The Best Exit Strategy for Your Business

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A business exit strategy is a plan for the transition of business ownership either to another company or investors. An exit occurs when a business owner decides to end his involvement with a business. This strategy outlines the form that the transition will take either be it internal of external.

Planning an exit strategy is the most commonly overlooked consideration of a business strategy, yet the exit strategy plays a key role in determining the strategic direction for a company. UBS (NYSE: UBS) Q1 Investor Watch Report, “Who’s the boss?” reveals 48 percent of business owners don’t have a formal exit strategy. Many don’t think to establish one until they are ready to leave. Surprisingly, majority of business owners don’t have a full understanding of what needs to take place in the selling of a business.

It is often useful to start planning for an exit in the early stages of the company’s life. Exit plans are imperative in ensuring that company transition smoothly to the new management and also makes it easy to keep tabs on the company’s finances. Exit strategy can influence many aspects of your business such as its legal structure, the types of revenue models you should adopt, the trade-offs between investing for long versus short-term growth, the types of investors you should seek, and other factors. By thinking rationally about various exit strategy from the outset, you can optimise your take home return on your investment and sweat equity.

This article provides an overview of the types of exit available to you and discuss when you should consider one. However, there isn’t necessarily a wrong or a right way to exit your business, its just a matter of finding the one that best fits your end goals and expectations.

Questions you need to answer before you walk away from your business.

What type of exit strategy is right for my business?

Merge

One classy way to exit a business is to merge or get acquired by another company. In a merger, two businesses combine into one, each being treated more or less as an equal. Acquisition is when a company buys another business. With an acquisition exit strategy, you give up ownership of your business to the company that buys it from you. One perfect example is when Google bought YouTube, seamlessly integrating the video platform into their own search product.

An acquisition or merger can be an appropriate approach for businesses of all sizes, including start-ups. The main benefit of a merger-and-acquisition exit strategy is that your company is likely to be highly valued because a buyer might have an immediate need for your product or service. Besides, multiple buyers may bid against one other, increasing the value of your business. When you sell to a competitor, you are more likely to negotiate a higher price than if you sell to a third party.

Sell to a friend

It is possible that when you are ready to exit your business, current employees or managers may be interested in buying your business.  When you sell to someone you know and trust, that extra familiarity and trust translates into less due diligence on both sides, reducing legal fees for everyone that involved. One added advantage is that the business can thrive as employees will get an established business that they are familiar with and are enthusiastic about. If you want to remain involved in some capacity, you can make an arrangement with the buyer to keep a share of the business and stay on in an advisory.

Initial Public Offering (IPO)

When businesses issue their shares to the public via a listing on the stock exchange for the first time, this is known as an initial public offering. Unlike a private business, a public business gives up part of their ownership to stockholders from the general public in return for more cash to grow and expand.  By taking your business public, you can secure more funds to help pay off debt.

In the reality, going public might be hard for small businesses—business conditions need to be just right for this option to be possible due to its high costs and require a significant amount of time.

Liquidation

Liquidating as an exit strategy is when you sell all of your assets with the intention to close the business in total. It is a recommended exit strategy when the time has come to simply move on. Liquidation is the least rewarding exit option in financial terms as it offers the lowest returns, where the only money earned from this process is obtained from the disposal of physical assets, such as land, equipment, and inventory. One disadvantage of this strategy option is that how it may affect employees, as well as clients or customers who rely on your service. This strategy means possibly severing relationships with employees, partners, clients, customers, and anyone else involved with the general operations of your business.

Reference
  1. Raconteur Publishing
  2. Investopedia
  3. The Balance Small business

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