Planning your exit strategy before actually starting your business might seem a little counter-intuitive. But in fact, it’s important to think through your end-game so you can plan your journey accordingly.
Leaving a business can be stressful. But a good exit strategy, planned well in advance, ensures a smooth transition if and when you hand over the reins to a new owner. In this guide, we’ll explore the pros and cons of different types of business exit strategies and when to use them. Then, we’ll show you how to plan your exit strategy.
What is an exit strategy?
An exit strategy is the plan that a business owner, founder, investor, or venture capitalist has for exiting a business. It may involve selling their share or the whole company for a financial return — or passing it onto a chosen successor.
Some owners have an exit strategy in place when they start their business. For example, they might plan to sell their business to a competitor in 5 years’ time for a 20% profit. However, research shows that less than half of business owners have an exit strategy or succession plan in place.
When are exit strategies useful?
You can use an exit strategy to:
Shut down a business that’s not profitable
Cash-out an investment after meeting profit objectives
Close a business if market conditions change significantly
Sell a company
Sell some shares in a company
Relinquish control or reduce ownership in a company
List your company on the stock market.
Types of exit strategies
Here are 7 types of business exit strategies to consider based on your long-term goals. We’ve outlined the pros and cons of each option so that you can make the best choice for your company and employees.
Merger and acquisition (M&A) deals
An M&A deal is the most popular exit strategy, especially for startups and entrepreneurs. Depending on the conditions of the agreement, you might remain involved in the business or exit altogether.
You’ll most likely be selling your business to a larger company that may want to increase its reach or acquire your product expertise or capabilities to beat the competition.
Pros:
You can control the price, terms and details of the M&A
If you are selling to a competitor or have several bids, you may be able to increase your asking price
You get a clean break from the business
A merger could keep a struggling business running.
Cons:
M&A deals can be lengthy, expensive and sometimes unsuccessful
The company culture and systems of the merging firms may be incompatible
The merger may result in employee layoffs
It may be hard to let go of your business.
Employees acquire an ownership interest
An Employee Stock Ownership Plan (ESOP) allows employees to acquire an ownership interest in a company by purchasing stocks or shares.
Pros:
Empowers employees to make the business successful
Motivates employees and increases their commitment to the company
Causes less disruption to business operations.
Cons:
ESOP company structures are challenging and costly to set up
Business decisions can take longer because all ESOP members need to approve.
Management buyouts
Like an ESOP, a management buyout (MBO) allows your senior management team to buy your business from you.
Pros:
You can hand the business over to an experienced team
The transition will likely be more seamless than selling to a third party
Cons:
The management team may lack experience in business ownership
The management team may struggle to raise the funding required for a MBO.
Initial public offering (IPO)
An initial public offering (IPO) exit strategy involves selling shares of stock to the public and converting the company from private to public ownership. It’s best suited to companies that are sufficiently established and resourced to manage their responsibilities to shareholders.
Pros:
An IPO is one of the most profitable business exit strategies
IPOs can increase publicity, reputation and brand awareness.
Cons:
An IPO is one of the most challenging and expensive exit strategies
Significant initial and ongoing documentation and reporting requirements
Shareholders play a significant role in running the company.
Liquidation
Liquidation is a common exit strategy for failing businesses, but you could also use it to exit a successful business. Liquidation involves selling your assets, repaying your creditors, paying any shareholders, and closing your business.
Pros:
It’s a straightforward process that you can complete quickly
You can get your cash immediately.
Cons:
You only make money from assets you can sell, such as land, inventory and equipment.
There will most likely be job losses as a result.
Family succession
The family succession (or legacy) exit strategy lets you keep the business in the family by passing it onto the next generation. But your successor must have the necessary skills and commitment to keep the business running.
Pros:
You have plenty of time to train your successor
Family members usually have a good understanding of how to run the business
You can remain as an advisor or consultant.
Cons:
There may not be a suitable family member to take over
Choosing a successor can cause tension in families
Employees, investors or business partners may not be supportive of your choice.
Bankruptcy
Filing for bankruptcy is the exit strategy no business plans for. Yet, in extreme cases, it’s the only viable option. Although you may have assets seized, you’ll be relieved of debts and the burden of running an unprofitable business.
Pros:
It relieves you of the responsibilities and debts of your business
You can move on from your failed business and start to rebuild your credit.
Cons:
It’s possible that filing for bankruptcy will not relieve you of all of your debts
If you file for bankruptcy, you may have difficulty borrowing money in the future
Most likely, it will mean ending relationships with employees, suppliers and customers.
How to plan your exit strategy
An exit strategy sets out the timeline, financial and market conditions for you to leave the business and someone else take over. Follow these eight steps as you plan your exit strategy.
1. Define your intentions for the business
Start your exit strategy by defining your intentions for the business. For instance, you may want to merge with another company, leave it to a family member, or liquidate it.
2. Identify your target buyer
When choosing your target buyer or successor, you need to consider several factors, including:
Financial benefits and costs
Ease of transition
Continuity of service
Future staffing requirements
Personality and cultural fit.
For example, if you’re selling to management or employees, you might need to stagger payments. Or, if you plan to keep the business in the family, you’ll want to ensure everything is transparent and fair, so there’s no conflict between family members.
3. Establish an exit timeline
A vital part of planning your business exit strategy is establishing an exit timeline. Some buyers, such as employees or management, might not have enough cash to buy the business outright, so you may have to factor in a staggered transition period. Other buyers may request you stay on board to facilitate a smooth transition and satisfy existing clients.
4. Keep accurate accounting records
Most potential buyers will want to see at least two years of accounting and financial records. They’ll want to see steady growth and profitability rather than sudden spikes and dips in revenue. An accounting package like MYOB Business provides you an up-to-date and accurate view of your cash flow.
5. Make yourself redundant
One step you may not have considered before is how to make yourself redundant. You have to ensure that your employees know how to operate the business without you. So, plan how you will gradually step back, delegate important decisions to your management team, and become less available to your customers.
6. Document your processes
You must document your business processes in a standard operating procedure manual. You need a single “how to” manual that covers every business process and workflow, such that a stranger could walk in, read the manual, and run your business without any disruption. Also, you’ll need to ensure you include employee job descriptions and their tasks and responsibilities.
7. Get a professional business valuation
A business is only worth what someone is willing to pay for it. If a business valuation is lower than expected, you may have to spend more time growing the business. If it’s higher than a buyer expected, you might have to bide your time until they can raise enough funds. So it’s vital to get a professional business valuation to know what it’s worth and set realistic expectations for potential buyers.
8. Observe market conditions
Finally, it’s essential to observe the market conditions to determine the timing of your exit strategy. For example, if there’s more than one potential buyer, you’re better positioned to drive the selling price higher.
Take the stress out of your exit
It’s worthwhile having an exit strategy in mind before starting your business. Developing a plan from day one gives you time to review and refine it accordingly as the business evolves or new information comes to light. A well-planned exit strategy ensures a business continues to thrive by:
Defining your intentions for the business
Identifying your target buyer or successor
Establishing an exit timeline
Observing market conditions
Documenting your business processes
Reducing your day-to-day involvement
Storing accurate financial data
Including a professional business valuation.
You can use MYOB’s accounting software to keep accurate, up-to-date accounting records — if you ever decide to sell your business, you’ll be well prepared.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.