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 plan during such early stages is akin to setting ones’ self up for failure. The thing is however, 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.
Businesses must have the foresight to plan ahead
Here are some of the reasons why having an exit strategy is integral to the success of any business.
Provides business owners with a framework for the company’s future
An exit strategy allows 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 company’s 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 team, 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 business’ 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 plan in place, businesses 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 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 an exits roughly 50% of the time. In an ideal situation, most businesses will already have a contingency 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.
nformation from UBS.com
Types of exit strategies
The list below features six of the most common exit strategies. The one you choose however, will depend on your personal and business goals.
A liquidation strategy is when a business completely shuts down through the sale of all of its assets. Often employed due to poor performance or when the business is unable to be sold of through other methods.
Liquidation usually generates the lowest returns out of all the exit strategies. In the event of this happening, it is advised for businesses to consider restructuring its operations to prime it for the purchase of the entire company.
An Initial Public Offering (IPO) is when a company goes public by offering a portion of their company as stock for the public to invest in.
A company is most likely to go public under two circumstances. The first one is when a newer, smaller company requires more capital to supplement their growth and the second is when a growing, privately owned company may have owners of investors who wish to cash in on their earlier investments.
In the event of an IPO, the business owner and their management team are likely to maintain their positions in the company for a period of time while being subjected to additional regulations.
This is especially useful for private companies that want to generate large profits whilst ensuring the continuous growth of their business through equity financing.
Sell business to an open market
Typically endorsed by small businesses, this occurs when the business is put up for sale at a pre-determined price and is hopefully able to sell it at the price it is valuated at.
This exit strategy is often employed when a company sits in high demand as this can help to drive up the price of the business. The company assets can be incorporated into the valuation of the sale to maximise the returns to the owner.
The disadvantages to this method however, lies in the fact that it can be a lengthy and time-consuming process to negotiate the sale and find the right buyer.
This involves selling a company to another business either through cash, stock options or a combination of both. 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 it you stand the risk of losing a lot of control over the decision making of the company. Your employees can also be affected if the buyer decides replace them with their own people or chooses to fold the business upon purchase.
Selling your company to your current team of managers or employees is known as a management buyout. This type of transaction provides the owner with almost instant liquidity and allows the business to continue on as a private enterprise.
The owner of the business is allowed to hold on to a portion of the company’s shares and wield some degree of decision-making power.
The benefit of a management buyout is that is 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.
A merger and acquisition (M&A) is what happens when a larger company buys a smaller company and “merges” their efforts.
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.
Selling your business to a competitor also permits you to ask for a higher price such as Salesforce’s 2020 acquisition of Slack for $27.7 billion.
How to choose the right exit strategy for your business
Asking yourself these questions will help you consider the best exit strategy for your business’ needs.
How do I want to be involved in future business plans?
Knowing the role you want to play in the business’ 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 an exit strategy 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 an exit strategy for your business
Selling your business can be an overwhelming process. Which is why diligent and careful planning can help to alleviate a lot of the stress involved. Consider the following steps for 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 a 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.
According to Bob House of online business marketplace BizBuySell, once hiring a broker can be beneficial when it comes to targeting your marketing efforts. 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 survey 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’ endeavors 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 business’ plan to exit once the deal has been finalised. Disclosing information too early on can jeapordise 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 day to day activities with negotiating its sale.
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. This might include outplacement support services, severance packages, counselling and more.
Addressing the culture gap behind foreign market exit
In an increasingly globalised and competitive environment, businesses are looking beyond borders in pursuit of growth opportunities. As a result, international expansion has become the mantra of choice for a multitude of companies.
Our global economy has resulted in people from different countries, backgrounds and customs communicating and transacting with each other more than ever. Some believe that our newfound connectedness has led to a better understanding of the other. That the cultural nuances distinguishing us are slowly diminishing as the world becomes smaller.
Coupled with today's frenzied approach to global expansion, it's not uncommon for businesses to tap into foreign markets without doing prior research on the cultural structures that uphold the practices of its targeted location.
An ongoing process of learning, sensitivity training and dismantling belief systems that tell us our world is homogenous, businesses must recognise that cultural awareness is more than just a stepping stone for international success. It is the heart of it.
This post was written by: Leanna Seah, Content Marketing Coordinator