Have you ever imagined building a company into a successful business empire that after only a couple years you have no other option than to sell to a much bigger organization? Then, you could take the proceeds and plan a dream vacation, do something you’re most passionate about or invest in an entirely new business.
Many entrepreneurs start a business with the intention of selling at a future date. For others, they may decide it’s high time they left the business to new management and move on with their life,but they’d like to recoup money invested in the business venture. If this is the case, then you need a smart exit strategy.
What Is A Business Exit Strategy Plan?
An exit strategy is an entrepreneur’s strategic plan to sell or transfer ownership of his or her business to a third party. A business exit strategy gives an entrepreneur a chance to recoup money invested in the business.
If the business is not successful, an exit plan offers a business owner the opportunity to limit losses.
Popular exit strategies include selling your business to a new investor, management buyout, selling to the public or the sale of equity.
Who Needs an Exit Strategy?
For individuals seeking funding for their business, having a clear exit plan is very important.
Regardless of how big or small your business, planning for the future is essential. You must have an idea of how you will sell the business or transfer ownership without making a loss.
A comprehensive business plan must have a clear exit strategy from the onset that details how you will maximize your financial returns.
Perhaps, you don’t feel the need for documenting an exit plan because you’re just starting,but potential investors will want to know your plans in the long run. A clear, properly documented exit strategy will help determine how you run and operate your business.
For instance, if you plan to transfer ownership to your offspring, you’ll need to know the right time to start training them.
Why All Entrepreneurs Need an Exit Strategy
The primary objective of every potential entrepreneur is to start a business and earn a profit. At some point, let say 10 or 20 years down the line, you will begin to think of selling the business.
Even if you’re not yet thinking of getting out of the business, there are reasons you need to have an exit strategy in place. These include
- Gives business owners peace of mind knowing that they can either sell the business or transfer ownership without making a loss
- Protects business value
- Guarantees financial security during retirement
- Creates a smooth transition for your business
- Making strategic decisions that propel business growth
- Grant warnings to employees so they can start job hunting elsewhere before you shut down
- Makes the process of selling business easier and less complicated particularly when an entrepreneur faces some type of medical emergency
- Allows for other opportunities when you lose focus
Five Smart Exit Strategies
Within the first few years of running your business, you will be brainstorming ideas for business growth and success. However, if your startup was less than a success, you’d want to look for a better alternative. If you’re ready to hand over the reins, there are many options to consider.
1. Merger and Acquisition
This simply means merging the services of another company in the same market into your own product or service offerings or selling your business to a bigger company.
A similar case was when Google bought YouTube. It was easier for Google to integrate YouTube into its own search product. Now, when you use the world’s leading search engine, you often find videos appearing in your search results.
One of the benefits of merger and acquisition is that you get to sell the company for more than its actual worth. And if you have several companies vying for your business, you may be able to raise the stakes further.
There are many reasons why businesses might consider acquiring or merging with another company. Not only does it give them a competitive advantage but it also expands their reach and increase customer base.
If your exit strategy is through merger and acquisition, be sure to make your business appear more attractive and lucrative.
2. Initial Public Offering (IPO)
This is one of the best and fastest way to earn big. Unfortunately, it’s not suited to most small businesses primarily because you need to have business stock that will attract potential investors,and also worth something to the general public. Shareholders are demanding, and it has a high risk of liability.
If you’re opting for this exit strategy or have plans of going public in a future date, the easiest way is to consult investors who have walked the path. They will advise you on how to become better prepared for what lies ahead.
3. Management Buyout
This is quite different from merger and acquisition since you’re not selling the business to another company.
If you’ve built a reputation that you’d like to retain, you may want to consider selling to your most trusted employee(s).
It’s an easy way to make money. Apart from that, your employees already know the ins and out of the company including business goals and objectives as well as strategies in place to ensure a smooth running operation.
Selling out to your employee is a great idea if your reputation and legacy matter a lot.
4. Family Succession
If you’ve trained and invested heavily on a family member on how the business operates, handing over the business to your family member may as well be a perfect option.
It will allow you to pursue other things you are passionate about knowing that your business is in safe hands.
If you’re considering this option, make sure to pass your business on to a family member with the relevant skill set and is committed to the growth of the business. This way, you can retire in peace.
5. Liquidation and Close
Even lifetime entrepreneurs may decide that it’s time to shut down and move on. Liquidation is a common exit plan for a sole proprietorship, in particular. Often, entrepreneurs overlook liquidating,but it’s one of the easiest ways of shutting down.
To limit loss and get the most out of this exit strategy, you must have highly valuable assets such as equipment, land,etc.
How to Create an Exit Strategy
When documenting your exit strategy, there are two main components.
First, you need to detail your most likely exit strategy. Are you considering management buyout? Is it initial public offering? Is it to sell your company to another company?
Make sure you think about your most likely strategy before documenting it.
The second component involves proving your exit strategy. If you’re considering the initial public offering, then mention a few companies in similar industry that have gone public within the past five years. Be sure to include the company name, and the dates they went public.
On the contrary, if you’re considering selling to another business, provide information about potential buyers. Also, state why such companies will be interested in purchasing your company.
Remember, just like other sections of your business plan, putting your exit strategy together require thorough research work.
When and Where to Address Exit Strategy In Your Business Plan
The exit strategy will be mentioned in your business plan alongside your financial projections. While you will be mentioning how much money you need and how they will be used, you also need to create a line or two to outline your exit strategy.
In the business plan proper, the exit strategy subsection should be presented in the finance section.
The primary objective of a business plan is to act as a guide when it comes to achieving your business goals and objectives. A clear, properly documented exit strategy plays a critical role in achieving that goal.
The exit strategy section of a business plan comes in handy for those seeking equity funding. It usually provides detailed information on how you plan on exit the business so that investors can cash in on the amount invested in your business plus their return.
If you decide not to sell or transfer business ownership, then the investor would get nothing in return regardless of how successful your business. Hence, the need for an exit strategy.
Many people believe that providing a subsection for an exit strategy in their business plan is not mandatory. It is true that most people don’t include an exit strategy in their business plan but the fact that this happens doesn’t mean it’s a wise thing to do.
A clear exit strategy places you in the best possible position to maximize your business financial returns.