How to Create an Effective Business Exit Strategy: Best Types and Examples

When it comes to running a successful business, planning for the end is as important as planning for the beginning. Surprised? Don’t be. Even the most successful business ventures need a well-thought-out exit strategy. It’s not about giving up; it’s about being prepared. In fact, the most experienced entrepreneurs will tell you that a strategic transition plan is not a sign of pessimism but rather a key to success. It’s just like constructing a building; you don’t start without knowing how to finish it. With an exit plan, you’re simply outlining your endgame, ensuring the business you’ve worked so hard to build is safeguarded.

This article will guide you through the different business exit strategies, helping you create an effective one for your business.

What is an Exit Strategy in Business?

Exit strategy is a plan on how to safeguard your investment and ensure a return, should you decide it is time to leave or if unforeseen circumstances push you out. To exit your business means to have a game plan. It’s a set of procedures that you, as a business owner, put in place to sell your ownership in a company, whether it be to another company, to investors, or even to the public through an IPO.

This strategy serves as your roadmap when (not if) you decide to exit, outlining the methods and timing of your departure. This could be due to a variety of reasons, such as retirement, market conditions, personal circumstances, or a lucrative opportunity to sell. An effective transition plan ensures that business disruption is mitigated, the business’s value is maximized, and the transition is smooth.

Understanding Business Exit Strategies

Understanding exit strategies does not require an intricate understanding of business jargon or complex financial concepts. Simply put, this strategy is your plan B. It’s your escape hatch if things go south, or your golden parachute when the business has reached its peak. It’s the what, when, and how of leaving your business, all planned ahead of time.

So, when do you need such a strategy? The answer is always. Whether you’re just starting or have been in business for years, a well-orchestrated exit plan should be in your playbook. It allows you to transition out of your business in a way that benefits you, making sure you’re not leaving money on the table. It provides clarity, giving you a clear direction in the face of uncertainty.

The real beauty of having such a plan lies in its flexibility. It’s not set in stone. As your business evolves, your strategy should too. It is a living, breathing part of your business plan, shaped by market trends, financial performance, and personal goals. The key is to start planning early and revise often. This proactive approach keeps you ready for any eventuality, securing the future of the business you’ve painstakingly built.

Who Needs a Plan of Exit?

Every business owner needs to develop a transition plan, regardless of the size or nature of their business. It might seem like something reserved for big corporations, but this couldn’t be further from the truth. Whether you’re a solopreneur running a small online venture, a family business, or a CEO at the helm of a multinational corporation, an exit strategy may prove to be crucial down the road.

Why is that? Because running a business is not just about the present. It’s about envisioning the future and preparing for all possibilities. A well-crafted exit plan helps ensure that when it’s time to move on – for any reason – you leave on your terms, with your business’s legacy intact.

8 Types of Exit Strategy

Now that we’ve covered the importance of developing an exit strategy, let’s delve into the specific types that business owners can consider. Each of these eight transition strategies has its pros and cons and is applicable in different scenarios depending on the nature of the business, its financial health, and the owner’s objectives. Understanding these options can help you chart a more successful and satisfying end to your entrepreneurial journey. Let’s explore these strategies one by one.

1. Liquidation

Liquidation is the process of selling all of a company’s assets, and then using that revenue to pay off creditors. Any remaining funds are then distributed among the shareholders. This strategy is often used as a last resort when a company is failing, or the owners wish to cease operations without passing the business on to a successor.

Bear in mind that this strategy usually doesn’t generate a large revenue since assets are often sold below their market value. However, it can provide a quick exit and immediate cash flow. While it might not be the most lucrative exit, it’s a pragmatic option when other strategies aren’t viable. It’s a clean break, allowing business owners to start anew, armed with the lessons learned from their entrepreneurial journey.

2. Legacy

Leaving a legacy isn’t just about an entrepreneur’s ego. It’s about building something that will continue to create value even after they’ve stepped aside. This exit often involves passing on the mantle to a successor who can carry forward the business’s mission and values, ensuring its continued growth and longevity. It can be a family member, a trusted employee, or even a mentee who shares the entrepreneur’s vision.

