Erin Lane
Last Updated on July 17, 2024 by Team Experts
Business exit planning is an important step in making sure that the owner of the business has a plan for what will happen to the company after they are no longer there. It includes preparing for potential situations such as bankruptcy, illness, or death. It is a process that involves actions to be taken in preparation for the possible sale or closure of a business.
In the United States alone, 34% of small businesses closed in May 2021, a few months after the pandemic started. Although some of these businesses may have their mitigation measures and exit strategy plans, the trying times eventually lead them to closure.
However, even without a pandemic, organizations are susceptible to challenges leading them to an exit plan that could save what’s left of a failing business. This is through business exit planning.
What is Business Exit Planning?
Business exit planning or a business exit strategy is a planned and strategic move to liquidate or reduce one’s stake in a business. An exit strategy is not necessarily limited to failing businesses. In fact, some business owners decide to sell my business to other successful businesses to gain substantial profit. Meanwhile, failing businesses can limit their losses with an effective business exit strategy.
What Are the Benefits of Exit Planning?
Having an exit plan for your business gives you a higher chance of securing a higher return on your investment. It can be a source of income for your retirement or to fund and pursue another business. Whatever your reasons may be, having a business exit plan offers several benefits.
It Gives You Control
Although most businesses are established thinking that it will last for generations, some unexpected circumstances may cause you to do otherwise.. Having an exit plan gives you control on whether to continue on with your business or to go towards a more profitable route that will allow you to generate more profits. Either way, having a “back-up” plan gives you better opportunities for making money, either by selling or continuing with your business.
Develop Your Business Further
Exit plans are not all about making money while your company is at its peak. It is about making informed decisions on whether one move would be beneficial than the other. It can help you proactively create and execute plans for your business, taking measured risks that gives you the best outcomes possible.
It Takes Time To Prepare
Exit planning for a business takes time. Covering every aspect of your business affected by your exit plan requires a comprehensive review. There are many things at stake. Selling your business is like building a career in leadership coaching. You need to prove yourself as an expert, a professional that can offer something beneficial for its customer.
The same is true for businesses. You need to improve your sales figures, become more efficient and update your processes and technologies to be an attractive business for investors or potential buyers. It is a complex process and may require years before you complete it.
It Is Essential in Retirement Planning
An exit plan is also your key to having a relaxing yet financially stable retirement. Although this is not instant and requires effort on your end to achieve, having an exit strategy is a significant portion of your retirement plan. Not all business owners are blessed with children who are willing, capable and interested in taking over the family business. Having an exit business plan gives you the opportunity to move quickly in selling your business for unexpected circumstances such as illnesses and other emergencies.
Reduces the Risks of Financial Failure
Not having an exit plan limits your capabilities in avoiding financial risks for your business. A failing economy or changes in the market can rapidly affect one’s business negatively. Preparing for such circumstances, through the creation of an exit plan gives you the opportunity to maximize the sale value of your business.
Different Types of Exit Strategies for Your Business
Regardless of how big or small your business is, having an exit strategy helps you achieve your personal financial goals and business goals. Here are the different types of exit strategies you can choose from:
Merger and Acquisition
One of the strongest exit plan options for an organization to consider. They can maintain control over price negotiations and set their own terms when selling a business to a competitor. Your target market for this business exit strategy are businesses seeking to eliminate competition to acquire your current talents, infrastructure or products. The best part, with multiple bids, you may be able to drive the price up even further.
Selling Stakes
If you are not a sole business owner, you have the option to sell your company shares to a partner or a venture capital investor. The good thing about this exit strategy is that the organization continues to operate as usual, with revenues streams unaffected by the changes in stakeholders. Additionally, anyone who decides to buy your shares from you is most likely interested and committed to the organization’s future success and is bound to stay for the long term.
Management and Employee Buyouts
In an exit strategy that involves management buyouts, employees that are already working within the business can transition into more senior roles to be able to fill in gaps in leadership. With this type of exit strategy, you’ll be able to have confidence that the business is entrusted to people who are already experienced in managing the organization, no sale to a third party is involved in this straightforward handover process. However, if there is a significant change in management, it may have a negative effect on the business.
Initial Public Offering
An IPO exit is a process wherein a business is sold to the public through the selling of shares as stocks to stakeholders. Most IPO strategies are very lucrative, yet very challenging. There are circumstances wherein private investors will see huge potential in your business, yet a wider audience may not feel the same. Scrutiny from stockholders, regulatory bodies and the public can be also too intense.
