Exit Strategy
A business exit strategy outlines the steps a business owner needs to take to sell their ownership in a company to investors or another company and generate the maximum value.
An effective exit strategy should be planned for every positive and negative contingency regardless of the investment type or business venture. This planning should be integral to determining the risk of the investment or business venture.
Who Needs an Exit Plan?
Business owners of both small and large companies need to create and maintain plans to control what happens to their business when they want to exit. An entrepreneur of a start-up may exit their business through an IPO, a strategic acquisition, or a management buyout. At the same time, the CEO of a larger company may turn to mergers and acquisitions as an exit strategy. However, some exit strategies are thrust upon the owner, leaving them with no choice but to file for bankruptcy or be liquidated.
Types of Exit Plans
Liquidation
Liquidation means that the business is closing down and it needs to sell its assets to try and cover debt and final salaries. It is one of the most common exit strategies faced by small businesses and sole proprietorships in particular. Liquidation can be one of the simplest and fastest exit strategies if the business runs well and is attractive to buyers. However, entrepreneurs run the risk of a lower return on investment due to the sale of assets.
Mergers and Acquisitions
For this type of exit strategy, the business is either merged into another, or it is acquired completely, handing over a controlling interest in a business to a larger, more profitable investor.
Start-ups often find this attractive because of the option to still be involved in the business operation, but being able to set their own price.
Legacy
The legacy exit strategy means that a specific person, perhaps a family member who is involved with the business, or a promising employee, is groomed to take over the enterprise. For this strategy to succeed, the business owner needs to mentor the successor in both steering the company and understanding the different responsibilities the role entails.
Acquihires (Strategic Acquisition)
An acquihire business strategy is done by a bigger business to acquire the skill, talent or knowledge of another business’s employees. The seller can easily make a profit in this way, while ensuring that the employees that help build the business has a secure future. It’s biggest advantage is that the business owner has more control over the negotiation of the sale.
Management or Employee Buyout
Whether it be one of the employees or management of a company, this involves these persons buying the business from the original owner. The challenge with this strategy is that a business owner isn’t able to determine beforehand who will be the best candidate for the future, but transferring ownership to someone who is already in the business helps ease the process.
Sell Stakes to an Investor or Partner
Selling the stakes of your business to an investor or partner can be an effective exit strategy for those who aren't the owner or sole proprietor of a business. This strategy allows the company to continue running with no significant changes to its operations.
Initial Public Offering (IPO)
An IPO is a method of making a privately owned business public. Shares are sold to the public, who then become stockholders in the company. When done right, IPOs can be highly profitable for business owners and investors.
Bankruptcy
Bankruptcy is never a first choice. Businesses that file for bankruptcy have their assets seized by the authorities and receive debt relief. It’s quick, requires minimal paperwork and allows the business to rebuild its credit, but doesn’t guarantee relief from debtors seeking payment.
Why Is It Important to Have an Exit Plan?
Businesses and investors should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments.
Here are several reasons why having an exit plan is important.
Removes emotions: An exit plan removes emotions from the decision-making process. Having a predetermined level at which to exit an investment or sell a business helps avoid panic selling or making rushed decisions when emotions are high, which could accentuate a loss or not fully realise a profit.
Goal setting: Having an exit plan with specific goals helps answer important questions and guides future strategic decision-making. For example, a startup’s exit plan might include a future buyout price that it would accept based on revenue turnover. That figure would help make strategic decisions about how big to grow the company to reach predetermined sales targets.
Unexpected events: Unexpected events are a part of life. Therefore, it’s essential to have an exit strategy for what happens when things don’t go to plan. For instance, what happens to a business if the owner faces an unexpected illness? What happens if the company loses a key supplier or customer? These situations need planning in advance to minimise potential losses and capitalise on gains.
Succession planning: An exit plan specifies what happens to the business when key personnel leave. For example, an exit strategy might stipulate through a succession plan that the company passes to another family member or that the business sells a stake to other owners or founders. Carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart.
Exit strategy refers to how a business owner or investor will liquidate an asset once predetermined conditions have been met. An exit plan helps to minimize potential losses and maximise profits by keeping emotions in check and setting quantifiable goals.
Suggested Experts Of Exit Strategy
R625 / 30Mins
Founder
About
Victor is an Executive Consultant and Success Coach with a Master’s degree in Marketing from the International Institute of Marketing. As a certified NQF8 Marketer, he leverages his academic expertise and extensive experience to help individuals and businesses unlock their potential. Victor specializes in developing equity growth strategies and solving complex enterprise challenges with his team’s support.
Free / 30Mins
Founder of Ohsome Labs
About
As a driven entrepreneur, I'm passionate about seeing SMEs not just survive but thrive. With experience ranging from small businesses to some of South Africa's largest corporations, I offer valuable insights into business operations. I leverage this expertise to help SMEs and entrepreneurs navigate and manage their businesses successfully. My services include product development, marketing, branding, positioning, sales, and systems automation, tailored to drive growth and success.
No question is too big or too small. Our Experts are here to help you find answers.