Exit strategies for business

Every business should have an exit strategy, if the pandemic has taught us anything it’s to expect the unexpected. Business exit strategies protect your organization, your investors, and yourself. In the event of market or technology fluctuations, sudden disease, or an accident, planning your exit will ensure that you have thought about how to protect what you have built up along the way.

An exit strategy gives a business owner a way to reduce or liquidate his?stake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy enables the?entrepreneur?to limit losses.

Ideally, the business owner will develop an exit strategy in their?initial business plan before actually going into business. As you think about your business exit strategy, you’ll not only want to consider?how?you’ll leave but also other factors that are involved with this process:

• Will you make money when you exit your business? How much money will you make?
• What will happen to your business after you leave? Will it continue under new ownership?
• How long will your exit take? What kind of transition period is involved?

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.

Let’s explore some of the different options you have in terms of a business exit strategy. At the end of the day, there isn’t necessarily a?wrong?or a?right?way to exit your business, but there are certainly options that may work better for you, depending on your particular situation.

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1.????Merger or acquisition

A merger or acquisition is a strong exit plan option for any company with their business for sale, and a particularly attractive option for start-ups and entrepreneurs. You’ll be?selling your business?to another company, that may want to increase their geographic footprint, eliminate competition, or acquire your talent, infrastructure, or product.

Pros:

ü?You’ll be able to have a clean break from your business (if that’s what you want).

ü?You can negotiate the terms, price, and other details of your merger or acquisition.

Cons:

ü?This can be a time-consuming, costly, and perhaps even unsuccessful process.

ü?Your business may cease to exist as it once was—with a range of possible consequences associated with this action.

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2.???Selling your stake to a partner or investor

As long as you are not the sole business owner, you can sell your stake to a partner or venture capital investor while the business runs as usual. The term ‘friendly buyer’ is often used in this type of exit strategy, as it’s likely that you would sell your stake to someone known and trusted.

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Pros:

ü?The company can continue to run with minimal disruption to business as usual, keeping revenue streams steady.

ü? It’s likely this person already has a vested interest in the business and is committed to its success in the long term.

Cons:

ü?Finding a buyer or investor for your share of the company can be difficult.

ü?The sale may be less objective and therefore not as lucrative; you may lower the asking price if the buyer is someone close to you.

3.???Take Your Business Public With an IPO

Many entrepreneurs dream of one day selling their business to the public for a large profit. However, in the realm of small business exit strategy planning, this method certainly isn’t for everyone—business conditions need to be just right for this option to be possible. This being said, however, if it’s possible for you and the conditions are right, an IPO can be very lucrative.

Pros:

ü?The potential to earn a substantial profit, more so than any other exit strategy.

Cons:

ü?Expect intense and ongoing scrutiny from stockholders, regulatory bodies, and the public.

ü?Additional requirements of an IPO include mandatory progress and performance reporting.

ü?IPO due diligence is difficult, costly, and labor-intensive.

4.???Management and employee buyouts

Although it may be difficult to plan ahead for many of these methods, it’s possible that when you’re ready to exit your business, people who already work for you may want to buy your company from you. As the management team is already familiar with your business, they should be well-equipped to manage the company, moreover, because these individuals are already part of your business, and they likely know you so well, they may allow for flexibility in terms of your involvement—perhaps they’ll want to keep you on as a mentor or advisor.

Pros:

ü?You can hand off your business to someone who has experience in the organization—and that you hopefully know and trust.

ü?As you’re still selling the business, you should be able to make some money off the deal.

ü?If you want to remain involved in some capacity, the employees who are buying your business should be more likely to make something work.

Cons:

ü?There may not be a manager or employee who is interested or ready to step in.

ü?You may find that these management changes are difficult to implement and may have a negative effect on existing clients.

5.???Continuing the Legacy in the Family

Many entrepreneurs want to keep their business in the family long term, and that means making plans for transitioning the company to a child or another relative at a certain point. It’s worth noting that business exit planning for a family succession is no less important than any other type of exit. This is an appealing option, but it’s important to ensure that the person is up for the job.

Pros

ü?As a family member, it’s likely this person will have an intimate knowledge of the business and a good understanding of how it is run

ü?You don’t have to completely separate from your business and may be able to stay on in some sort of transitional or ongoing advisory role.

Cons:

ü?You may not find a family member who wants to (or is capable) of taking on the business.

ü?Employees, business partners, or investors may not support the individual in your family you choose.

ü?Blurring professional and personal lines could lead to unnecessary financial or emotional stress for the family.

6.???Liquidation

This is a common exit strategy for failing businesses. Liquidation is one of the most final exit strategies, whereby a business is closed down, and all assets sold off. Any cash earned must go toward paying off debts and shareholders (if there are any). This being said; however, liquidation doesn’t have to mean defeat—just an ending to a chapter.

Pros:

ü?You’ll never have to worry about the business again, free of the chains involved in trying to preserve a legacy.

ü?This method can be simpler and faster to execute than other methods, such as acquisition.

Cons:

ü?You likely won’t get the biggest return on investment with this option.

ü?You could be breaking ties between you and employees, partners, and customers.

7.???Declare Bankruptcy

As far as small business exit strategy planning goes, this last method is the option that you can’t really plan for. Ultimately, no one wants to file for bankruptcy, however, this could be your last resort if something goes wrong (or you never managed to plan ahead with any of the other exit strategies listed above). Although you may have assets seized and troublesome credit that will need to be rebuilt, you’ll be relieved of debts and the burden of the business if things get really bad.

Pros:

ü?You’ll be unburdened of the debts and responsibilities of your business.

ü?You’ll be able to move on from your business and start to rebuild your credit.

Cons:

ü?You may struggle to borrow credit in future business endeavors.?

ü?This process will likely mean the untimely end of relationships with anyone involved with running your business, as well as clients and customers.

You've worked hard to build your business. And you deserve to be well compensated for your time and energy upon retirement. Expertise and planning are key. Finally, Financial Control will work with you to identify options that will give you flexibility and control over how and when you leave the business, while ensuring that all stakeholders’ interests are respected. Message us for more information