In a study conducted by Harvard Business Review, nearly 70% of the respondents agreed to have neglected business exit planning.
Surprisingly, most entrepreneurs only take exit planning seriously when they desperately need to sell the business or have an inbound interest from an acquirer.
The result?
Entrepreneurs either miss out on an exciting strategic opportunity or have to agree on an unsatisfactory deal for their venture.
To avoid such situations, it’s important to have a detailed exit strategy business plan in practice.
But what’s an exit strategy, and what purpose does it solve? How to prepare an exit plan, and what are the different approaches to exit strategies?
Let’s understand each of these in this blog post with real-life examples.
But before that…
What is the exit strategy?
An exit strategy is a planned approach to end the business or transition its ownership to a third party. This strategic plan protects the interests of shareholders, businesses, and business owners by helping them maximize the returns or minimize losses.
A proper exit strategy details all the necessary steps to close or sell the business by outlining its exit options, expected valuation, objectives, and timeline for the exit.
What is the purpose of an exit strategy?
While no entrepreneur thinks of closing a business from the beginning, there would come a time when they would sell the business or close it due to changing market and economic conditions.
A well-detailed exit plan in such times will help them in winding up or selling the business for maximum returns.
Here are a few reasons why you need an exit strategy:
- Maximize the financial gains for investors, owners, and other stakeholders.
- Align the exit process with your long-term business and personal goals.
- Prepare for unforeseen market and economic changes.
- Offer clarity and direction to stakeholders during the transition.
- Ensure financial and operational sustainability of the business after exit.
- Minimize the financial risks in case of business failure.
Now that you understand the purpose of exit strategy, let’s understand a few different business exit strategies.
7 types of exit strategies with examples
Let’s help you understand how exit strategies are implemented in the real world with practical examples.
1. Strategic acquisition and merger
Amongst the common exit strategies, acquisition and merger are the ones widely practiced by businesses.
Here, a business owner sells their company to a larger company, typically operating within their industry.
Potential buyers (larger firms) often acquire businesses whose services they can merge with their own. Acquisitions that can help them expand their market, strengthen their competitive advantage, or deliver comprehensive services.
Examples of acquisition and merger
1. Walt Disney acquired 21st Century Fox in 2017 at $52.4B.
21st Century Fox’s acquisition enhanced Disney’s portfolio of streaming services and its global presence. It streamlined its direct-to-consumer streaming offerings and brought franchises like X-Men and Deadpool under one roof.
2. Microsoft acquired Github for $7.5B in 2018
In the first year itself, Microsoft’s acquisition of Github increased the number of GitHub monthly users by 70%.
2. Initial Public Offering (IPO)
IPO is when a private company offers its shares to the general public for the first time on a stock exchange.
By going public, business owners and early investors can sell their shares to realize the profits. They can use the liquidity to engage in new businesses and diversify their wealth.
Alternatively, owners can also retain a portion of their shares to continue participating in the company’s growth and governance.
Examples of famous IPOs
Airbnb went public on 10th December 2020 and shattered records by claiming its position as the most valuable IPO in the history of the hotel industry.
On the contrary, we have an IPO that proved to be an instant Wall Street flop. When Uber went public in May 2019, it managed to gather only $69 billion. This was almost half of its expected valuation, i.e. $120 billion.
3. Management Buyout (MBO)
Management buyout or leveraged buyout is a type of business exit planning where you sell your business to the existing management.
This is a perfect strategy for entrepreneurs who want their legacy to continue even after their exit. Since the management is already aware of business intricacies and its day-to-day operations, the transition remains smooth with minimum due diligence.
Example of Management Buyouts: Thomas Cook
In 2013, Thomas Cook was a publicly traded company struggling financially. The management team along with the CEO Harriet Green negotiated the deal of buying the company with the board of directors.
This MBO was a success wherein the company successfully managed to pay off its debt and go public again.
4. Family succession
As the title suggests, here the ownership and leadership of the business are passed down to the next generation of the family.
This is the best exit strategy if you have a reliable family member to carry forward the business legacy.
Although the ownership transfers within the family, it’s important to devise a proper exit plan. If not, the feuds within the family and rivalries can destroy the century-long businesses.
Examples of family succession
BMW, founded by Günther Quandt, is a perfect example of family succession. Despite being the largest luxury car brand in the World, the family still owns a 46% stake in the company
Ford Motor Company, the second largest automaker in the World, still owns a 40% stake in the company. The family members still own executive positions carrying the legacy forward.
5. Liquidation
Liquidation is a common exit strategy where businesses shut their operations by selling all the business assets. The amount generated by selling off the assets is first used to repay the creditors and pay the employees before getting distributed amongst the owners.
It’s mostly practiced when the business is solely dependent on an individual. Sometimes, even the failing businesses at the cusp of bankruptcy choose to liquidate.
6. Bankruptcy
When the business faces a liquidity crisis or extreme financial burden and there seems to be no out, business owners file bankruptcy to seek legal protection from their creditors.
It’s the least desirable exit strategy as it severely impacts the creditworthiness and reputation of the company.
Here the financial institutions seize the company’s assets to provide debt relief. And while bankruptcy may not bring a return on investment, it helps the company owner close or restructure their dying business.
Examples of bankruptcy
Six Flags, a renowned theme park operator and amusement company filed for bankruptcy in 2009 with a $2.7 billion debt. However, the company reorganized and emerged from bankruptcy in less than a year.
One of the US’s most valuable startups, We Work filed for bankruptcy in November 2023. We Work continues to operate while it renegotiates its lease and debt obligations.
7. Partner or investor buyout
Such an exit strategy is often associated with the term friendly buyer. Here a business owner sells their stake in a limited liability partnership to the partner or investor while the business continues to operate as usual.
That’s a round-up of all the business exit strategies to sell or close a business effectively.
How to plan an exit strategy for a business
Planning a successful exit strategy involves a careful consideration of financial, operational, and stakeholder interests to ensure a smooth transition of ownership.
Here are a few quintessential elements of any exit strategy:
- Define your business’s exit objectives. If you’re chasing returns, what returns are you expecting? If not, what is it that you want to gain from this exit?
- How long do you plan to be part of this business? Define a time frame when you would sell or close this business.
- Define your intentions with the business. Do you want to sell the business to a larger acquiring firm or want the management to take over? Do you want a family member to continue your legacy or launch an IPO?
- Prepare your financial documents and demonstrate your financial preparedness. Ensure that your financial documents, legal documents, and business operations are transparent offering a true insight into your business value.
Conclusion
While the term exit strategy may associate itself with negative connections, it’s one of the most critical and practical aspects of your business plan.
Investors typically need to know how they will get a return on the money invested in your business. A solid exit plan instills their confidence in your idea demonstrating your readiness to grow and lead the business to its desired profitability.
By preparing a successful exit strategy, you can navigate your business’s future and ensure a smooth transition when the time comes.
Now, quickly whip up your business plan for investors using the Upmetrics business planning app. Its predefined templates, detailed guides, and AI-powered tools will help you prepare a perfect plan in about a few minutes.