Legacy is a long-term exit, demanding not only a successful business model but also a strong leadership development plan. It requires careful planning and grooming of the successor to ensure a smooth transition. The result, however, is a living testament to an entrepreneur’s hard work and dedication – a business that continues to thrive and serve its community long after the founder’s departure. This strategy is not just about financial returns, but also the satisfaction of leaving behind a lasting impact.

3. Bankruptcy

Declaring bankruptcy is an exit that is generally considered a last resort. It is utilized when a business is in severe financial distress and is unable to meet its debt obligations. This complex process involves legally declaring that the company is unable to pay back its debts, which may result in the liquidation of assets to repay creditors.

The upside to this strategy is that it can provide a fresh start by wiping out most of the company’s debts, and it can halt any legal actions from creditors. It should be noted that this strategy can significantly impact the business owner’s credit score and reputation, making it harder to secure financing in the future. This decision should not be taken lightly and requires careful consideration of its long-term implications.

4. Acquihires

An acquihire is a strategy often used in the tech industry where a larger company acquires a smaller one, primarily for the skills and expertise of its staff, rather than its products or services. The acquiring company is typically more interested in the talent the smaller company has attracted and nurtured, rather than its market share or intellectual property.

This strategy can be a win-win for both parties involved; the larger company secures a ready-made team of skilled individuals who can inject fresh ideas and innovation into their operations, while the smaller company’s team gets to continue their work, often with more resources and a larger platform.

It’s, however, important to note that this strategy requires a culture fit between the acquiring and acquired companies to ensure a successful transition. It’s not just about acquiring talent, but also about ensuring that the talent will continue to thrive and be productive within the new business culture.

5. Management or Employee Buyout

A Management or Employee Buyout (MBO or EBO) is an exit where the company’s management team or employees purchase the business, taking over its operations and ownership. This strategy is appealing for several reasons. First, it can ensure the continuity of the business and the preservation of its culture, as the people taking over are already familiar with its operations and values. Moreover, it can be a motivating factor for the employees who now have a direct stake in the business and its success.

The downside, however, is that financing the buyout can be a challenge. Often, a combination of personal savings, bank loans, and seller financing is required. Additionally, the transition from employee to owner can be a steep learning curve for many, necessitating a solid transition plan.

6. Initial Public Offering (IPO)

An Initial Public Offering (IPO) is a bold strategy that involves taking your company public by selling shares on a stock exchange. This move can offer significant financial rewards, often raising substantial capital for the company while allowing the original business owners to profit from the shares they retain. The heightened exposure can also increase brand recognition and provide the company with a broader base for future capital raising.

That said, it’s crucial to understand that an IPO is not a decision to be taken lightly. It is a complex, time-consuming process that requires rigorous financial auditing, regulatory adherence, and a shift in management practices. Furthermore, the company becomes accountable to a new group of stakeholders—its public investors. This means increased scrutiny and the pressure to consistently demonstrate profitability to maintain a healthy stock price.

7. Mergers and acquisitions

Mergers and Acquisitions (M&A) is an exit that involves combining your company with another or selling it outright. In a merger, two companies join forces to become a new, larger entity, often enabling access to new markets, enhancing operational efficiencies, or achieving other strategic goals. Acquisitions, on the other hand, typically involve a larger company buying a smaller one. For the entrepreneur, an M&A can often lead to a significant payday, especially if their company has developed unique technology, accessed a niche market, or accumulated other valuable assets.

However, navigating M&A requires careful planning and negotiation to ensure a fair deal. It’s essential to consider the cultural fit between the two companies as well—the merging of two different company cultures can be challenging and, if not managed well, can undermine the benefits of the M&A.

8. Sell Stakes to an Investor or Partner

Selling stakes to a funder or partner is another viable exit that enables business owners to retain a level of involvement in the company while also generating a return on their initial investment. By selling a part of your business, you can bring in fresh capital, as well as potentially add new skills, connections, and strategic insights to your business. This strategy is an excellent choice for entrepreneurs who are not quite ready to completely step back from their business but want to reduce their financial risk and workload.

