The focus of many entrepreneurs and new businesses is to grow and increase their revenue. However, they rarely think of the contingency plan that how they would close down their business if things don’t work out. Today, we’ll be discussing business exit strategy, its types, and importance;
What is Business Exit Strategy?
A business exit strategy is when you strategically plan to sell out the ownership of your business either to another company or to investors. It provides you an option to decrease your stake in the business if it’s growing. If the business isn’t growing, then an exit strategy helps you to minimize the losses.
Why Business Exit Strategy is Important
According to a study conducted by Securian Financial that 72% of small businesses don’t plan any exit strategy. In fact, it takes years to plan and execute the endgame of your business. Now, the question is whey exit strategy is important for your business. Here are some of the reasons why;
Mentally prepare yourself
Most of the businesses don’t even know the real worth and market value of their business until any demand takes place. It would be a challenge for them to manage the emotions at that point. However, if you have an exit strategy, it would help you to find and satisfy your goals in case of an exit strategy.
It also helps you to answer the questions like whether your business is ready for the business or not. Most importantly, it prepares you to manage your emotion
Make your Business appealing to the buyers
An exit strategy plan makes a company more attractive to buyers. Because it proves the fact that the management has a clear vision of the company. You have planned various outcomes in advance if things don’t work out as desired.
It’s necessary to know that making your company attractive to prospective buyers is also important, not just securing its financial aspect of it. If you do that, then would present you as a professional seller. If you don’t have an exit plan, then the buyer would back out from the deal at the last minute.
Know the Time to sell out
The exit strategy helps you determine the timing that when you should sell out your business. It could be one, two, or five years from now. However, the company would work within a limited time frame, and make it better and attractive for the buyers.
For instance, if things turn out well, then you can transform your exit plan into a strategic plan. It would ultimately improve productivity and the company’s values.
The worth and value of your company may seem like a simple and obvious question. But finding out its exact value is a bit complicated. It would require you to prepare a detailed record of your company for 3 to 5 years, market conditions, and the company’s intangible assets. You’ll have to find a buyer who’s willing to maximize the amount to your business.
The evaluation would help you to know the worth of your business. When you integrate it with the exit strategy, then you’ll know that your business is moving on the right track.
How to Deal with Unsolicited Offer
According to a study by National Center for the Middle Market, 46% of the total sales are from opportunistic buyers. The exit plan would help you how to deal with such offers and prospects. It would be a huge risk if you accept such offers.
How to plan your company’s future
The exit strategy helps you to predict the future of your company by providing you goals and objectives. They help you to measure the success of your business. It helps you to find and imagine the next leader of your company. It could be your children, merger and acquisition, an alliance, or liquidation. Whatever exit strategy you choose, it would guide your organization.
Types of Business Exit Strategies
Merger & Acquisition
Merger and acquisition is a type of exit plan where you either buy another business or sell your business to any other company. The goal is to expand and develop infrastructure, acquire professionals, reduce competition, and expand the company’s market.
- Better bid offer
- Selling terms
- Controlling Price
- Failure to achieve targets
- Wastage of time
Investors buying a stake
It also goes by the name of a friendly buyer. If your business isn’t a sole proprietorship and you sell your stake or a part of it to the investors or partners or someone you trust.
- The buying person has a fair interest and more committed to the business affairs
- Stabilize the company’s operations
- Maintain its revenue stream
- The sale won’t bring you the required results
- Difficult to find the loyal partner
Legacy or family succession is where you pass on the business to the next generation. It means keeping the business within the family by making sure that the person is up to the task.
- Developing a close connection between the family and the business
- Leadership role over the years
- The family has a better knowledge of the business and they could run it more efficiently
- Emotional and financial stress in the family
- Incapable person to take the role
Acquihires is when you hire the professional talent of the other organization. It’s very helpful to the skilled professional because the buying organization would pay them well.
- Successful future
- Strong negotiating terms
- Costly and expensive
- Difficult to find the relevant client
Bought out by Management & Employee
The management and employees are familiar with the company’s operations and they take the senior leadership role. They could better take care of the organization.
- Internal staff is much better than the outsider third party
- Experienced personals running the organization
- Negative impact
- Not ready to handle the role
Initial Public Offering
The initial public offering is when you sell the shares and stock of your business to the public. It could be very profitable to the company, but it’s challenging at the same time. Scrutiny pressure and regulation cost would make the company private.
- Increasing revenue
- Difficult process, expensive, and labor-intensive
- Additional requirements like reports
- Intense Scrutiny
Bankruptcy doesn’t fall under the category of an exit plan. When a company files for bankruptcy, the court would seize all of your assets, but it would relieve you from the debt.
- Unburdened from debt and responsibilities
- Difficult to borrow credit in future
- Liquidation is the final exit strategy where you sell out your business in parts and pay off all of your debts and responsibilities. It’s usually the permanent shutdown of the business.
Liquidation is the final exit strategy where you sell out your business in parts and pay off all of your debts and responsibilities. It’s usually the permanent shutdown of the business.
- Simple and faster
- This is it and finish
- Breaking up with partners, investors, and employees permanently
- Not the expected high-value exit
A real example of small business exit strategies
A real estate company has a large network of more than 200 brokers and agents and they all were generating revenue. The company was making an annual revenue of 60 million dollars. Although the company has faced much hardship during its 20 years of business it remains there. However, the owner decided to sell out for over 100 million dollars at its peak after a thorough market valuation.