What Is a Business Exit Strategy?
A business exit strategy is an entrepreneur's strategic plan to sell his or herownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate hisstake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy (or "exit plan") enables the entrepreneur to limit losses. An exit strategy may also be used by an investor such as a venture capitalist in order to plan for a cash-out of an investment.
Business exit strategies should not be confused with trading exit strategies used in securities markets.
Key Takeaways
- A business exit strategy is a plan that a founder or owner of a business makes to sell their company, or share in a company, to other investors or other firms.
- Initial public offerings (IPOs), strategic acquisitions, and management buyouts are among the more common exit strategies an owner might pursue.
- If the business is making money, an exit strategy lets the owner of the business cut their stake or completely get out of the business while making a profit.
- If the business is struggling, implementing an exit strategy or "exit plan" can allow the entrepreneur to limit losses.
Understanding Business Exit Strategy
Ideally, an entrepreneur will develop an exit strategy in theirinitial business plan before actually going into business. The choice of exit plan can influence business development decisions. Common types of exit strategies include initial public offerings (IPO), strategic acquisitions, and management buyouts (MBO). Which exit strategy an entrepreneur chooses depends on many factors, such as how much control or involvement (if any) theywant to retain in the business, whether theywant the company to be run in the same way after their departure, or whether they're willing to see it shift, provided they are paid well to sign off.
A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean the founder is giving up control. IPOs are often seen as the holy grail of exit strategies since they often bring along the greatest prestige and highest payoff. On the other hand, bankruptcy is seen as the least desirable way to exit a business.
A key aspect of an exit strategy is business valuation, and there are specialists that can help business owners (and buyers) examine a company's financials to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.
Business Exit Strategy and Liquidity
Different business exit strategies also offer business owners different levels of liquidity. Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well; for example, an IPO may not be the best exit strategy during a recession, and a management buyout may not be attractive to a buyer when interest rates are high.
While an IPO will almost always be a lucrative prospect for company founders and seed investors, these shares can be extremely volatile and risky for ordinary investors who will be buying their shares from the early investors.
Business Exit Strategy: Which Is Best?
The best type of exit strategy also depends on business type and size. A partner in a medical officemight benefit byselling to one of the other existing partners, while a sole proprietor’s ideal exit strategy might simply be to make as much money as possible, then close down the business. If the company has multiple founders, or if there are substantial shareholders in addition to the founders, these other parties’ interests must be factored into the choice of an exit strategy as well.
FAQs
A business exit strategy is a plan that a founder or owner of a business makes to sell their company, or share in a company, to other investors or other firms. Initial public offerings (IPOs), strategic acquisitions, and management buyouts are among the more common exit strategies an owner might pursue.
What are the 4 major strategies of a business exit? ›
The four main exit strategies for a business are selling to another company or individual, passing on the business to a family member or employee, liquidating assets, and taking the company public through an initial public offering (IPO).
What is exit strategy with an example? ›
The goal is to maximize the value of your company before converting it to cash, and to minimize the amount of time consumed. The business plan needs to include alternative exit strategies. Examples include selling to family member(s), selling to partner(s), or liquidation.
Which of the following are examples of exit strategies? ›
8 types of exit strategies
- Merger and acquisition exit strategy (M&A deals)
- Selling your stake to a partner or investor.
- Family succession.
- Acquihires.
- Management and employee buyouts (MBO)
- Initial Public Offering (IPO)
- Liquidation.
- Bankruptcy.
How to prepare an exit strategy
- Step 1: Determine length of involvement. ...
- Step 2: Assess financial goals. ...
- Step 3: Identify creditors requiring payment. ...
- Step 4: Research different types of exits. ...
- Step 5: Write your exit plan.
The idea that your business will provide you with income after you are no longer there may not be a reality. You have to depend on yourself. Take the time to look at the four D's of a business exit strategy: death, disability, divorce, and departing. To have a successful business, you must plan for all four D's.
What are the three main exit strategies? ›
Initial public offerings (IPOs), strategic acquisitions, and management buyouts are among the more common exit strategies an owner might pursue. If the business is making money, an exit strategy lets the owner of the business cut their stake or completely get out of the business while making a profit.
What is the exit strategy of an LLC? ›
An exit strategy in business is the transferring or selling ownership of the business, including a limited liability company (LLC). It provides owners a way to liquidate their stake in the business. If an LLC is successful, an exit strategy should maximize its profits.
What are three examples of means of exit? ›
Exit Discharge: That portion of a means of egress system between the termination of the exit and a public way. Aisle: An unenclosed exit access component that defines and provides a path of egress travel. Corridor: An enclosed exit access component that defines and provides a path of egress travel.
What is the best exit strategy for a market? ›
Popular exit strategies include stop-loss orders to limit losses, take-profit orders to lock in gains, trailing stop-losses to capture profits in trending markets, using technical indicators to identify reversal points and time-based exits.
Developing a well-rounded exit strategy entails the following.
- Knowing when you want to leave. ...
- Discovering who your most likely buyers are. ...
- Developing assets that are valuable to other businesses. ...
- Improving performance in your business. ...
- Chasing profitable growth. ...
- Doing everything you can to keep customers loyal.
An exit plan can help achieve strong financial returns by increasing the value of your business, for instance by focusing on 'maximising multiples'. An exit strategy may also incorporate succession planning to help ensure stability in the future ownership structure and direction of the business.
How long should an exit strategy be? ›
One of the most common, and important, questions business owners ask is “When should I start my exit planning?” Ideally, you need to begin serious planning no less than five years before your desired exit. Your final 60 months will make or break your exit success.
What are the 4 key business strategies? ›
Four generic business-level strategies emerge from these decisions: (1) cost leadership, (2) differentiation, (3) focused cost leadership, and (4) focused differentiation. In rare cases, firms are able to offer both low prices and unique features that customers find desirable.
What are the four key strategies? ›
4 key strategy types
- Business strategy. A business strategy typically defines how a company intends to compete in the market. ...
- Operational strategy. Operational strategies focus on a company's employees and management team. ...
- Transformational strategy. ...
- Functional strategy.
The four possible exit strategies are:
- Pass to Family.
- Sell to Outside Third Parties.
- Sell to Inside Key Employees.
- Planned Liquidation.
There are only four ways to leave your business: transfer ownership to family members, Employee Stock Option Plan (ESOP), sale to a third party and liquidation. The more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want.