The key here is to find the right funder or partner, someone who understands and respects your company’s mission, culture, and vision for the future. It’s important to perform due diligence before making any decisions, as you want to ensure a good fit, not just in terms of finances, but also in ethos and future planning. Selling stakes can be complicated and may require complex contractual agreements, so legal advice is recommended. However, if executed well, it can breathe new life into your business, provide you with a financial boost, and set the stage for a full exit down the line.

Exit Strategies for Investors

Investors must also have a transition plan. The moment an investor enters into an investment, they should also consider the conditions and plan for their eventual exit. This is not purely about maximising profits, it’s about risk management and securing returns.

What are common exit strategies used by Investors?

Investors usually have different ways to exit their investments, depending on their portfolio and the specific investment. Here are a few commonly used strategies:

1. Selling to Another Investor. Sometimes, investors sell their shares or stake to another interested investor. This happens when the company is still growing, but the investor wants to exit.
2. Buyback. In a buyback, the company itself buys back the investor’s shares. This usually occurs when the company has extra cash and wants to regain ownership.
3. Merger or Acquisition (M&A). In an M&A, another company purchases or merges with the company where the investor has a stake. This strategy often leads to a significant increase in the value of the company’s shares.
4. Initial Public Offering (IPO). An IPO happens when a privately held company offers its shares to the public for the first time. This can be a profitable exit, as it often increases the company’s valuation.
5. Liquidation. Unfortunately, sometimes the least desirable exit is liquidation, where a company’s assets are sold off, often due to bankruptcy. Investors may recover some of their investment, depending on the proceeds.

Exit Strategies for Established Businesses Owners

Established business owners, particularly those who have spent years or even decades building their enterprise, face unique challenges associated with business exit planning. Their businesses often have more complex structures, larger workforces, and a more diverse array of assets to consider.

Crafting an Exit Strategy for Established Businesses

Having a well-thought-out exit plan is crucial for established organisations. It serves as a blueprint for a smooth transition, encompassing various essential steps. First, determining the value of your business value goes beyond financial statements to include intangible assets like brand reputation and customer loyalty. Next, identifying potential buyers or successors is vital, whether it’s a family member, key employee, or an outside buyer. Ensuring they have the necessary skills and resources for continued success is paramount. Lastly, preparing the business for transition involves streamlining processes, resolving legal matters, and making it attractive to potential buyers.

What exit strategies can Established Businesses use?

Established businesses have several transition plans at their disposal. Here are a few commonly employed methods:

1. Selling to an Outside Party. You can consider selling your business to a competitor, a customer, or even someone unrelated. This strategy can lead to a significant monetary gain, especially if your business is in a strong financial position and has a solid customer base.
2. Passing onto a Successor. If you have a willing and capable successor within the company, like a co-founder or a high-performing employee, transferring ownership can ensure business continuity.
3. Family Succession. Another option is passing the business on to a family member, preserving its legacy. However, this plan requires diligent succession planning and requires the family member to be interested and competent in managing the business.
4. Initial Public Offering (IPO). Going public allows you to sell shares to the public. While this strategy can be lucrative, it demands substantial preparation and transparency.
5. Mergers & Acquisitions. If you merge with or sell the business to another company, it can result in a substantial payout. However, keep in mind that it may also mean losing control over the business.
6. Liquidation. In the case when the business is not profitable or when you want to retire without a successor, you can consider liquidation. The process involves selling all business assets, paying off creditors, and keeping the rest.
7. Management Buy-Out (MBO). With an MBO, the company’s management team purchases the assets and operations of the business. This strategy can be beneficial for owners, as it ensures the business is left in capable hands.

Exit Strategies for Startups

Startups, with their high-risk, high-reward nature, need to carefully plan their transition plan. The most common path is acquisition, where a bigger company purchases the startup. This often leads to a great return on investment, especially if the startup has developed unique technology or gained a substantial market share. Another option is going public through an Initial Public Offering (IPO), where startups transition from private to public ownership. This route is typically taken by startups that have shown consistent growth and profitability. Lastly, smaller-scale exits include buyouts by private equity firms or other entrepreneurs.

What are the most popular exit plans used by startups?

