Why having an exit strategy in 2022 is so important!
Date13 May 2022
CategoryGuides & Helpful Hints
A business exit strategy refers to how you plan to transfer ownership of the company when you leave. After investing your personal wealth into your business a clear exit plan will help ensure that you get a healthy return on your investment. However exit strategy planning is vital whether your business is successful or not.
Types of exit strategy
Common types of exit strategies include a strategic acquisition, management buyouts, or in smaller businesses selling to investors or someone you know and in larger businesses perhaps an initial public offering (IPO) on the stock exchange. Other examples of exit plans are mergers, liquidation, or in a worst case scenario filing for bankruptcy.
Why an exit strategy is necessary
All types of companies — large and small — need an exit strategy. Planning to leave a business doesn’t mean planning for failure. Indeed many people many start a business with the express intention of selling it when they meet profit objectives or when the company has met various lifestyle or financial objectives its owner may have had. Equally an exit strategy is helpful for when you plan to retire especially is a lot of your wealth may be tied up in the business you have started. And in that respect if you are a small business owner over 50 we would suggest that you need to start planning for this even if you intend to retire in 10 years time or more.
Having a formal exit strategy is also helpful to ensure a smooth transition. This is because leaving a business that you helped establish can be a stressful time. Emotions can easily affect your judgment. So a formal exit plan can help you make tough decisions and protect your finances.
There is another reason it’s wise to have a formal exit strategy - knowing the circumstances that will cause you to leave the company helps you focus early throughout the business venture. Indeed knowing and setting conditions for leaving can help you set goals, make plans, and manage your assets wisely.
If you are a small business what should your plan look like
Business exit strategy options depend on the type of company and objective. However there are several critical elements in every exit strategy:
Exit strategy objectives — It’s a good idea for any new business owner to consider individual goals. So for instance you may want to have a specific return on investment or leave a legacy. Knowing your objectives helps to prioritize goals to sell the business for a substantial profit.
Exit strategy timeline — Having a time frame when you intend to leave or sell the business is vital in a company exit strategy. When you know how long you plan to be part of the business you can plan accordingly.
Intentions for the business — Include within your exit strategy what you intend to happen to the business. You may want to sell it on, merge with another company, or leave it to a family member.
Market conditions — Another factor to consider is conditions in the industry that could dictate the price or timing of the sale. For example if there are many potential buyers or the market for the services that you provide are high you could sell for a higher price than you might get at other times.
Once set it’s a good idea to revisit your exit strategy plan every so often. So say you initially planned to merge your company with a larger one. However your son or daughter now wants to buy the business from you - so you should update your plan to selling to a family member instead of looking at merging.
An example of different exit strategies
For each of these strategies you will also see the positives and negatives.
An acquisition strategy
Selling ownership of your company is one of the most common exit strategies. An acquisition exit strategy means that you give up the right to run your business. In some cases you could sell your business for a higher price than it’s worth especially if you sell to a competitor.
There are a few reasons why acquisition is not an exit strategy for all business owners. Firstly you may not be psychologically ready to let go of the business entirely. Secondly you may have to sign a non-compete agreement when selling to a competitor meaning you can’t start a new business in the same industry.
+ You can make a clean break from the business and sell it for a significant profit.
- The process can be time-consuming, and your business may cease to exist in its present form.
A merger strategy
A good small business exit strategy is to merge it with a larger company. This type of exit strategy usually increases the value of your business. When merging your business you typically remain part of the new company - either as an owner or director / manager. Usually mergers take place with businesses in the same industry. The result is that your business grows in size and becomes more profitable.
+ Your business can increase in value, and you could take on a new role in the merged company.
- This is not the best exit plan if you want to retire or cut all ties with the business.
Selling the business to a friend, family member, or partner
If you want to create a legacy then selling to someone you know is an excellent way to exit a business. In this instance you could have plans to transition the company to your son or daughter or another close relative. Other options to sell the business could be to a business colleague, partner, or arrange for an employee buyout. When dealing with family or friends you may not get the optimal value of your business although optimum value is not normally the driver in this situation.
+ You can groom your successor to take on the role of owner to ensure a successful transition. Additionally, you could continue in an advisory role.
- There may not be a suitable person to leave the business to. Also transitioning the business to a family member or friend can cause stress and even jeopardize the relationship.
Which strategy best?
The best exit strategy for your business depends on several factors. The two most important things to think about are what is best for you and what is best for your business. As such you need to ask yourself the following questions.
Involvement — Think about how much you want to be involved in your business in the future. Do you want to cut ties with the company but ensure that the business continues to operate? In that case, a merger or acquisition could be the best idea.
Your personal financial or liquidity needs — It’s essential to know what your future financial needs will be. An acquisition will give an immediate payout. However, a merger could mean you continue to have a role in the day-to-day operations.