Guide to the Exit Strategy Options

Planning your exit from the business at an early stage of the business enables you to adapt to changing circumstances. A successful exit requires a good exit strategy which can save the owner and investor of a small business from suffering a large loss. Consider various small business exit strategies and choose the one that best suits your small business.

The Exit Strategy

The exit strategy, or plan, details how the owner wants to sell his or her stake in his or her company. Exit strategies help small company owners leave the business easily. An effective exit strategy adapts as the business expands and demand evolves. Such a plan protects your business from losses and assures investors and lenders that their money is safe.

Related: 6 Keys to a Successful Exit.

Small Business Exit Strategy

Knowing the different ways to exit from a small business comes in handy when you begin the exit process. This article discussed some effective business strategies for small businesses.

1. Merger

Two businesses combine as one in a merger. Mergers raise the profitability of the combined business, which is why investors seem to like them. A merger likely requires that you remain part of the new company to assist with the transition. The new, combined corporation may also hire your workers. However, a merger is not the right exit option for you if you want to break ties with the company.

Five major forms of mergers exist:

  • Horizontal: All firms are in the same market.
  • Vertical: The two firms that belong to the same supply chain.
  • Conglomerate: The two firms have little in common.
  • Extension of the market: The firms offer the same goods and compete in multiple markets.
  • Product Extension: The goods of both firms fit well together.

Before you combine companies, make sure that the existing businesses are a suitable match with regard to both product/service and culture. Otherwise, you might end up wasting money.

2. Acquisition

An acquisition is when one company is acquired by another. In an acquisition, you give up control of your firm to the corporation that purchases it. One of the positive aspects of an acquisition is the potential for a higher payoff. The acquiring company may be willing to pay a price higher than your business’s real value, particularly if it’s a rival.

If you’re not willing to let the company go, an acquisition may not be the best option for you. Many acquisition deals require the seller of the acquired company sign a non-compete clause agreeing not to work or start a new company in that same market space.

3. Family Tradition

Many entrepreneurs want to keep their companies in the family. That implies making arrangements at a certain stage to move the business to a child or other family member. This can sound like an attractive company retirement plan in which you train heirs over time to ensure that the uncertainty and burden of business management are covered by your family relationships.

Although keeping the business in the family might sound like the easiest way to maintain your legacy for many generations, it is important to be realistic about who is the best choice for running the business. Family members who are interested may not be suitable to run the company and those who are suitable may not be interested.

4. Selling Shares

If you are not the sole owner of the business, you can sell your share to a business partner or another investor. Depending on the buyer, this can be a “business-as-usual” departure technique.

5. Initial Public Offering

The first listing of a company’s shares to the public is an initial public offering (IPO). This is sometimes called “making it public.”

Newly public companies generally enjoy a high-growth period with sales of shares generating additional money to help pay off loans. For small enterprises, though, going public might be daunting due to the time and resources required. An IPO may not be the way to go if you want a quick exit strategy.

6. Liquidation

Company operations stop with liquidation. The company’s assets and properties are sold, with the funds distributed among creditors, investors, and shareholders. Creditors, not investors, have first dibs.

Liquidation is a clear-cut termination plan best suited for insolvent companies. Liquidation often results in the business owner losing the business model, credibility, and clients.

Exit Plan Items to Consider

When it comes to planning your small business exit strategy, where do you start? Although much your exit strategy entails information specific to your company, there are some questions you can ask yourself to get started with the development of your exit plan.

A robust exit strategy adapts to circumstances. If bankruptcy looms, an exit strategy can guide you through the divestiture of your company on the best terms possible. If you are retiring or decide to pursue other opportunities, then an exit strategy will help persuade prospective investors that your business is a good place to safeguard their capital.

Consider the following when coming up with your exit strategy:

  • Your market
  • Company size
  • The economy
  • Profitability
  • Entrepreneurial family members or friends
  • Competitors
  • Duration.

Are You Planning an Exit?

To help make the best decisions, many business owners work with consultants or professionals such as accountants or business attorneys. As part of your business strategy, once you have addressed considerations of market and company size, you might enlist a professional to help develop an exit strategy.

Your exit strategy will tackle executable items, such as taxes, the structure of the deal, and so on. To understand your options, you also need to understand your company’s full value.

The planning process for your exit strategy crystallizes your personal and business objectives to make the best decision at the appropriate time of exit for your business. If your exit will happen in the immediate future, then you need to choose one plan and stick with it. However, if you have the time to plan, then it’s a good idea to set up multiple options to allow yourself flexibility.

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Author Summary:
Dan Doran

Dan Doran

Is the Founder of Value Scout, Quantive and the 2019 Exit Planner of the Year. He is a recognized expert and speaks frequently about M&A, valuations, and developing more deliberate value creation strategies.

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