Some of the most popular types of exit strategies include:

1. Trade Sale. This is the most common exit for startups. It involves selling the startup to another company. Typically, the acquiring company is in the same industry and uses the acquisition to expand its capabilities or market presence. It’s like passing the baton to someone else who can take the startup to new heights.
2. Acqui-hire. This is an exit where a startup is acquired primarily for its talent rather than its product or services. Tech giants like Google and Facebook often use this strategy to bring innovative, entrepreneurial teams on board. It’s like inviting a group of talented individuals to join the family and bring their expertise to the table.
3. Initial Public Offering (IPO). Although less common due to its complexity and regulatory requirements, some startups aim to go public. This strategy provides a potentially significant return on investment, but it also requires a high level of transparency and accountability to public shareholders. It’s like unveiling the startup to the world, allowing everyone to become a part of its success story.
4. Merger. Sometimes, two startups may choose to merge and form a new entity. This strategy is often used to combine resources and capabilities, achieve economies of scale, or gain a larger market share. It’s like joining forces with another startup to create something even more powerful and impactful.
5. Management Buyouts (MBO). In an MBO, the management team of the startup buys out the founder’s shares, taking over the business. This strategy works well when the management team is robust and fully capable of running the business. It’s like a group of dedicated leaders stepping up to steer the ship toward success.
6. Bootstrapped Buyout. In this scenario, the founder of the leadership team buys out the investors’ shares over time, eventually regaining full control of the startup. It’s like reclaiming ownership and independence, charting the course according to the startup’s original vision.
7. Liquidation. If all else fails, a startup might have to liquidate the business. This involves selling all of the company’s assets, paying off liabilities, and returning the remaining funds to the financiers and owners. It’s essentially a way of salvaging whatever value remains in a failed or struggling startup. It’s like closing one chapter to pave the way for new opportunities.

What is The Importance of Having an Exit Business Plan?

Having an exit plan is incredibly important. It acts as a roadmap for entrepreneurs to achieve their long-term goals and protect their investments. It forces us to view our businesses from a broader perspective, considering not just the day-to-day operations, but also its long-term sustainability.

An exit plan provides clarity and direction. It informs business decisions and shapes the trajectory of the company, ensuring alignment with the owner’s personal and financial objectives.

Furthermore, it is essential for attracting financiers. Most of them want to know the path to their return on investment. A clear, well-thought-out plan indicates that you have a realistic understanding of the market and a viable plan for delivering returns.

Finally, having a plan to exit ensures a smooth transition. Whether it’s grooming your business for sale, a succession, or even liquidation, having a plan in place reduces uncertainty and disruption, facilitating a seamless handover. It’s all about setting yourself up for success and minimising any hiccups along the way.

When You Should Use a Business Exit Strategy?

Deciding when to implement an exit strategy is a critical decision that largely depends on an entrepreneur’s personal goals and the state of their business. Ideally, a well-considered exit should be a part of your initial corporate plan, allowing for a clear roadmap for future decision-making and an opportunity to pivot when necessary. Several key indicators suggest it may be time to use your strategy:

Achievement of Business Goals

If your business has reached or exceeded the objectives laid out in your corporate plan, it may be a good time to consider an exit. Whether your goal was to reach a certain financial milestone, market position, or innovation, realizing these targets can signal a perfect time to exit, leaving on a high note.

Personal Readiness

This could mean a desire for a lifestyle change, retirement, or a wish to pursue new ventures. If your passion for running the business is waning or you’re ready for a new challenge, it’s likely time to consider your strategy.

Financial Necessity

If the business is struggling and recovery seems unlikely, or if you’re facing personal financial difficulties, it may be best to exit the business before the situation worsens.

Market Conditions

Paying close attention to market trends can help you time your exit for maximum benefit. If market conditions are favorable – for instance, if your industry is booming, or if a larger company is actively acquiring smaller ones – it might be an opportune time to sell.

Interest from Buyers

If you receive an unexpected offer from an interested buyer, you might want to consider it, even if you hadn’t planned on exiting. A good offer can provide a sudden, profitable exit opportunity.

If you want to find out more about how to create an effective business exit strategy get in touch.