The article will offer insights to startup founders, small business owners, and established company leaders about the importance of developing an exit strategy, outlining key benefits and steps involved.
A business exit strategy outlines the steps a business owner needs to take to sell their ownership in a company to investors or another company and generate the maximum value.
There are several different exit strategies, including types like strategic acquisitions, an initial public offering (IPO), management buyouts (MBOs), liquidation, bankruptcy, selling a stake to a partner or investor, or passing the business on to a family member.
It’s recommended to develop an exit strategy early in the business planning process, ideally during the initial stages of forming the company. This is because this strategy can impact future business plans and influence key decisions regarding growth, investment, and operational strategies.
For instance, if the exit strategy business plan is to pass the business on to family members, the focus may be on creating stable day-to-day operations and a strong brand reputation. In contrast, if a business owner aims to sell their business within, say, five years, they may focus on rapid growth and building tangible assets to increase the company’s valuation.
In fact, one of the most important parts of every thoughtful exit strategy is business valuation, as it determines the company’s fair price. Understanding the current and potential future value of the business helps to make the right decisions regarding when and how to exit.
It’s also important to note that business exit planning can include two subsets — investor and venture capital exit strategies:
Let’s explore why developing a business exit strategy is always a good idea.
1. Maximizing value
A well-defined exit strategy helps maximize the value of your business by focusing on growth, profitability, and building tangible assets. This, in turn, will lead to a higher sale price or better terms during a transition.
Example: WhatsApp, a messaging app, focused on user growth and engagement before its acquisition by Facebook for $19 billion in 2014. This strategic approach maximized the company’s value and resulted in a lucrative exit for its founders and investors.
2. Mitigating risks
An exit strategy allows business owners to mitigate potential risks associated with industry changes and unattractive market circumstances, protecting the value of their businesses.
3. Facilitating succession planning
By outlining a clear exit plan, you can facilitate smooth succession planning and ensure a seamless transition of ownership or management, minimizing disruptions to operations.
Example: Walmart, a retail industry leader, demonstrated effective succession planning. When Sam Walton retired in 1988, his son, Rob Walton, became a chairman, prioritizing expansion and technological advancement. In 2015, Rob Walton smoothly transitioned leadership to his son-in-law, Greg Penner.
4. Enhancing investor confidence. Having a well-defined exit strategy increases investor confidence, as it demonstrates strategic planning and commitment to maximizing returns. This, in turn, facilitates fundraising and growth opportunities.
The selection of an appropriate exit strategy is influenced by a few different factors, such as the entrepreneur’s goals, market conditions, and the business growth strategy. Each strategy comes with its own set of advantages and disadvantages, making it crucial for company owners to carefully evaluate their options before making a decision.
Business exit strategy example | Best for | Pros | Cons |
IPO. Enables company owners to exit by selling their equity to investors in public equity markets. | Companies with strong growth potential and a desire to raise significant capital quickly. | Access to large capital Increased liquidity Enhanced credibility | High costs Extensive regulatory requirements Loss of control |
M&A. Selling the business to another company or merging with another company. | Businesses seeking rapid expansion, synergies with other companies, or exit by selling to a larger competitor. | Potential for a high valuation Quicker exit process Access to resources and expertise | Loss of control Cultural integration challenges Potential job losses |
Management buyout (MBO). Owners sell the firm to the current management team, whose familiarity with the business technically makes them the best potential buyers. | Succession planning, maintaining business continuity, and retaining key talent. | Smooth transition Continuity of business operations Alignment of interests | Financing challenges Potential conflicts of interest Limited access to capital |
Liquidation. Selling off the company’s assets and distributing the proceeds to shareholders. | Financially struggling businesses. | Closure of the business, realization of the remaining value Resolution of debts and liabilities | Loss of investment Potential legal complexities Reputational damage |
Bankruptcy. The legal process of declaring a business unable to pay its debts. | Businesses facing overwhelming debt or financial distress. | Opportunity for debt relief Chance to restructure and start anew | Loss of business reputation Potential for creditor disputes Limited control over the process |
Selling stake to partner or investor. Selling a portion of ownership in the business to an external party. | Businesses seeking capital infusion, strategic partnerships, or expertise. | Access to capital Potential for business growth Shared risk and decision-making | Dilution of ownershipLoss of control Potential conflicts with new stakeholders |
Passing business to a family member. Transitioning ownership and management control to a family member. | Family-owned businesses planning for succession. | Preservation of family legacy Continuity of operations | Family disputes Challenges in separating personal and professional relationships Potential lack of business experience in successors |
Let’s also explore the most suitable exit strategy business plan examples for different company types:
A survey of business owners conducted by the Exit Planning Institute shows that just 20% of businesses put up for sale successfully find buyers. Among the businesses that manage to sell, 75% express significant regret within one year of leaving their business.
That’s why it’s so important to proactively develop an exit plan and facilitate the transition to a new business owner. Here are key steps to take: