Nothing lasts forever, even in business. In fact, one of the best moves a business owner can do when launching their business includes putting their exit strategy in the business plan. If you are a business startup, looking to retire, or wanting to move on, you might be wondering how to include an exit strategy in your business planning — and how to do it in a way that takes care of you, any employees, and your customer base.
There are different types of exit strategies. This article will discuss what an exit strategy is and why you need one. It will also go into different strategies you might choose from and what you need to know about each one.
What Is an Exit Strategy?
An exit strategy is exactly what it sounds like: your plan to exit out of your business by shutting down or moving the company into the hands of someone else. It may sound like something you would do when it's time to retire or sell, but there are some things you should consider even when launching a new company that will help make your eventual exit much easier.
- Individual goals: Know what you want to achieve with business ownership. The answer might be to make a profit, but it may also be something else. Maybe it's creating change, something that your family can carry on in future years, or something else entirely. Your goal will help determine the type of exit you want to make.
- Time frame: You may want to get a business up and running and then turn it over, or you may want to run the business for a number of years first. Whatever your time frame, plan backward from the ideal exit time so you aren't rushed and make potentially costly mistakes.
- Next steps: Like your individual goals, what you want next for your business will be highly personal. Ask yourself if you plan to have your business continue without you or cease its operations entirely.
- Demand: When it's time to exit your business, the demand for your products or services will impact your decision process. If you're planning to sell the business, the market of interested buyers will also have an impact.
- Existing partners or debts: If you took on any partners, investors, or if you've incurred debts, those will need to be paid off when you exit. The type of exit strategy you employ will impact your ability to do so.
Why Are Exit Strategies Important?
Choosing the best exit strategy can make all the difference in a transition. When you know your timeline to exit, it helps you decide the types of projects you want to undertake: long-term growth projects versus short-term projects.
When you exit a business, having a plan that includes succession planning will mean avoiding a leadership vacuum and can help employees continue to succeed after you're gone. It also means you will have the time to develop leadership within your company. Your exit plan can also help the new owners hit the ground running rather than spin their wheels learning about who they're working with and the business operations.
Additionally, when you have a strategy, you'll be more likely to keep your performance, cash flow, and revenue analysis up to date. And even though it may seem like extra work at the time, you'll be able to liquidate your stake of the business more efficiently.
5 Small Business Exit Strategies
Now that you understand why you need an exit strategy and what to consider when putting a strategy in place, let's talk about some of the most common exit strategies to use and how they work.
With an acquisition strategy, you sell your business to another business (typically a larger one). One of the benefits of this strategy is boosting your company's valuation and making more on the sale. When you sell to a larger company instead of selling to someone you have a relationship with, the anonymity allows you to do more negotiating and get the best price.
On the other hand, though, when a larger company takes over, it can result in large changes to what you have built and, sometimes, can have a negative effect on your employees. It also may mean that the company loses its identity entirely through absorption. The success of the acquisition strategy is also largely dependent on the market of potential buyers, which means you have to get your timing right or you might not profit as much.
Although sometimes used in tandem with acquisitions, a merger is actually quite different. With a merger, two companies of equal size decide there is a benefit to joining forces and merge the businesses. It's often a good time for a business owner to step back and exit the business entirely. However, when companies merge, there's typically no actual cash exchange. It's important to set clear terms on buyouts or shares being distributed.
Liquidation can happen in two ways. You can liquidate your business over time. This works well for companies defined as "lifestyle businesses" where you can just continue to pay yourself until there is nothing left and close. It's not an option that works well if you have investors or employees, though.
The other version of liquidating is to close and sell off any assets you have quickly. The benefit is speed and efficiency. The risk is what you are able to sell those assets for — which will be dependent on the market. You'll only make money from what you can sell, and some of your most valuable assets (like business relationships) can be lost.
Sell to Family or Friends
Selling to a friend, a family member, an employee, or a customer is also known as selling to a friendly buyer. If selling to an employee, you may also consider a long-term management buyout. If legacy is important to you, this might be an option to consider. The plus side of this exit strategy is the possibility that your legacy and the business you built will be preserved. Passing a family business to a new generation may have been the goal all along, and there is less due diligence involved when you sell to a known quantity.
The downside, though, can be costly. First and foremost, when you know someone, it makes it harder to negotiate. You want to be fair and help make a good deal, which means that you may walk away with less. When you sell to someone you know, there can also be issues with negative emotions over changes that might be made once you walk away.
Initial Public Offering (IPO)
If you choose to go the initial public offering (IPO) route, know that it will take significant time. With an IPO, you sell part or all of the company in a public market. Then, you and your management team typically continue to run things, although with more regulations than before. While you continue to operate, your employees and investors can sell stock and make some money. When it's time, you can step back from the business, selling your stock, as well.
Organize Your Small Business Finances With Skynova
From the day you launch a new business, keeping your exit game in mind will only help your business do better and ensure you walk away with the best possible outcome. No matter which strategy you choose, one key aspect is keeping your finances and records up to date to avoid costly delays.
Skynova can help make your accounting easier so that you can focus on growing your business. Our software products are designed to help small businesses like yours. Whether you want to create invoices, bids, or proposals, or keep your accounting and receipts up to date, Skynova is there to lend a hand.
Notice to the Reader
The content within this article is meant to be used as general guidelines for a business exit strategy and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.