What is a ‘Business Exit Strategy’
A business exit strategy is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate their stake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy (or “exit plan”) enables the entrepreneur to limit losses.
Breaking Down ‘Business Exit Strategy’
Ideally, an entrepreneur will develop an exit strategy in their initial business plan before actually going into business. The choice of exit plan can influence business development decisions. Common types of exit strategies include initial public offerings (IPO), strategic acquisitions and management buyouts (MBO). Which exit strategy an entrepreneur chooses depends on many factors, such as how much control or involvement (if any) they want to retain in the business, and whether they want the company to continue to run in the same way or are willing to see it change going forward as long as they are paid a fair price for their ownership share. A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean giving up control.
A key aspect of an exit strategy is business valuation and there are specialists that can help business owners (and buyers) examine a company’s financials to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategy.
Business Exit Strategy and Liquidity
Different business exit strategies also offer business owners different levels of liquidity. Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well; for example, an IPO may not be the best exit strategy during a recession and a management buyout may not be attractive to a buyer when interest rates are high.
Business Exit Strategy: Which Is Best?
The best type of exit strategy also depends on business type and size. A partner in a medical office’s best exit strategy might be to sell to one of the other existing partners, while a sole proprietor’s ideal exit strategy might simply be to make as much money as possible, then close down the business. If the company has multiple founders, or if there are substantial shareholders in addition to the founders, these other parties’ interests must be factored into the choice of exit strategy as well.