This article was originally posted on 10th of June 2015.
A business exit strategy may not be the first thing you think about when you start your business. And why should you? The dream of anyone going into business is to create a service that is functional for many people. By doing so, they create an impact and leave a legacy, while making a handsome profit.
After labouring for considerable time building the business to success, business owners often find themselves faced with the decision of leaving. The reasons for the exit are widely varying. Taking a retirement or focusing on other ventures are common reasons. You may even be searching for an exit when your venture is not going well. Regardless of your motives, it is always a plus to you to be ready for the time.
That is what this article is going to do for you. We present to you the ultimate guide to designing an exit strategy for your business. Uscita is your partner in providing a comprehensive solution in exiting your engineering, manufacturing and B2B services businesses.
As is our practice at Uscita, we are here to help you make the best decisions when parting from your company. So let’s get into it.
Looking for a handy checklist that will walk you through all that’s needed when preparing your business for sale? We’ve created one with all you need – and you can download it here.
What is a business exit strategy?
A business exit strategy is simply a step-by-step plan for a business owner to pull out from the business. Because your intentions may be widely varying, a business exit strategy may take different forms. The plan usually involves reducing or liquidating your stake in the business to make a profit.
An exit strategy may indicate the end of your involvement in the business or the end of the business entirely. While this may be true, a business exit strategy is usually incorporated as you make the initial business plan before commencing operations. The choice of an exit strategy usually affects the path through which you grow the business.
The decision to implement the business exit strategy often falls on one of these reasons:
- To reduce your stake and your control of the business freeing you up to pursue other activities
- To make a substantial profit if the company is profitable
- To cash out of an investment (common with venture capitalists)
- To limit or put a stop to the losses if the business is unsuccessful
Regardless of the reasons, the exit plan is implemented in the same way and requires sufficient planning for success.
What is a good exit strategy for business?
The first point to note here is that a good exit strategy for a business affords you the best possible outcomes. This means that the exit strategy must allow you to express your intentions in selling your business. Whether it is the ability to make a considerable profit or just to reduce your day-to-day involvement in the business, as long as your exit strategy helps to fulfil this, then it is a good one for you.
There are many different means by which you can get out of your company. And the choices can get confusing. This is why we created this infographic to help you simplify the process and decide on the best approach for you.
A popular exit strategy for a business is to sell the business. This method has worked for many business owners and it may also be the way to achieve your needs. But it is essential to plan and outline your needs when undertaking this process. Although you can approach this on your own, it may be more convenient to employ the services of experts to advise you on the most appropriate steps to take.
What is the exit strategy in a business plan?
The ultimate choice of an exit strategy depends on what you wish to achieve. But you will still have to know the possible paths you can take before you choose them.
Here is a list of exit pathways you can explore.
- Liquidation: In this, you close the business, sell off the assets and stock options and walk away. This usually spells the end of the company.
- Strategic sale: Here, you approach competitors with an offer to take the business off your hands. This is a plus for both parties when the competitor will benefit from owning your business.
- Management buy-out (MBO): The senior management team, if interested, takes over the business in this method. The team buys your stake in the company, allowing you to take your exit.
- Employee ownership: This is just like in an MBO, except that the employees, instead of senior management, assumes ownership of the business. This is an excellent way to ensure staff retention if you are particular about that.
- Investment: You may get investors to buy a part of your stake in the business. This may mean having to continue to function in the business for a while longer.
This list is not exhaustive, and the eventual choice you make may not be known while planning your exit at the beginning of the business. Also, depending on how you build your business, your preferences may change over time. However, knowing about them helps you eliminate some choices and pick what works best for you.
How to plan an exit strategy for a business?
Without a doubt, you will get the best effects when you start planning your exit strategy as early as possible. Although the ideal method is to develop it as you start up the venture, it is not too late to make a plan now if you haven’t done so.
An exit plan is to serve as a guide, and in doing so, it should be comprehensive. In developing it, you should consider all variables and details and examine how much impact they will make when you want to implement the plan.
Answering the following questions will help you craft a detailed and effective exit strategy. (Remember to think through this in terms of exiting your business)
What does it mean to run a successful business?
It is usual to find that the measure of success of most new business owners is profits. After all, a good business, through profitability, is supposed to eventually raise your standards and help you live a better life.
However, as you go on, the definition of success usually evolves. Business owners look to a long-term impact or legacy, much more than the bottom line.
For an entrepreneur hoping to get out of the business, the prospects of a substantial profit form the first stage of success. Usually, the idea is that once the venture is profitable enough, it is sold off, possibly to use the proceeds to launch another venture.
