Some entrepreneurs start a business with the intent of growing it over the years and eventually passing it on to a younger generation business owners. However, there are people who start new businesses with the intent of selling it once the enterprise is well established in a few years, when it is time to retire decades later, or when it reaches a certain stage of growth at any time. At the same time the entrepreneur is developing a business plan, he or she can also consider the best exit strategy.
Expected and Unexpected Events
An exit strategy is a plan for managing business succession or closure. It addresses the steps that will be taken should the entrepreneur decide to sell the business, transfer ownership, or close the business voluntarily or to satisfy a forced exit due to bankruptcy. An entrepreneur may have difficulty thinking about exiting the business for any reason, but it is important to establish a clear strategy, if for no other reason than to anticipate unexpected events like becoming disabled or having to retire earlier than expected.
The exit strategy is also required by investors because closing or transferring business ownership has a direct bearing on them. Angel investors, venture capitalists, and even banks want to know the owner has thought through the possible events that could impact its ongoing operation and the security of an investment or loan.
Menu of Exit Strategies
There are various types of exit strategies:
• Merger and Acquisition (M&A) – Companies can increase synergy by merging with or selling itself to another business after performing operational and financial due diligence. For example, an office supply company decides to buy a software company that develops office management and communication programs. M&As can strengthen a company’s market presence, enhance competition, or even take a competitor out of the running. The company that is acquired or loses its identity in a merger should have an exit strategy that addresses value, assets, personnel, and so on.
• Management Buyout – Sometimes the entrepreneur lets employees buy the business. They are the people who understand the business and have a vested interest already in its success.
• Sell Outright – Business owners can sell the business to payoff investors and gain net cash that can be plowed into a new business. This is a particularly popular strategy used by online businesses.
• Go Public – The Initial Public Offering (IPO) takes a company public by letting shareholders own a piece of the company through stock ownership. It is a lengthy process with strict legal requirements that must be met and requires paying underwriting fees and incurring legal fees. The business “exits” private ownership and enters public ownership.
• Transfer Ownership – Ownership of a business can be transferred to family, friends, a business partner, or a stranger. There are many tax consequences concerning business ownership transfers so it is important to get legal and accounting advice.
• Liquidate the Business – Depending on the circumstances, it may be time to close the business due to death, bankruptcy, or retirement. The exit strategy makes a plan for liquidating assets and distributing the proceeds after creditors are paid.
Developing an exit strategy is not always easy because it is planning for a future that will change over time. It is wise to get professional help with mapping an exit strategy. Though this process sound like it is negative, the reality is that it is a smart one. There is no sense in waiting until ownership transfer or liquidation must be done on an emergency basis.
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