When it comes to business planning, creating a perfect exit strategy is vital, especially for the founder of the business, as he has put considerable time, effort, and resources into developing his business and bringing it to a level where it is considered successful. Moreover, it can have serious implications for the new investors and the company itself as it decides their future too.
The way an entrepreneur decides to divest his ownership in the business can have far-reaching consequences and the exit strategy can make or break the company. Similarly, Exit Strategies in Business are also dependent on their purpose, whether the founder wants to retire, or pursue new ventures, perhaps he feels the company requires new leadership.
So today, we will learn about the types of exit strategies, how to create the perfect exit strategy as a founder, and learn what long-term implications they can have on all the stakeholders.
What is an Exit Strategy?
An exit strategy is a plan made by the owner of the business to determine how he will transition out of his role in the business. From the timing of the exit to the method, every tiny detail in between is neatly planned out in the exit strategy for a smooth transition. A good exit strategy plans for everything to minimize disruptions and maximize the value of the brand and the company.
When planning an exit strategy several factors are taken into account and they are as follows.
- Financial Planning: A good exit strategy accounts for the financial future of all the stakeholders, particularly the founder, and ensures that he receives fair returns on his investment.
- Business Continuity: It should have a good roadmap for the future of the business, detailing how operations in the future will be continued and how the company assets will be managed post-exit.
- Risk Management: Every potential risk factor and challenge is taken into account and mitigated as much as possible for a smoother transition.
Types of Exit Strategies in Business
Several different types of exit strategies exist and, in most cases, a perfect exit strategy is planned well in advance, but in other cases like bankruptcy, it may not be as well planned or even voluntary. Here are some of the most common types of exit strategies.
- Acquisition: Acquisition involves another company or individual purchasing your company. Acquisition comes in many forms like an outright buyout or partial sale. Similarly, the purpose of an acquisition also varies like acquiring a company for its technology, and assets or entering a particular market.
- Merger: A merger involves two companies combining forces and becoming one and generally the goal of a merger is to either diversify or get an edge over other competitors. A merger also allows the new company to increase its market share and enhance its presence.
- Initial Public Offering (IPO): An IPO is a transition of a company from private to public ownership. Going public means, the company starts selling its shares, resulting in a greater acquisition of capital and more visibility for the company.
- Management Buyout (MBO): Besides the founder or the owner of the company there is a whole management team and they can also decide to buy the business from the founder. This can be a perfect exit strategy as the team is already involved in the management of the company.
- Liquidation: Liquidation can be both voluntary and involuntary and it involves the company stopping all its operations and ceasing to exist. This is generally done in cases of bankruptcy or when the business is viable or there is no other feasible exit strategy.
How to Create the Perfect Exit Strategy as a Founder?
Creating the perfect exit strategy can be a daunting task, but when executed perfectly it can pay dividends. Here is a step-by-step guide to creating your perfect exit strategy.
- Define Your Objectives: You start by defining clear set goals for yourself and your business. Your goals should include reaching your desired financial target and a smooth operational continuity for your business post-exit. If you know what you want to achieve the transition will go a lot more smoothly.
- Assess the Company’s Value: You need to conduct a thorough assessment of your company’s assets and determine what is it worth. This may involve a detailed audit as well as an evaluation of the market condition and having an accurate evaluation can help you make a better deal.
- Choose the Right Exit Type: Now that you have set your goals, it is time to decide on the best kind of strategy, as choosing the right strategy can mean the difference between success and failure, and choosing the right strategy should involve you looking at every potential outcome.
- Assemble a Team of Advisors: A lot of time and effort goes into planning the perfect exit strategy and you need a crack team of professionals to do it. This should include legal, financial, and business experts, preferably those who have spent time in the company.
- Prepare Financial Statements: Having all your financial records up-to-date and in order and very important as buyers or investors will go through every tiny detail and scrutinize every document.
- Develop a Transition Plan: The transition period can be the most critical part of any exit strategy as it may involve a change in leadership and even business styles and effective communication and leadership during this period is vital.
- Market the Business: The financial and planning side of the exit strategy is important, but so is the marketing side, as you want to attract as many potential buyers as you can, and to do this you need a competing narrative.
- Negotiate the Deal: The art of negotiation is essential in most exit strategies in business, as it determines not only the sale price but also the structure of the payment and any potential payouts post-sale.
- Communicate Effectively: The perfect exit strategy involves clear and concise communication between all the stakeholders. This is especially true since it involves several different parties, from the founder to the buyer and of course the employees and the customers.
- Reflect and Adapt: Lastly, you should be able to reflect on the decisions made after the exit and be able to adapt in case not everything goes as planned. This may not be helpful in the present scenario but it can be useful for future business ventures.