The second stage of success focuses more on the long-term. People with this view are often older and are already considering early retirement. In thinking of an exit strategy, the goal is to make enough to live comfortably during retirement and take care of kids or engage in other interests.
Any action taken is such that will make these intentions easiest to fulfil. Whether it is to sit tight and build the business further or sell it right away, you will be able to decide the best way for you.
The third stage of business success is one where you focus less on yourself and more on what you can do for others. Usually, at this stage, the business is big and profitable, and you don’t worry about money because it’s available. At this stage, you are considering leaving a lasting legacy.
This is a description of the spectrum of business success, and as your priorities change, you must tailor your business exit strategy to meet them.
What is the mode of operation of your business?
How your business operates significantly determines the steps you will take to exit from it. Trying to get your business sold doesn’t have to be tough. If potential buyers see the company’s value, they will come rushing to take it off your hands.
Part of planning to exit your business is arranging the operations in such a way as to make it attractive for prospective buyers. There are several ways of doing this and we will be discussing tips you can follow in this section.
- Make the business independent of you: Many business owners, either deliberately or otherwise, often find that the business revolves around them. If they were to step away for a minute, business operations would halt. As much as that may not be the most efficient way to run a business, it also doesn’t help your exit attempts.
For a business to be attractive to a buyer, it must be able to function outside the actions of particular individuals. So in planning your exit, you should ensure that the business is not too dependent on anyone.
In the early years of a business, it is common to find businesses reliant on their owners. But this is something to work on subsequently. Train your staff to be more capable to handle tasks while you’re away. In addition, let your clients get used to dealing with other people. With this, you will find it easier to take holidays as you’ve built an independent business.
- Keep accurate records and document your processes: Having correct financial records implies that you have nothing to hide. Anyone planning to take over your business will be more confident when they can view the details of financial transactions and gauge the strength of the enterprise.
Furthermore, the independence of your business is helped when you share the knowledge you have with your team. You will do this most effectively by documenting the processes and procedures. These guides come in handy when you are present, as the work will continue smoothly.
With your exit in mind, you can begin documenting one process at a time until you have completed the spectrum. The same action applies to keeping accurate records of financial transactions. Because this might take a while to accomplish, it is preferable to start early.
- Take care of your customers and suppliers: Your customers may have gotten used to dealing with you and would not like to transact with someone else. This is good. It shows how much effort you have put into cultivating excellent customer relations.
But when you are planning your exit strategy, you must carefully manage the customers. If they feel like you abandoned them, the business may lose their patronage. So you should take time to introduce them to other team members. This helps to build trust in the new person they will interact with when you are gone.
As for suppliers, it is essential not to be spread too thin. It is always a plus to have an array of suppliers. So while you may have a few preferred ones, you will not be taken for granted as they are aware you have many options. This also makes the business seem more robust and flexible by potential buyers.
- Make sure contracts are up-to-date: In planning your business exit strategy, you should review the agreements binding on the business to ensure all is in order. Some contracts may be a snag in finalising your business sale, amongst other things.
Examples of such contracts to check out include staff contracts to ensure that all requirements have been taken care of. Examine your lease agreement and make sure they comply with regulations.
You should also review customer contracts. You should make sure that the business’s obligations, as well as the customer’s, are not violated as ownership is transferred.
- Know your value: It is expected that as time moves on, the value of your business changes. It is crucial to keep track of the value of the business over time through shifting market trends or regulations.
A sense of the value of the business also helps the exit plan. With it, you can get an accurate worth of your company when a new owner buys you out.
How long will it take to sell my business?
Selling a business is generally not something that gets done super fast. Often, the efforts start from making the business appealing by racking up the profits and balancing the books.
Advertising, waiting for potential buyers and engaging in negotiations are other activities to perform, which can take a considerably long time. A business sale may take months or even years to complete, so the time varies.
To hasten the sale of your business, you should try to make the company more sellable. Sellability is an estimate of the ease of selling a business, and it is influenced by a range of factors. Profitability, marketability, and the existing demand for it are some of the aspects that come into play.
Essentially, the more sellable the business is, the shorter the time you need to close the sale.
You have read a guide to a business exit strategy. Now, you can begin to make plans and advance real steps to exiting your company. Remember that the earlier you start the process, the more smoothly it’s likely to go.
Alternatively, you can contact business sale experts to help design your exit strategy. Uscita is a business broker with over a decade of experience and over a hundred business deals completed in the manufacturing, engineering and professional services sectors. Contact us today for your business exit strategy and get a free business valuation.