Strategies To Consider In Your Exit Plan

No one size fits all exit strategy exists since each business has its own needs and structures specific to the company and industry.

However, careful planning is necessary for a successful exit strategy, which you should also routinely evaluate to more accurately represent current terms and conditions.

Exiting a business requires a plan with a strategy, and some of these strategies include:

1.??Merging The Company

A merger is an arrangement that combines two current businesses into a single new company. The companies that agree to join are roughly comparable in size, customer base, and operational scope.

Most companies merge to increase market share, lower operating costs, expand into new markets, boost revenues, unite common products and grow profits. Following a merger, existing shareholders of the two original businesses receive shares of the new company.

There are different types of mergers, depending on the firms' objectives. Some of the most typical kinds of unions include;

·???????Horizontal Merger- A horizontal merger occurs between businesses in the same industry. This kind of merger usually involves two or more rival companies that provide the same goods or services. These mergers maximize economies of scale, boost market dominance, and take advantage of revenue- and cost-based synergies.

·???????Vertical Merger- A vertical merger joins two businesses operating in the same sector but at various stages of the production cycle. This merger often aims to boost trade, increase synergies, and control the supply chain. As a result, vertical mergers frequently result in increased production, efficiency, and cost savings.

·???????Market Extension – In this case, companies that sell the same items but compete in different markets often merge. The primary goal of a market extension merger is to guarantee that the merging companies may access a larger market, which ensures a more extensive clientele.

·???????Congeneric- A congeneric merger occurs between businesses that belong to the same industry but offer different product lines. Whether it's the market, the technology, or the production process, these two businesses will have something in common. These two businesses will use their combined markets to expand their product offerings by merging.

·???????Conglomerate- A conglomerate merger is a union of two businesses engaged in unrelated commercial endeavors. Conglomerate mergers typically occur between enterprises operating in various sectors, subcategories, or regions. There are two types of conglomerate mergers: pure and mixed. A pure conglomerate merger involves businesses with no shared interests. Companies that seek commercial expansion, such as extending their products to other markets or creating new products, are included in mixed conglomerate mergers.

NOTE: Mergers can fall apart if the corporate cultures of the merging companies do not sync well, if resistance exists to changing management or operational procedures, if technologies are incompatible, or if there are disruptions to the workforce. The stronger firm may acquire the weaker one if a merger is challenging to implement

2.??Acquisition by Another Company

A company acquisition is where one firm buys most or all of the shares of another company to become the majority shareholder or outright owner. Conversely, an acquisition exit strategy makes you transfer ownership of your company to the one purchasing it from you.

This means the buying company can make decisions without your consent or other shareholders and effectively run the business.

The acquiring company may absorb your business into its own company and put its branding in place or keep its current identity and make it a sub-brand.

The most significant way to get a business to acquire yours is to identify the one that matches your own most effectively.

Handing off the business to a more prominent company creates a higher value for your business since there is an immediate need for your service by the buyer and eliminates competition in a very strategic manner.

The acquiring company can potentially pay more than the actual value of your firm, especially if it is a competitor. However, an acquisition isn't a superb exit strategy if you aren't yet prepared to close your company.

3.??Listing the Company in the Initial Public Offering

A corporation selling its shares to the general public is called an initial public offering (IPO). So, to generate additional funds, businesses frequently employ this process.

Any company that wants to grow must take the complex and expensive step of going public. Once it accomplishes this step, the business is then subject to public reporting.

A company's IPO shares get valued through underwriting due diligence. When a corporation goes public, the previously held private share ownership transforms into public ownership, and the existing private shareholders' shares are now worth the general selling price. The underwriting may also include special clauses for private to public share ownership.

In the meantime, the public market creates a significant opportunity for millions of investors to purchase firm shares and add money to the shareholders' equity of a company. Anyone interested in investing in the company, whether an individual or an organization, is considered a public member.

The company's new shareholders' equity worth is determined by the number of shares it sells and the price at which those shares get purchased.

When a company is private and public, shareholders' equity still refers to the shares that investors possess. But with an IPO, the shareholders' equity rises dramatically thanks to the money raised from the primary issuance.

Before you begin an initial public offering (IPO), you must identify an investment bank, compile financial data, register with the Securities and Exchange Commission (SEC), and determine the share price.

4.??Selling Shares to a New Owner

You might want to let somebody else run your company, and selling to a friend or acquaintance is frequently a viable exit plan.

Some potential buyers for your company include a family member, a friend, an employee, a business associate, or a client.

Think about the drawbacks before selling your firm to a new owner you may know. You don't want to put your relationships in danger. So before a family member, friend, or acquaintance buys your business from you, be transparent about your company's liabilities and profitability.

The buyer typically has the option to progressively close the sale while under a finance agreement with the seller. As a result, the seller can continue making money while the buyer launches the company without investing a lot of money upfront. To make the transition simpler for everyone, you can also serve as a mentor.

Remember that inheritance planning, company transfer, and valuation considerations might be complicated when selling to a family member. Therefore, you should consult with lawyers, accountants, and family members.

