An exit strategy is a contingency plan for a person to exit a business in the event that it meets a substantial profit, or becomes no longer profitable. Investors, business owners, traders, or venture capitalists may plan exit strategies when they sign onto a business. The purpose of an exit strategy is to limit losses or maximize personal profit when an individual exits a business endeavor.
Whether you're a small business owner or the lead of a corporation, it's wise to have an exit plan to limit personal losses in the event of an unprofitable investment, or significant changes in the market. In order to devise an exit strategy, you should receive a business valuation, which gives potential buyers an overview of the company's financials to determine a fair value for the business.
7 Types of Exit Strategies
Initial Public Offering (IPO): An IPO is when a private company begins selling its shares to the public. This is a popular exit strategy for startup companies looking to expand. After an IPO, a business owner may choose to sell the business, or stay on board.
Mergers and acquisitions: Being acquired by another business can be a profitable exit strategy for businesses and entrepreneurs. If you've planned for a high business valuation, you can attract good buyers and control the price negotiations.
Selling your control: If you are not the sole business owner of your business, selling your stake to your partner is a quick and clean exit strategy. If you're part of a family business, you can make a succession plan, which outlines a strategy for a family member of close acquaintance to take control of the company.
Acquihires: An acquihire strategy is based on attracting a buyer who is interested in acquiring your business's talent. If you've planned your business to ensure your employees are competitively skilled, you can attract a higher buying price from buyers that want to acquire your team.
Buyouts: In a management buyout, a member or members of the management team buy the business from the business owner. The existing management team will already have an understanding of the business, so this strategy can be a smooth setup for a business transition.
Liquidation: Liquidation is the preferred exit strategy for a business that is no longer profitable. This strategy outlines a plan to sell all assets and real estate owned by the business to pay off debts and stakeholders.
Bankruptcy: Declaring bankruptcy is the least desirable option to offload non-profitable businesses, and is generally only enacted when absolutely necessary. When your company files for bankruptcy, you will not be responsible for any debts your business has accrued, but your assets are seized to make up for those debts.
3 Tips For Preparing an Exit Strategy
If you're looking to set up the best exit strategy for your business, follow these simple tips.
Get a business valuation. When you're planning your exit strategy, you'll want to know how much your business is worth. Strategists can help you do your due diligence for a business appraisal so that you can figure out how much your company is worth. This can help you set expectations for potential buyers.
Consider the road ahead. Ask yourself what you want from your exit strategy. Do you still want to maintain some control over the business? Do you just want to walk away? If you're exiting a long-term business, strategies like succession planning or management buyouts can help with consistency during the business transition, and help you stay connected with your business.
Consider the best and worst-case scenarios. When you're preparing your exit strategy, you should consider all of the possible outcomes, and make contingency plans accordingly. Consider what you'll need to do if your business sells for less (or more) than your projected valuation. Consult with strategists to understand your specific business or investment interests, and can help you plan exit strategies that make sense with your profit goals.
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