Talking about an exit strategy for your small business or startup may seem like you’re expecting the worst to happen. But it simply means you’re preparing a plan for the final phase of your business—cashing out the investments you’ve put in the business.
An exit strategy, also known as an exit plan, is a plan for a time in the future when you decide to leave your business and give up your ownership.
Ideally, you think about an exit strategy before starting your business. Businesses usually create an exit strategy along with their business plan. Your exit plan should address the following questions:
- What will happen after you exit the business? Will a new owner take over, or will you permanently close your business?
- Who will take over your business when you leave?
- What’s the process of transfer of ownership?
- What are the benefits you will receive after the transfer?
- What’s the duration of the exit process?
In this article, we’ll see why you should have an exit strategy and the eight common exit strategies to pick from for your small business or startup.
Why Do You Need a Business Exit Strategy?
While a business plan outlines the process of setting up your business and running it, an exit strategy helps you transfer ownership or dissolve your business.
Calling it quits may not be in your mind while starting your business, but there can be situations where exiting may be the best choice. With an exit strategy in place, you can save time and effort, and stay prepared to make the final move when the moment arrives.
A business exit strategy helps:
- Understand the market value of your business: Continuous evaluation of the market value of your business is part of an exit strategy. This information helps you track your financial goals. With it, you can change your marketing strategies or operational plan to reach business milestones.
- Make the transition easy and instructive: An exit strategy outlines the operations, employee responsibilities, and chain of command of your company. It helps the successor to understand the workings of the business in a seamless manner.
- Make SMART decisions: When you have an exit strategy in place, you can make decisions according to its timeline. Simply put, you can choose which projects to accept, the number of products to manufacture, and the repayment time of your loans.
8 Small Business Exit Strategies
Whether you’re a scrappy new startup or an experienced small business, an exit strategy is a must for all types of businesses.
Here are the eight commonly used small business exit strategies. Make sure to pay attention to the pros and cons of each to help pick the right one for your enterprise.
1. Family Succession
If you have a family business and want it to continue running after your retirement, this strategy is the right pick for you. In this exit strategy, the ownership is transferred to the son or daughter of the owner (if they’re of legal age) or any other eligible family member.
However, it is essential to pick the right successor, one who is capable of handling the responsibilities of the business. Failing to do so can hinder the growth of the company and hurt the progress made so far.
|You can choose your successor and coach them about the responsibilities.||Personal relationships and conflicts can hinder key business decisions and functions.|
|The successor may have basic knowledge about the business.||Family members may not have the right skills, qualifications, and experience to be a successor.|
|You can choose to remain in an advisory role for the business.||Your employees, partners, or investors may not want your family member to replace you.|
2. Selling to Your Partners or Investors
Selling your stake to your partners or investors is another option if you are not willing to sell out your business to an unknown party. This strategy is quite popular since the buyer is someone you already know and trust.
This is only possible when you’re not the sole proprietor of the business.
In this exit strategy, you will sell your share and negotiate a compensation price for your investment of time and money in the business. Depending on the nature of your business, the compensation may vary.
|Your business continues to run as usual, without any drastic changes.||You may not find suitable partners or investors who are willing to buy your shares.|
|You’re earning a profit for your investments.
|You may not have the opportunity to continue in an advisory role.|
|The complexity of the transactions can cause problems between you and your partners or investors.|
3. Management or Employee Buyout (MBO)
If the above two exit strategies are not your cup of tea, you might want to opt for a management buyout (MBO). In this exit strategy, you sell your shares to the employees of the company.
|The buying parties understand the workings of the business, ensuring a smooth transition.||You may face difficulty in finding buyers, i.e. managers or employees.|
|Your business continues to function with minimal changes.||The changes in organizational structure may negatively impact business performance.|
|You’re making money off the deal.||Your clients may not agree with the decision.|
You may continue in an advisory role.
|The company retains control over its business.|
4. Merger and Acquisition (M&A)
In the M&A exit strategy, you sell your company to or merge it with another company whose business strategies and goals align with yours.
If your competitors want to acquire your company, you can leverage this opportunity to negotiate and sell at high profits.
|Depending on the value of your business, you have the negotiating power and freedom to set your own prices and terms.||You have the freedom to choose your level of involvement in the business.|
|The process is time-consuming, and expensive, and there’s a high risk of failure.|
|You have the freedom to choose your level of involvement in the business.||There can be drastic changes in the management and operations of your business.|
5. Initial Public Offering (IPO)
Unlike other exit strategies in this list, an IPO is more of a progressive step than an exit. If your business is doing well and you want to attain high profits by selling off your stakes to the public, this is your best bet.
However, this strategy is complex and challenging to implement.
|You can attain large profits by selling your shares to retail investors.||It consumes more time, money, and effort.|
|It helps the business gain more capital by selling shares for large profits.||You have to report and reveal your financial statements and other details about the company regularly.|
|IPOs are usually seen as a positive indicator of the company’s increasing value and help boost brand image.
|You cannot control the volatility of the market acting upon the price of your share.|
|You’ll be under the public eye and receive criticism from shareholders and analysts.|
Acqui-hiring is similar to the acquisition exit strategy, but the motive to buy the company is to acquire its skilled employees. If you want to sell off your business while ensuring that your employees don’t lose their job, the acqui-hiring exit strategy is a suitable option.
|Depending on how desirable your employees are, you can negotiate a better-than-fair price for your business.||Like the acquisition exit strategy, this process is time-consuming, costly, and cumbersome.|
|When acquisitions take place, you settle all of your pending business obligations, leaving you with a clean track record.||Finding a suitable buyer can be difficult; both parties may not agree on the value of your business.|
If all the previous business exit strategies don’t work, it might be time to liquidate your company. Liquidation refers to the permanent closing of your business by selling off all the assets to pay off debts and other obligations.
Liquidation is a deliberate decision made by the entrepreneur in case they want to wind up the business for any reason. For instance, you might want to dissolve one business to invest its resources in a more profitable one.
|If your business is a private limited company or limited liability partnership (LLP), creditors can only confiscate your business assets; your personal assets are secure.||If you are a sole proprietor or a general partner, you are personally liable for your business debts. If liquidating your company assets isn’t enough to pay off debts, you have to use your personal assets.|
|This exit strategy is quick and easy compared to others.||Liquidation leads to the end of your business relationships such as your suppliers, clients, and customers.|
8. Declare Bankruptcy
Declaring bankruptcy is never fun; it’s something that no entrepreneur wants to go through. But when all else has failed, it’s your last resort to dilute your business. Bankruptcy refers to the state of being unable to pay off your business debts.
For most businesses, this is a clear dead-end. But it is possible to recover from bankruptcy. Filing for bankruptcy can be a deliberate decision or an involuntary action you have to take to unburden yourself from your existing obligations.
|Filing for bankruptcy eliminates your business debts as the company doesn’t have the means to pay back creditors.
|Loss of business assets and company image.|
|Negative impact on credit rating making it hard to get loans.|
Plan a Clean Exit with a Business Exit Strategy
Running a business and dealing with risks go hand in hand. The best way to avoid potential roadblocks is by planning well into the future. Create an exit strategy to tackle business failure or stay prepared for an ownership transfer. Compare the above exit strategies to choose the best one for you.