5.??Passing the Business to a Relative

Many owners choose to appoint a family member as their successor, mainly if that individual currently works for the company. This is because the ability or ambition to run the company may not be present in people from other worlds.

Handing over a business to a family member is considered a safe option since it will be in the care of someone who shares the same passion you had, and your legacy will continue.

Making a decision

You must be objective while deciding who is most suited to lead the company forward. Follow the needs of the business rather than your feelings.

Look for signs of dedication when evaluating potential successors. Carefully consider their qualifications and experience because the selected person must be qualified. Also, consider whether they possess the charisma and leadership qualities needed to inspire and guide others.

6.??Liquidate the Business

Liquidation is shutting down a company and either selling its assets or distributing them to shareholders and creditors. There are two methods to accomplish this:

One approach is closing the deal and selling the assets as soon as possible. Unfortunately, this is sometimes the last option for a corporation because it only generates money on the products it can sell while losing significant assets like client lists or long-term business ties.

Before liquidating a business, you should consult with liquidation experts to ensure you follow the proper steps for selling your assets, paying off all debts, keeping track of personnel, and meeting all legal and financial requirements.

The alternative common settlement strategy is to keep paying yourself until your business's resources are exhausted before closing the company. This is frequently called the "lifestyle business." So, instead of reinvesting the cash in the company, the owner gradually withdraws the funds.

7.??Dry it Out

Running your company "dry" is a strategy you can think about if you are in a position to pay off your debts and have a regular flow of income. This plan opposes corporate growth but can still result in a happy ending for everyone.

Profits should be directed back to you rather than used to expand the business. Consider personal bonuses and a pay increase. You should be able to shut down the business and be satisfied with the results as long as you pay off your debts and consider the extra tax duty you incur.

The Best Steps To Get Your Company Ready For an Exit

Taking the necessary steps to prepare your company for an exit is essential because no one wants to take over a crisis. Here are the best steps to prepare your company for a successful exit;

1.??Ensure your Finances are In Order

A clear financial history is achieved by maintaining good bookkeeping practices, especially when separating personal and business expenses, as this shows the level of discipline in the owners.

A solid financial strategy helps you stay focused and on course as your business expands, new problems appear, and unanticipated crises occur. In addition, it supports the development of a contemporary, open company and straightforward communication with employees and investors.

So what can you expect to gain from keeping your finances in order?

·???????Clear company goals- this serves as the foundation of your entire financial strategy. For example, what goals does the company have for the upcoming quarter, year, three years, and so on?

·???????Cashflow management- A precise estimate for cash flow, or the amount entering and leaving the business, should also be included in your financial strategy. You will undoubtedly spend more money than you make in the beginning. Clean books will help you know what constitutes a reasonable level of expenditure and how to stay on track.

·???????Smart budget allocation- Budgets provide each team with its limitations to work within. They can plan campaigns, personal growth, and product development because they know the available resources.

At the corporate level, keeping track of project or team budgets will always be more superficial than keeping track of overall spending. Also, it's easy to track who is spending what once you've broken down each budget.

·???????Risk mitigation- Your financial strategy should account for costs associated with specific business insurance policies, losses due to risky inefficiencies, and possibly set aside funds for unforeseen expenses. In reality, you may make many financial projections, especially during tumultuous times, each showing a different outcome for the company: one where money is easy to come by and another where things are more complex.

2.??Gain More Insight into Revenue Sources

An exit strategy necessitates maintaining consistent and current company performance data.

This implies that you will always have a thorough awareness of your sources of income as well as your cash inflows and outflows. You can identify the activities that generate the most income and how this income gets used.

Having precise financial information makes for better decision-making. Making accurate projections also aids business owners.

They will better control cash flows, prepare for seasonal changes, and concentrate their marketing efforts on the most crucial initiatives.

Establishing an exit strategy helps you choose between short-, medium-, and long-term income goals.

You can concentrate your efforts on projects that generate income fast if they plan to leave the company in the next few months.

These include services like monthly subscriptions, recurring payments, and active membership packages until the customer cancels them.

These low-effort income-producing initiatives keep money coming into your company while requiring little effort.

However,?if you plan to be in business for the foreseeable future, you should concentrate on long-term growth initiatives.

Establishing life-long client relationships creating a solid pool of employees, and being inventive will go a long way in helping the company grow.

3.??Consider your Exit Options

As explained above, there are various options for exiting a business. Therefore, one should consider all possibilities exhaustively and settle on the most suitable plan in a way that is a win-win option for all.

4.??Evaluate the Value of the Company

Maybe you want to sell your business, or probably you're seeking investors or financing. Either way, estimating your company's value is a task that all business owners occasionally have to perform.

Determining the value of your company is a difficult task, even if it appears like it should be a simple one.

The value of your business might be complicated, regardless of whether you're a one-person business or a large corporation with thousands of employees.

The investor's proportionate ownership following the investment get determined by the pre-money valuation and the amount invested.

When assessing the financial aspects of a suggested value, it is impossible to study the pre- and post-money assessments separately. So, to decide if it is a fair deal, you should consider other aspects, such as dividends and liquidation preferences.

