuations. Moreover, when the acquiring company is a competitor, they may be willing to pay a premium for the strategic advantages the acquisition would bring, such as eliminating competition, gaining access to a broader customer base, or acquiring valuable intellectual property.
One classic example of an M&A is Salesforce's acquisition of Slack in 2020 for $27.7 billion, showcasing how a well-established company can see immense value in integrating a smaller company’s offerings with its own, to better serve its customers and to strengthen its position in the market.
However, M&A transactions are complex and require careful planning and execution. The process involves thorough due diligence, negotiation of deal terms, and often regulatory approvals.
The integration phase post-acquisition is also critical and often challenging, as it involves merging cultures, systems, and operations to realize the anticipated synergies. The success of the M&A largely hinges on how well the integration is managed and whether the anticipated benefits are realized in a timely manner.
Furthermore, an M&A could potentially lead to job redundancies, culture clashes, and loss of key talent if not managed sensitively and strategically. The announcement of an M&A can create uncertainty among employees, customers, and suppliers, which can adversely affect business operations and relationships. Hence, clear communication, well-planned integration, and retention of key personnel are crucial aspects to ensure the success of an M&A transaction.
How to choose the right exit strategy
Asking yourself these questions will help you consider the best exit strategy for your needs.
How do I want to be involved in future business plans?
Knowing the role you want to play in the company's future is key to determining the type of exit strategy you choose. If you’re comfortable with relinquishing your current role and passing on the reigns, then a strategic acquisition will work best under these circumstances.
However, there will be no changes to your current position in the company in the event of an IPO so this would be the best decision for when you want to continue to stay in charge and involved in the decision-making process of the company’s direction and future growth potential.
What are my liquidity needs?
Mobilising your personal liquidity is surely one of the benefits that follows a successful exit, but it is important to recognise that the type of strategy you decide on can largely impact the timeline in which this will occur.
A strategic acquisition usually results in an immediate payout once the transaction is complete while management buyouts might involve you cashing in over a period of time.
What are the current market conditions?
What is the state of demand for your product or service? How many competitors are you currently up against? What are the market conditions like?
All of these circumstances ( and more) can and will affect your the type of exit strategy to decide to implement.
Before you decide on a strategy that will work best your your needs, speak to your private equity partners and financial advisors to better understand marketplace trends and inform your decision.
How to prepare a corporate exit strategy
Selling your business can be an overwhelming process. Diligent and careful planning can help to alleviate a lot of the stress involved.
Consider the following steps when the time comes to put your exit strategy in place.
Determine your business valuation
Before putting your business on the market, you’re going to want to find out if it’s in a good position to be sold.
Knowing your business’ current financial health, future earning prospects, the market value of your assets etc. will enable you to get a clearer idea of your business’ economic worth and help to manage your expectations when putting a price on your company.
Non-financial factors such as your employees and management team can also impact business value. Consult with a professional to answer these questions and work with them to find out how you can build your business’ value to prime it for its eventual sale.
Decide on the best time to sell
Numerous external factors go into determining the best time to put your business on the market.
The economic climate, competition, industry trends and your business’ current profitability can substantially affect demand and purchase price.
Monitoring all these elements will help you decide on the most effective time to put your business on the market.
Market the sale
Marketing your business to potential buyers is a critical step as how you do it will affect how quickly you sell it and to whom. Think about who is likely to buy your business and use that to determine the best way to reach your prospects.
Aside from their familiarity with the areas to market your business in, they can also help you gather and prepare the required documentation to list your business.
Brokers can also act as a buffer between your business and potential buyers, allowing you to focus on running your business while surveying the market to find the right buyer.
Consider the legal implications
Investing in a lawyer to help you navigate the legalities surrounding buyer protection, confidentiality and non-disclosure agreements, compliance with state and local regulations, etc. can help you safeguard your business.
It is crucial that you provide full disclosures about your business endeavours to avoid any liabilities that may be attributed to misleading or incomplete information.
Communicate with your employees
It is usually best to inform your employees about your plan to exit once the deal has been finalised. Disclosing information too early on can jeopardise the process and potentially affect the value of your business.
The last thing you want to do is create panic and invite a torrent of questions while you’re trying to balance managing your company’s daily activities with negotiating its sale price.
Before informing the entire company, ease into It by telling your closest associates and senior management team within the company.
Do your best to make them feel involved, and be sure to keep them looped in on any potential changes that will be made within the company. Prime them on how to address any questions from the rest of their team once the news has been shared with the rest of the company.
Compassion is key when breaking the news to the rest of your employees. Be transparent with them and acknowledge the fact that each employee is likely to handle the change differently from one another so be prepared to answer any questions.
It is also imperative to make sure that all your employees are fully aware of the available resources you have put in place to provide them with the support they need amidst this change.