What is an exit strategy?
As this definition explains: an exit strategy is a method by which entrepreneurs and investors, especially those that have invested large sums of money in startup companies, transfer ownership of their business to a third party, or by which they recoup money invested in the business. Common exit strategies include being acquired by another company, the sale of equity, or a management or employee buyout.
In truth, creating an exit strategy is not a sign of a lack of confidence and can actually help strengthen your chances for success. An exit strategy looks at the signs of a business failure, including the point of no return, which can help you avoid closing your doors too soon and knowing exactly when to stop throwing good money after bad. If you get an offer for your business, an exit strategy can help you determine its worth.
Exit Strategy
In addition, as Small Business notes, if your business doesn’t work out, you can’t just close the doors and walk away. You’ll have personal and legal responsibilities to take care of that will be much easier to take care of if you know what they are in advance. An exit strategy is a plan that helps you go through the procedures necessary for shutting down a business. This includes a list of the government agencies you’ll need to contact, papers you’ll need to file, fees you’ll need to pay and other things you’ll need to take care of as you shut your doors and afterward.
Who needs an exit strategy?
As this report also observes, anyone seeking venture capital funding or angel investment, must have a clear exit strategy planned in advance.
Even if you’re a small company, it’s a good idea to plan ahead and to actually have an idea of how you will transfer ownership of the business down the line, sell the business, or make a return on your investment.
Types of exit strategies
This list should give you an idea of common types of exit strategies, as explained by BPlan:
- Acquisition
The acquisition is often known as a “merger and acquisition.” This is because, when a company decides to sell itself to another company, the buyer will often incorporate or merge the services of that company into their own product or service offerings.
- Initial Public Offering (IPO)
This exit strategy is not suited to most small businesses, primarily because it means convincing both investors and Wall Street analysts that stock in your business will be worth something to the general public.
- Management buyout
If you’ve built a business whose legacy you want to see continued long after you’re gone, you may want to consider turning to your employees. That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work.
- Family succession
On that note, if your family has been brought up with an intimate knowledge and understanding of your business, they may well be the best people to pass things on to.
- Liquidation
For small businesses, liquidation is a common exit strategy. It’s one of the fastest ways to close a business and may sometimes be the only option in cases where the operation of the business is dependent solely upon one individual, where family members are not interested in or capable of taking over, and where bankruptcy is close at hand.
The Best Exit Strategy
Finally, as The Balance notes, the best exit strategy is the one that best fits your business and your personal goals. Decide first what you want to walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then family succession or selling to employees might be best for you.
It cannot be over-emphasized how important it is to get started on your exit strategy sooner rather than later.
The foregoing information does not constitute advice of any sort what so ever. Consult with your own legal and tax professionals before making any move. The impact of your exit strategy is strategic.