There are several methods for determining a company's value. Among the most well-liked techniques are:

·???????Publicly-Traded Comparables: With this approach, you look at publicly traded businesses with values that are comparable to your own based on their share prices. To determine the projected value of your business, it looks at the share price during the previous 12 months and makes revenue projections for the following 12 months.

·???????Book Value- The most straightforward valuation approach is book value. It purely depends on the finances. It takes the financial statements and the value of assets and deducted liabilities.

·???????Cash-Flow - This approach is solely dependent on predictions of prospective future outcomes. It considers how much consistent cash flow the business will generate. After that, it converts those values into today's dollar value.

·???????Transaction Comparables: This approach concentrates on transactions over the previous 12 months and forecasts for transactions in the upcoming 12 months.

It's crucial to understand your firm's worth, even if you have no plans to sell it or look for financing. You may seize any chance that comes your way when you know how much your business is worth.

5.??Speak with Your Investors

A clear exit strategy enables outside investors to calculate the timing and expected rate of return on their investment realistically and increases the likelihood that an angel or venture capitalist to invest.

Most equity investments by venture capitalists and angel investors depend on a successful business exit to get a return on their investment.

This means that unless you cover an exit strategy in the pitch and business plan, entrepreneurs will have a tough time obtaining equity capital from outside investors.

For instance, if you want to be acquired, dominating your specialty and being the first to market it in your industry will make you more appealing to major organizations.

Increase the worth of your company by recruiting and keeping your core team, given that they will be part of the business transaction.??

Make sure all of your investors are firmly on board with your exit plan to lessen the likelihood that a minority investor would oppose your acquisition intentions.

The company that is buying you will also value that your company doesn't have too many shareholders because it lessens the complexity of the purchase and eliminates potential stumbling blocks.

You will be a more desirable acquisition target if you collaborate with one or two large investors instead of many smaller ones.

Conversation with your investors is crucial since this is where you get to explain how the company will repay them. In addition, investors always look for answers in your sound financial systems to support your plans, so you should be generous in sharing such information.

6.??Get an Advisory Board.

An advisory board is a collection of impartial experts that pool their knowledge and experience to support a company's strategic direction.

They are far less formal than a Board of Directors, have no legal responsibility, and have no governance duties.

Their recommendations are not legally enforceable or governing, which gives organizations the freedom to concentrate on strategy, accountability, and critical corporate goals.

Consider an advisory board a strategic backbone for CEOs, directors, and company owners. The board can offer expertise, bridge knowledge gaps, and give the company a fresh perspective.

However, to get the most out of an advisory board, it's important to impose some written formalities, like what is expected of your nominated advisors, time commitments, and compensation, if any.

7.??Review Employee and Client Contracts

The goal of a contract review is to ensure that legal agreements and the provisions contained within them are solid and that legal and financial implications get reduced as far as possible to safeguard the interests of your business.

A supplier's and a customer's connection is often contractual or grounded in a business agreement. Therefore, your business could face fines if you end this agreement early and without good reason.

Be cautious when signing agreements with exorbitant exit fees. Significant fines could essentially lock you to that provider. And your company can suffer if its efficacy and quality decline, especially if there is a merger or an acquisition.

Establish policies for how you will handle dissolving a supplier or employee relationship. Following best practices and negotiating a mutually advantageous and amicable end to the relationship might open the door to the prospect of future collaboration.

A service level agreement (SLA) that outlines mutual obligations expected performance standards, and termination terms should be a part of your supplier and employee contracts.

Normally, contracts outline how much notice you must give to end a relationship. You must adhere to the pre-established notice method. The provider may claim that you have violated the contract's conditions if you fail to provide the sufficient and timely notification.

8.??Qualify Potential Buyers and Successors

A trade sale is typically a superb option to make an excellent financial exit from a business, especially if you have numerous competitive buyers.

Identify prospective purchasers who would profit from buying your company. A corporate finance advisor will have a database of potential purchasers and might be able to identify less obvious ones willing to pay a premium price.

You can consult trade publications, directories, and the financial press to get the ideal buyer.

But if you want a family member to be the successor to your company, it's essential to identify and openly communicate with potential successors. There might be just one viable contender. However, you must still be confident that this person possesses the required abilities and dedication. So you may get them to work somewhere else or let them take on various duties.

If there are multiple potential successors, it will be more challenging. It might not be a good idea to grant everyone in the company equal position. If you do, make sure they have the same goals in mind and define their responsibilities upfront.

Your kids will demand fairness from you. However, this does not imply that they should all participate actively in the company. For example, you may divide the company's share capital into two categories: one with full voting rights for kids involved in the firm and the other with limited or no voting rights.

9.??Plan and Time your Exit from the Company.

Conversation with other business partners and settling on the right exit option, whether a slow or quick transition strategy, requires enough preparation and proper timing. Exiting at the wrong time can hugely affect the business value by affecting its company cycle.

Set a date in the future by which you wish to have accomplished your ultimate goals for a voluntary exit plan based on criteria like company revenue and profitability.

Determine if you will proceed with a sale even if you don't meet the goals. Once you've set a deadline, your exit plan approach should focus on increasing your company's value and making it as appealing as possible to prospective purchasers.