EXIT STRATEGIES FOR A BUSINESS
A business exit strategy is a plan for the transition of business ownership either to another company or investor. An exit strategy is a strategy in which entrepreneurs and investors who have invested a whole lot into the business transfer ownership of the business to a third party. It is a way in which investors get the return on the money they invested in the business.
According to Investopedia.com, an exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once the predetermined criteria for either has been met or exceeded.
An exit strategy may be executed to exit a non performing investment or close an unprofitable business. It can also be executed to limit losses, when a business or investment has met its profit objective, or due to catastrophic events, legal reasons or the business owner wants to back out of the business.
You might ask me that who are those who need an exit strategy? In my last article on how to attract funding from angel investors, I wrote that one of the things that angel investors look out for before they can invest in your business is that you must have a good exit strategy. So one of those who need an exit strategy is someone who wants to attract angel investors to invest in his or her business. Also anyone seeking venture capital funding must have an exit strategy.
However, it is advisable for every business to have an exit strategy no matter how small the business is, it is very good to plan and prepare ahead on how you will transfer the ownership of your business whether it will be acquired, or you will sell it e.t.c. It is not too early or too late to plan.
Generally, most business that needs investment should have an exit strategy because it is not all business that can be invested on, and it should be included in their business plan and in their pitch to the investors.
You might also ask me that why is a business exit strategy important? It is important because;
- It ensures that business owners have placed systems for recording essential and important information on a regular basis.
- It helps a business owner to have a better understanding of their revenue streams, cash inflow and outflow. They are able to know and determine the activities that generate revenue the most and how the revenue is being spent and this helps the business to keep accurate financial information which in turn help in decision making.
- It leads to smooth running of the business because an exit strategy plan contains all the necessary information that the person taking over the business would need to run it.
- It also help to develop an effective leadership.
There are different types of exit strategies. The determining factor on the type of exit strategy to adopt for your business include the type of business you are running, your business goals and financial plans. The most common types of exit strategies are;
- Family Succession
- Initial Public Offering (IPO)
- Management buyout
- Become part of an “Acquihire”
- Sell your stake to a partner or investor
- Declare bankruptcy
- Family Succession : This is one of the most common type of exit strategy. Most business owners pass on their business to their immediate family members to preserve the family name in the business. This is one of the best way to pass on your business if your family or the person you want to pass the business to in the family have adequate knowledge about the business and the skill set needed for the business, must be competent, and is ready to take up the business and make it succeed.
This is why most fathers that are business owners want at least one of their children to go into their line of business so that they can pass on the business to them. Some of the advantages of passing on the business to a member of the family is that you can choose the person you want to be in charge of your business by yourself and train him or her before you leave the business. Another advantage is that you might necessarily not have to completely stay out of the business, you might be an advisor or take up a transitional role.
However, one of the problems of family succession as an exit strategy is that you might not find any family member who is ready to take up the business, in some cases you may even find someone that is ready to take up the business but is not capable enough to handle the business. Another problem or disadvantage is that your employees or business partners might not support the individual you want to hand over the business to. It can also cause family rivalry if the business owner has or is from an extended family.
- Liquidation : Liquidation is one of the fastest ways to close a business. Sometimes, it might be the only option for a business in the case where family members are not capable of taking over or are not interested in the business, bankruptcy is close at hand and the business is dependent solely on one person. According to the Advanced English Dictionary, Liquidation is the termination of a business operation by using its assets to discharge its liabilities. That is, after selling the assets, any profit made are used to pay creditors first. It simply means closing your business and selling off your assets.
Using liquidation as an exit strategy, you can only make money when you have tangible and valuable assets that you can sell like equipment, land e.t.c.
Some of the pros or advantages of this type of exit strategy is that it is one of the simplest, quickest and easiest method compared to other type of exit strategies, another is that you will have no course to worry about the business again.
One of the cons or disadvantages of liquidation as an exit strategy is that you would most likely not get the biggest or largest return on your investment.
Acquisition: This type of exit strategy occurs when a business owner sells off his or her business or a business is acquired by another business. Acquisition is often known and referred to as “merger and acquisition”, this is because when a business or company decides to sell itself to another business, the buyer would end up merging up the services or products of that business with that of its own initial business.
One good thing about this strategy is that if you can strategically align your business right, you stand the chance to sell your business or company more than its original worth. So if you know acquisition is your exit strategy from the start of your business, try to present yourself very attractive to companies that might be interested in purchasing your business later.
Another advantage of acquisition is that you will be able to have a clean breakup from your business. You also have the freedom to negotiate your price, terms and conditions with your merger.
Some of the disadvantages of this type of exit strategy is that it is very costly and time consuming, your business may cease to exist as it was once e.t.c.
Initial Public Offering (IPO) : This type of strategy involves convincing investors and analysts that they should stock in your business because it would worth something to the public. That is, selling your business to the public for a large profit. However, this type of exit strategy is not for all kind of business, for the public to buy your business, your business must be appealing to the public in a way that will get stock buyers excited to buy your business.
Although this strategy is not too easy because the process is difficult and long, but the easiest way to go about it and get listed if you think it is the right strategy for you is to seek investors that have done it with other companies before because they know the process very well and will help you better. To adopt this type of exit strategy, there are a lot of business conditions that must be met.
- Management Buyout: This type of exit strategy occurs when you want to maintain the legacy you have built for your business and you are afraid of passing it to your family members maybe due to the person might not be diligent or committed enough, or the person might not understand the business, or to even avoid family rivalry, you can decide to sell the business to your employees. This is also a good strategy because the employees already know how things are run in the business, they have a very good knowledge about the company’s goal, culture and they have the determination to make the business succeed because they all share the same goal so it is an advantage to you. As a business owner or entrepreneur, having your employees buy your business is a very good idea if legacy matters to you. Another advantage of selling your business to your employee is that you will be able to make money out of the deal. But a major problem about this type of exit strategy is that you might not find an employee who wants to buy the business from you
- Become part of an “Acquihire : This is another exit strategy which is very much different from the original acquisition strategy. In this strategy, a business buys your company for the sake of acquiring your skilled and talented employees. Although this will not maintain your legacy in name, it will help to take care of your employees.
- Sell your Stake to a partner or investor: This type of exit strategy is for businesses that are not owned by sole proprietors. It occurs when you sell off your stake to a business partner or investor. Some of the advantage of this strategy is that your business legacy will remain intact, you can fully exit your business and earn profit on the sale of your share, another advantage of this strategy is that the buying process will be much easier because you will be dealing with a buyer who you already know and you’ve worked with in the past.
Some of the disadvantages of this type of strategy is that you might not find a buyer who is ready or willing to purchase your share, there might also be a problem between you and your business partner.
- Declare Bankruptcy: This exit strategy is one that is not always planned for by small businesses because no business owner or entrepreneur wants to file for bankruptcy but a business owner or entrepreneur can resort to it as the last and only option available for exit if something goes wrong and he or she did not plan ahead for the other exit strategies listed above. Some of the advantages of filing a bankruptcy are the step will relieve you of the debts and responsibilities of your business, you will be able to start building your credit and move on from your business. However filing a bankruptcy may likely affect your chance to borrow credit in the future. It will also end your relationship with your business partners, clients, and customer’s e.t.c.
A proverb says “If you fail to plan, you have definitely planned to fail”. So, as a business owner, even as much as you want your business to grow and you want to make profit from it, you must make plan and determine the type of exit strategy you want to use for your business.
ABOUT THE AUTHOR
Damilola Babatunde has a great passion for writing. She write articles on starting a business, how small business owners can grow their business e.t.c and many small business owners have really benefitted from her write ups.