I am guessing you might have heard of the term exit strategy. In some business plans, people actually detail what their exit strategy will be. Anyways, what is an exit strategy? Let me start with a dictionary definition: a pre-planned means of extricating oneself from a situation that is likely to become difficult or unpleasant. About business, the premise is not always anticipated difficulty or unpleasantness. It can actually be for when a certain business goal or goals have been achieved. An exit strategy refers to a series of deliberate steps that will be taken by an entrepreneur to leave their business.
Why Is Exit Strategy Important?
There are two fundamental reasons why an exit strategy is important. One, it helps inform one’s business goals and objectives. Once you have an exit strategy in mind it is easy to define the overall goals and objectives of the business. Two, several things can lead to a business owner getting out of the picture. When this happens it becomes necessary to go through a transition. A well laid-out exit strategy will ensure there is a smooth transition. Additionally, an exit strategy increases the likelihood of you getting funding if you are looking for it from financiers or investors. If they find your exit strategy alluring they will definitely buy-in.
Key Elements Of An Exit Strategy
The way an exit strategy plan is put together varies. However, I will just point some of the core elements that must be included. There must be clearly defined goals and objectives. Then there must be a section dedicated to the valuation of the business or company. There will also be several analyses to be explored e.g. gap analysis, value drivers, value enhancement, exit options, and implementation approach amongst others. Timing aspects will also have to be detailed in the plan – these deal with assessing how ripe and ready or not a business is for an exit strategy.
Types Of Exit Strategies
Initial Public Offering – IPO
An initial public offering is when a business or company makes available some of its shares for sale to the public. If the valuation of a business or company is good it means the share price will be quite good. IPOs are not just used as an exit strategy only; they are mainly used to raise capital. The biggest IPO in history is that of Alibaba – it stood at US$25 billion. Had that been an exit strategy, that would have been a cool amount of money to be set for life.
Employee Stock Ownership Plan – ESOP
This is when employees are given room to be able to buy shares (part ownership) of the business or company. The working arrangements vary but can range from just a few particular employees being given the opportunity or everyone. This type of exit strategy is the best pick for entrepreneurs who want their employees to benefit. It is also for those who are particular about the fate of their business thus they would want it to be taken care of by people who have been a part of it all along.
Transfer Of Ownership
This transfer of ownership can be any one of your choices really. However, it is common for the transfer of ownership to be to one’s family. Thus entrepreneurs who want to keep the business in the family easily settle of this type of exit strategy. Another common arrangement says when two people own a business. It could be that one person wants to leave the business whilst the other one still wants to be in the business. This essentially means that he or she will transfer ownership to the other person.
Sell The Business
This is quite straight forward; it is just selling off the business. Of course, the business would have to be properly valuated before the sale is done.
Merger And Acquisition
This is quite common in the business world along with another variation of it. That variation is a merger and partnership but for purposes of exit strategies, you will find that merger and acquisitions are the most common. This is a notch ahead of simply selling off a business. Here your business or company is merged with another one and then also acquired in the process. Thus the one being merged with will in essence also be the acquirer – that is not always cast in stone though, arrangements can vary.
There are exit strategies here that I discussed that entail the selling of shares. These are the IPO, ESOP, and transfer of ownership. There is still another strategy where you can just sell your shares to anyone of your choice in a bid to exit the business. It can be someone already in the business or it could be someone external to the business. Note here that you will basically be selling your shares in particular.
This is simply when you shut down your business and sell off all the assets. This is usually done with the selling price being quite low. This is usually done as a sort of last resort when all other methods cannot be explored. This is usually because the business or company would have been failing or nearing closure due to irreversible circumstances. For instance one of such circumstances could be bankruptcy.
The dynamics surrounding these strategies are so diverse that you have to carefully consider them before settling for one. They all have their respective advantages and disadvantages. I have noticed that most local entrepreneurs do not plan their businesses with exit strategies in mind. It is pertinent that you get to put together an exit strategy plan for your business.