Liquidation
One of the most common exit strategies for failing businesses is liquidation. It is considered to be an example of a final exit strategy wherein remaining assets of a business is sold off after the business is closed down. Cash earned in selling assets will be paid towards the company’s debts. If there is any money left with the sale, it is divided among its shareholders.
Liquidation is a firm end for a company. It is one of the simplest and fastest exit strategies similar to acquisition. Unfortunately, in this scenario, it does not create a high-value exit. Additionally, you are most likely going to break times between you and the people working and supporting the business.
Bankruptcy
Of all the types of exit strategies there is, bankruptcy is considered to be the least planned and least prepared for exit plan. It does not entail a business plan. Such a move may relieve you of your financial debts and will definitely impact your credit.
For failing businesses, this exit strategy relieves you of your debts and responsibilities. However, you might find yourself having difficulties in securing a loan for your future business endeavors.
Why is Business Succession Planning Critical?
Business owners have difficulties in planning for the possibility of passing their firm along to their children or selling it to a new owner. Succession planning is a difficult topic to touch, but it’s critical to establish guidelines to ensure a smooth transition of the business.
Your business could fail when you need it most if you don’t plan ahead. Customers and suppliers will be affected, in addition to your staff. When you don’t take care of succession planning before ticking off every retirement ideal, you’re risking everything. You risk losing the business that you have invested your time and resources on. The people working and profiting from your business will suffer with you as well. Without a feasible and profitable exit strategy, a lot of lives and businesses will be affected.
Any company’s success depends on succession planning, and it’s crucial to get started today before it becomes a problem. Invest in a business succession plan to shield your company from issues once you’re no longer able to run it. You can feel comfortable that your firm will flourish just as well without you if you establish a company leadership strategy.
How to Evaluate a Potential Exit Strategy for Your Company
An exit strategy is a plan for the future of your company. It is important to have an exit strategy in place before you start your company so that you can be prepared for what might happen in the future. There are many things to consider when evaluating an exit strategy, and this article will help you decide what is best for your company.
Your Future Role in the Business
Think about your future roles in the organization. Part of your decision will be based on whether you want to keep running your company. You and your team will perform nearly identical roles before and after an IPO or a management buyout. However, in a strategic acquisition, the acquirer may choose to replace you and your team with its own employees. An IPO or a management buyout will work better for teams that want to stay in charge, while a strategic acquisition can be an ideal answer for organizations that are grappling with succession planning concerns.
Identify Your Needs for Liquidity
Exit strategies offer opportunities for business owners and shareholders to profit from their hard work and increase their wealth through a profitable exit strategy. However, not all departure tactics are profitable for everyone. Take an IPO as an example , your shares are likely to be subject to a share lock-up agreement, which means you won’t be allowed to sell them for a period of time after the IPO, usually six months. Although IPOs are highly profitable, it is not always the same case for all businesses.
On the other hand, a strategic acquisition will frequently result in an instant cash payment, enhancing the liquidity of the owner. However, the final price is sometimes established after an earn-out period, which might span several years. The original owners will often get liquidity over a period of time in a management buyout. It would still be best to plan ahead and plan strategically to achieve the liquidity that you desire for your business buyout.
The Future Potential of Your Company
Perhaps you don’t need immediate cash but would like to be a part of your company’s future growth. In this case, you’ll want to adopt an exit strategy that allows you to keep a stake in the company. An IPO allows you to preserve a significant stake in the firm while also allowing you to time the eventual sale of your shares to match your personal needs.
A management buyout also allows for continuous involvement in a company’s development. An acquisition, on the other hand, will usually remove, or at the very least considerably reduce, your ownership interest in your firm, as well as your capacity to influence its future direction and performance.
Market Conditions
The demand for your company’s products or services, investor and strategic buyer appetite for IPOs and acquisitions, and other market factors will all influence your exit plan. If you see an increasing demand for them in the future, you might want to schedule a buyout at a later date. It would be best to check the potentials that you will miss in case you sell your businesses earlier than you should be. Discuss market trends with your private equity partner, as well as any commercial lenders, investment bankers, or other financial specialists.
Are You Ready with Your Business Exit Strategy?
Exit strategies are important for any company, as they provide a way to exit the business gracefully and with dignity. However, not all exit strategies are created equal. The best exit strategy for a company will depend on the industry, size of the company, and market conditions.
Read more: What you Need to Know Before Selling your Business
