An exit strategy is a plan of getting rid of an investment in a business venture or financial assets. There are business and trading exit strategies. A trading exit strategy is for such investors as venture capitalists who plan for a cash-out of their investment. A business exit strategy is for those who have a part of the company and want to sell this part. We will focus on business exit strategies.
Business exit strategy
For a business owner, an exit strategy is a plan to sell their ownership in the company, either to investors or to another company. An exit strategy opens a way for an owner to reduce or liquidate his stake in a business. If the business is successful at this moment, an owner can make a substantial profit. And if the business is not doing well, it helps the owner to limit or minimise losses. It is better to develop an exit strategy in the initial business plan — before actually starting the business: you need not only to develop a business worth, say, millions but also to make sure you know how to get the money back out.
Possible reasons to apply exit strategy
There are several reasons for a business owner to decide to initiate an exit strategy, here are some of the most common ones:
- To close an unprofitable business and limit losses
- When a business venture has met its profit objective — when a start-up company plans to make an initial public offering (IPO)
- Significant changes in market conditions
- Legal reasons, such as a liability lawsuit
- When a business owner wants to retire and wants to cash out
Benefits of planning an exit strategy
The biggest reason for planning an exit strategy in mind in advance is to be sure you would be able to leave the business profitably if needed. However, there are other benefits to having an exit strategy ready and planned.
- Protecting the value of the business you have founded
- Ensuring a smooth transition for the stakeholders of your company
- Ensuring potential income for yourself in case of retirement or disability
- Reducing the risks for your property and family
- Working out a strategic direction of your business development and growth
Types of business exit strategies
Common types of business exit strategies include:
- Initial public offering (IPO), which is a process of turning your company from private to public — by offering shares of the business to the public, issuing a new stock of them. The public here is any person or institutional investor who is interested in investing in your company and IPO allows you to raise capital from public investors. IPO is a complex process, involving several criteria and steps of getting ready for it.
- Strategic acquisition means selling your company to a larger competitor. This, on one hand, can help you to raise the price of your company — if, for example, you are a high-tech start-up and competitors will be ready to spend more to buy a potentially profitable company. Or, on the other hand, there can be minuses — as the buyer and new owner of the company will have the right to fire all the staff and even change the image of the brand.
- Selling to a “friendly buyer” is opposite to a take-over, or not so friendly an acquisition. In case of a take-over, whether you resist or strongly oppose the purchase, you might not be able to support your business anymore and will have to sell it on the conditions of the buyer. No need to say that they will be able to do with it whatever they want. In case of a “friendly buyer” (who might be your family, for example), the group would most likely be interested in developing and supporting the company, being at the same time committed to its status and value. The selling of the company to its managers (described below) may also be characterised as the sale to the friendly buyer.
- Management buyout (MBO) is about going private — by selling the company to its management team. The managers buy out the business, planning to get more profit in future, as they will be not just employees, but owners. While focusing on the development of the company in a close circle of owners, the ex-managers may raise the profit, but it may also come out difficult for them to turn their mindset from that of a manager to that of an entrepreneur. Sometimes, the managers may decide to go public with the company again.
- The liquidation will involve...literally the liquidation of your company — any proceeds from the assets are to be used to pay the creditors and the remaining money is supposed to be divided between the shareholders.
What can influence the choice of a business exit strategy?
There are several factors that help to determine what type of an exit plan to choose, among them:
- How much control/involvement, if any, you want to retain un business
- Whether you want to keep the things with your company going as they were or let others decide its future, while you just get a price for your ownership shares
- Whether you want the company to be operating at all, or you want to let it go bankrupt
For example, an acquisition will take off your ownership responsibilities, and also rip you off of any control over the company. While IPOs might bring you prestige and biggest payoff — this is often seen as the most popular exit strategy. While bankruptcy is seen as the least desirable.