In conceptualizing a business, the usual focus is on the marketing strategy, how to optimize the product or service to offer or building up the community that would patronize the brand. All of these are important, that much is true. However, it’s likewise okay to begin with the end in mind: to see beyond the comings and goings of the business that you are planning to set up and try and look forward to the time when it would be more beneficial for everybody concerned – including you as the owner – that you would leave the business behind. This is where a business exit strategy comes in.
An exit strategy is a detailed plan of how a business owner could leave a business. The plan acts as a guide for a smoother transition, may it be in the form of a sale to one of the business investors or a complete closure of the business, among other options.
While there are misconceptions regarding exit strategy in that it only takes place on account of a business’s loss of profitability (or complete lack thereof), the truth is far from it – a business exit strategy shows readiness for any impending future scenario that your business could face.
A holistic exit strategy takes into account all the stakeholders of the business in deciding what strategy to implement; it can plan out different scenarios that the business could very well face in the future so that nothing will take it by surprise. A survey showed that 48% of business owners have no formal exit strategy in place. It’s not surprising, considering that exit strategies are somewhat seen as pessimistic because of the common misconception that exiting a business comes only at a time when it is no longer lucrative. Here, we will be discussing the different kinds of exit strategies available to you as a business owner as well as the importance of having an exit strategy in place.
There are a few common exit strategies that businesses adopt, depending upon the needs and the circumstances at the time of the exit. Here’s the list, and we’ll be discussing each succinctly:
-Management (or Employee) Buyout (MBO)
-Mergers and Consolidation
-Initial Public Offering (IPO)
-Filing for Bankruptcy
A management or employee buyout happens when a current member (or members) of the management, or an employee or a group of employees, takes over running the business. This exit strategy would be good for the continuance of the business since it’s the current management or employees themselves who will take the helm of running it, and they have been with it previously.
In family succession, the business is turned over to the owner’s close family relations who will take over the business. This is particularly important to discuss because if you are solely considering family succession as your business’s exit strategy, a survey conducted by UBS showed that 82% of business owners said that upon consultation, their children would rather inherit the money or proceeds of the sale of the business rather than managing it themselves. Something to think about.
A merger pertains to the combination of two different business entities to give rise to a new one. An acquisition, on the other hand, happens when one business entity buys out the other. In a merger, the current business management usually forms part of the new one. In an acquisition, it is not necessary that the management team and employees of the purchased business will be absorbed by the buying entity. You have that to consider when thinking of a merger or acquisition as your business’s strategy, especially if you have employees.
In the case of liquidation, the business ceases to operate altogether. The business’s assets are disposed of, and its liabilities should be settled before closing the books once and for all.
An Initial Public Offering, more commonly known as an IPO, is where a business or company sells its shares to the public in the form of stocks. This exit strategy is usually done with the aim of expanding the business through the participation of the public and the funds that they will be bringing in as capital. With this, the original business owner could opt to stay on board or completely sell his or her shares. Careful study is needed before you decide to open your business for IPO. According to Statistica, in the US, shares of companies have been on a decline year-on-year for the past decade. From a peak of 81% in 2009, only 28% of companies became profitable after the IPO in 2021.
Filing for bankruptcy is the remedy for businesses whose enterprises did not become lucrative. The anticipated profits unfortunately did not materialize, and continuing the business would do more harm than good to the business owners and its employee/s if there is/are any. Once you file for bankruptcy, the business’s assets will be used to pay off existing liabilities to ensure that nothing gets missed.
There isn't a formula to know which exit strategy will fit best with the business you have in mind or currently operate. In conceptualizing exit strategies for your business, here are a few things that could guide you in choosing what could be most beneficial to your business:
Is your business thriving in the present? Given its performance, which strategy would be most beneficial for you and your employees, financially or otherwise?
Are your competitors doing well right now? Or is the industry that you are in suffering from the brunt of the economy one way or the other?
Considering how big (or small) your business is, which strategy would be most beneficial and conducive to your long-term goals?
Given your long-term goals, which strategy/ies would be best to implement that could help you in attaining such goals?
Would this strategy positively affect my employee/s and stakeholder/s?
Are there certain conditions that need to be met before you are willing to exit the business? Are these conditions ironclad or will they be flexible?
Ultimately, you can opt to choose only one strategy or a combination of a few to be ready for any contingency. Remember, it is with proper planning that you can have a clear vision for your business.
Now that you know what you should look out for when thinking about which exit strategy would be best for your business, you should likewise be mindful of the following:
In order to set up a robust exit strategy, you should know how much your business is currently worth. This knowledge will help you decide on important matters such as whether to continue with the business or whether the time is ripe to execute the exit strategy. This sets the expectation of all the interested parties such as you, the potential buyer, and your employee/s and stakeholders if there are any.
In setting up the exit strategy, you should have a clear picture of your vision for the business. In case contingencies come up and you have to resort to the exit strategy, what happens to your participation in the business? Will you still be a part of it or will you relinquish all management prerogatives to the new owner? Will there be a new business prospect once you exit your business? Once you have clear answers to these kinds of questions, you’ll have more direction for your exit strategy.
Now that we have discussed common exit strategies, it is best to appreciate the potential benefits that your business could reap when you have done the proper planning and eventually execute that plan.
Having an exit strategy in place apprises you as the business owner in terms of what to prepare for the strategy to succeed. For example, having a proper business valuation will let you know your business’s actual standing once you decide to sit at a negotiation table. This will give you an idea of whether you have the upper hand in the bargaining and more importantly, whether it’s the proper time for you to sit on that negotiation. Moreover, having an exit strategy gives you a heads-up on how much funds were needed for the business exit to be successful.
Having an exit strategy in place gives comfort to you, as the current business owner, as well as to the potential new owner, for this demonstrates readiness and smooth transfer of responsibilities as well as powers. It gives the new owners the assurance that they will not be left to fend for themselves in the dark once they have assumed the business: they will have a clear overview of the business’s financial standing, management policies, employee count, and guidelines.
As the owner, you can opt to make use of an exit strategy in order to sell the business once it has met a certain profit threshold. That way, you can go ahead and get a head start on a new endeavor. Other times, when business is not as profitable as you would like it to be, an exit strategy can be used to minimize your losses.
The reality is that there is no perfect time when it comes to exiting your business. The timing of your exit will be largely dependent on a lot of factors, most of them based on your own determination. Current industry trends and the present business climate as well as the economy’s current performance are just some of the factors to consider; timing your exit from the business does not always mean that it has become unprofitable or that you are now incurring losses. Ultimately, exiting the business entails your readiness in meeting the situation as it arises.
Planning your business’s exit strategy has a lot of benefits. Beginning with the end in mind does not necessarily mean that you are pessimistically looking at your business venture, but rather, you are planning for the long-term and for the contingencies that the business could face so that it won’t take you by surprise. In choosing the proper exit strategy for your business, you need to consider a lot of factors such as its scale and current performance and its compatibility with your personal, long-term goals.
When setting up a robust exit strategy, it is important to conduct a business valuation first and foremost to give you an awareness of your business’s actual standing. Moreover, you should have a clear vision of your business’s future to better guide you in deciding which exit strategy to make.
Having an exit strategy is beneficial for you as a business owner in that it gives you a clear direction in terms of proper preparation and ensures a smooth transition to a new owner once you decide to exit your business. It likewise ensures that your exit will be profitable, or in some other cases, that your exit will be a way to limit the losses that you have incurred in case your business takes a dire turn. It only proves that the old adage remains true: failing to plan is planning to fail. However, if you plan and prepare, then you will not be caught off guard by any circumstance that could be thrown your way.