Developing an exit strategy is probably the last thing on an entrepreneur’s mind when you start a business. But there may come a time when you decide to exit and move on.
Maybe you’re ready for something new, maybe you’re ready to finally retire and reap the financial rewards of hard work, or maybe it was your plan all along?
Whatever the reason, even if you don’t plan to sell your business right now, at BBN Times we know that developing a business and focusing on the right things is crucial before you can look into an exit strategy. It helps you prepare for unexpected circumstances and ensures a smooth exit when you decide to step down.
In this guide, we look closely at what a good business exit strategy is, the types, and tips you should consider. We also cover how you can develop an exit plan to ensure a smooth and profitable transition.
Without further ado,
What Is a Business Exit Strategy?
An exit strategy is a plan that outlines how a business owner intends to transfer ownership of a company. This involves transferring control to another party but can also include terminating business entirely.
If a company grows and earns good profits, an exit strategy gives entrepreneurs the option to sell and turn a profit. It also helps business owners limit losses when struggling to stay afloat.
If you receive an irresistible offer or need to take some time for personal reasons, then follow the steps outlined below to form your exit plan and get the process started. This includes chores like:
- filing the necessary paperwork,
- transferring assets,
- notifying any stakeholders,
- notifying staff.
To put together a viable and robust exit plan benefits the new owners in the case of a sale. With a process well-planned, written, and presented, people who want to acquire your assets can pick up from where you left off business with fewer worries and continue running the company with little to no hiccups.
A Sturdy Exit Strategy Is Vital For Financing
If you reach out to investors and funding, they’ll want to know how you’ll protect their prospect investment way before they lend your business any money. That’s called “trust in business” and it stands for robust business ethics.
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Types of Business Exit Strategies
There are a few different types of strategies you can consider when you decide to exit your business.
Let’s take a closer look at the steps in more detail:
- Get acquired by another company.
- Sell to a new owner.
- Pass on your business to your family.
- Sell your business stake to partners.
- Liquidate your business.
Another Company Acquires Your Business
An acquisition, or merger, is when a company buys your business, most often because of capital needs. With this exit strategy, you hand over the reins of your business and give up ownership.
Becoming acquired can be extremely lucrative as long as you find the right buyer. In some cases, it also gives you the option to remain as a board member. However, if you decide to step away, you may need to sign a non-compete agreement.
You Sell Your Business to a New Owner
This business exit strategy is self-explanatory — it involves listing your business for sale and finding a new buyer.
Ideally, this will be someone who’s familiar with the industry and has the business know-how to manage strategy and operations. Ways to find buyers include turning to business brokers and your social network.
Pass On Business to Family
Many entrepreneurs decide to keep their business in the family. A good example is Walmart, which the Walton family still controls through various holding companies.
Passing on your business to a family member can seem like an excellent strategy. It allows you to involve yourself to some degree still and act as a mentor.
However, taking this route can lead to familial tensions if there are disagreements about management decisions. One survey from PwC found that nearly half of family firms argued about the direction of the family business.
Sell Business Stakes to Partners
Selling to a partner is a highly common exit strategy.
The benefit here is selling to someone who already knows the ins and outs of the business. The sale should also go more smoothly if you have a good working relationship, and we don’t mean the intimate aspects, right.
For this exit strategy, you must create a buy-sell agreement — a legally binding agreement that defines the procedure for transferring ownership. It also establishes a method for determining the business’ value.
Liquidate Your Business
It’s hard to shut down something that you’ve worked so hard to build. But liquidating your business is another option that you might consider.
Liquidating involves permanently closing your business and selling any assets you have, such as inventory and equipment. Just remember that you’ll need to use the cash to pay off any creditors before you pocket anything.
If you decide to go this route, you’ll need to consider how liquidating will affect your employees and customers, so be sure to plan accordingly.
Planning Your Business Exit Strategy
Having an exit strategy in place will ensure that you’re prepared if you need to sell. Follow these steps to develop an exit plan for your business.
- Prepare your finances
- Choose a strategy
- Increase your valuation
- Inform stakeholders
- Tell your employees
- Limit your involvement
- Get help
Prepare Your Finances
Buyers will want to see all financial records before they even consider your business. What documents should you prepare?
Start by putting together a profit-and-loss statement for the last few years. These financial reports summarise the company revenues, costs, and accounting.
Consider working with an accounting firm to help you prepare your financial records.
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Choose an Exit Strategy
What are your financial goals? Do you still want to stay involved in the business? Do you have any partners or creditors that you still owe money?
Answering these questions will help you find the right exit strategy.
If you want to take on an advisory role, you might consider passing on the business to a family member. But if you want to step away entirely and have enough for retirement, then finding a new buyer might be your best bet.
Increase the Value of Your Business
Look for ways to add more value to your business. That could mean optimising operations, team expansion, or tapping new markets.
Consider seeking outside funding to help your business scale. A good example is StuDocu, an online content library that recently raised $50 million in Series B funding to scale its business.
Selling a business can take time before you hand everything over. If you plan ahead, you can bring in more revenue and get a higher offer when you decide to exit.
Inform Your Shareholders
The decisions you make will ultimately affect your shareholders and investors. It’s important to involve them in your plans to exit the business as early as possible.
If you took out any loans or secured funding from investors, create a plan that details how you’ll repay them and when.
Tell Your Employees
Breaking the news to your employees that you’re selling the business can be difficult. They may lose their job, and that’s tons of stress.
- Once you have your nitty-gritty plan in place, inform employees on your decision to sell and what everybody can expect.
- Keep employees in the loop of any organisational changes (if any) and be prepared to answer their questions.
Make Yourself Redundant
Buyers want a business that can sustain itself. If a business can’t survive without you, then potential buyers may have second thoughts.
Develop systems and document processes that break down how work gets done.
These steps not only increase overall efficiency but also make your business more attractive to prospective buyers.
Hire a Business Broker
While you may think you can manage your business exit on your own, hiring a business broker can prove to be invaluable when it comes to getting the best possible offer.
Brokers generally work on commission, so it’s also in their best interest to help you. In addition to helping you find buyers, a broker can also assist with negotiations and ensure you have everything in order.
Develop a Business Exit Strategy, Final Thoughts
Even if you have no immediate plans to sell your business, you should still put together and optimise a business exit plan in place as your circumstances may change in the future.
Follow the steps as laid out here to get started. Be sure to revisit your exit strategy as your personal and professional goals change.