In the struggle to launch a business, many entrepreneurs forget to keep the end in mind. You have put in the money but are not sure if this is the road you will always be walking in the future. If you are looking to start your business, then planning a way out of it, in case things do not go down too well, is also necessary. Hence, a business exit strategy is a must in order to ensure a way to get your money back if your business takes an undesirable path.
So, What Exactly Is An Exit Strategy?
A plan executed by the investor and the entrepreneur to safeguard investments and interests from future uncertainties to maximise benefits and minimise losses.
Are Business Exit Strategies Important For Your Business?
Not everything is meant to last, the same goes for a business. Therefore, planning one is important, especially if you are looking for outside investment. Simultaneously it is important to implement changes with every step as your business begins to prosper or vice versa. Some of the main reasons include:
- Retirement, Disability or Death of a partner
- Shutting a business that is not bringing revenue
- When the profit goal has been achieved
- Legal reasons
- Change in industry and market trends
Or, if you simply want to hike on a different path. The reasons could be endless. Therefore,if you want to wind up your business in the future, keep these 5 business exit strategies in mind.
Types of Exit Strategies
1) Let it take its course
Here, you keep the business expense low and pocket the profits and eventually let the business ‘take its course’ and dissolve it when it is no longer profitable. It is an ideal option if you are in the business only for the profits and are not looking to further your business legacy.
- You can enjoy the huge paycheck and bonuses.
- With a huge paycheck comes a huge tax liability.
- If you do not structure your business smartly and lower your dependence on investors you could end up risking the danger of draining your ‘company money’
If you really want to pull the plug on your business then Liquidation is the way to go. The business activities come to a shutdown and the company assets are distributed, as per the prior agreement, among shareholders, creditors, etc.
- It is easy and does not involve lengthy procedures.
- Company debt is written off.
- All legal actions against the firm will end.
- Owner can be held personally liable for company debts.
- If you want to get into business again, you will have to start a new company, as running this one will not be an option.
- There are chances of facing a post-liquidation investigation.
- You will be able to recover just the current market value of our business while rest of your efforts go down the drain.
- It damages business values and relationships with clients, customers and employees that were built over time.
3) Selling to an interested buyer, Management or Employees
In simple terms, cash in exchange or ownership. If the company had the potential for growth then you could simply sell it to an interested buyer. You can also sell it to the ‘inside-men’, i.e. employees, managers, etc. This is ideal if you want to continue the legacy of your company as you hand it over to the people who have first-hand knowledge of how to run it.
- It requires less due diligence.
- Your business legacy continues.
- There is a chance you can still exert some sort of influence in the running of the business.
- It could pose a problem in the future if you are not clear about your financial and tax liabilities.
- Employees may not be qualified to take over a business or it could lead to client dissatisfaction with the new handover prospect.
- Selling to another person may take a long time. It is estimated that less than half of the businesses that listed for sale actually sell.
The most common of all business exit strategies, also known as Merger & Acquisition, where another company that could profit from your own, buys you off. However, it depends on the acquirer whether they want to carry out the same business processes or change everything entirely.
- If your business is tailor-made to suit the other company’s need, you might end up making a huge profit and have a decent chance to negotiate a higher margin than what you actually invested.
- If you do not have potential buyers, it could end up selling that company for way less, or maybe, not selling it at all.
- There could be an issue of clashed cultures that comes with an acquisition.
5) Initial Public Offering
IPO is a process wherein a businessperson can make money by listing on the stock exchange and sell its shares to the public. It is not ideal for small businesses.
- Challenging, but if achieved, one can gain a lot monetarily.
- Complicated and lengthy procedure.
- Increased IRS and public scrutiny.
- There will be a lock-in period for selling shares, underwriting fees and running around convincing analysts as well as investors.
Steps you should take to prepare for an exit.
- Determine the personal and business goals.
- Access your financial readiness and have your bookkeeping in order.
- Identify the strategy that best suits your goals, financial and operational status.
- Timing is everything. Keep in mind the market and seasonal trends before you finally decide to exit.
- You need to ensure beforehand who you want to appoint as an owner. Especially if the success is dependent on the owner, which could hinder the prospect of future success with the transferability of ownership.
Understand that there are numerous other exit strategies for your business based on your industry type and personal goal. They cannot be formed overnight and call for thorough planning and professional help. The best time to plan your business strategy is during the conception of your business itself, but it’s never too late.