What is a Business Exit Strategy?
A business exit strategy can be defined as an exit plan whereby any person running an existing business plans to liquidate its ownership stake either through sale or another such transfer mechanism whereby the proprietor (existing owner) will no longer have any financial/ legal interest in that business generally planned to either exit loss-making business or to meet immediate cash requirements.
A business exit strategy is a medium by which any proprietor reaps invested funds out of the business. Any type of exit will influence the structuring decisions of the business. There are various types of exit plans available; the owner has to evaluate which one best suits his environment by looking into factors such as after exit plan, the quantum of control and ownership he wants to retain in the business, whether to carry on ongoing business in the same way as it is running or is ready to make necessary changes by moving ahead until he is paid the fair price for the share of his business. Under the acquisition exit plan, the key person who started the business gets relieved from the ownership and related duties but simultaneously, he also loosest all the controls over the business too. The main purpose of an exit is the evaluation of the business.
Top 5 Best Business Exit Strategies
#1 – Merger & Acquisition
The acquisition can be defined as an exit business plan where an existing business owner sells its running business to another person i.e. ownership gets transferred. The mergerMergerA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share. is an exit business plan where the business owner liquidates its ownership partially with the formation of a new company having mutual control. Merger and acquisition mean merging with the same type of company or selling to a larger company. This is a purely winning situation as under this the acquiring company already has skills and can cope up with the business without ruining it. It is the practice of huge companies to grow their profits instead of making new products from ground zero. Under merger and acquisition, a large scale of negotiations takes place. There is no limit on purchase consideration. This process usually takes a longer time. Though acquisition is a great exit strategy on its own but may turn to be negative if there are misunderstandings between potential buyers and sellers.
- If the business has strategic points which an acquirer is looking for it may be paid more than what is expected.
- If there is more than one buyer for the business the seller may increase the price to some extent.
- If the business is targeting a specific company and prepares products required for the same targeted company, then it is less likely to be attractive for other buyers in the market.
- Acquisitions are problematic if the working culture differs in both companies.
#2 – Initial Public Offerings (IPO)
It is the dream of many entrepreneurs to sell their business to the public for a larger profit under the scheme of IPOIPOInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes.. This is the most preferred mode of an exit strategy. But this strategy may not be practical for small businesses. There are certain rules and regulations to be followed in order to issue IPOs and even after stock listing. There are lots of companies in the US but only 7000 are public companies. IPOs are difficult and have lots of complications but no doubt they can yield one substantial amount of profits.
- Improves business value as it becomes listed securityListed SecurityListed security refers to a financial instrument such as stocks, bonds, derivatives, etc., registered with and readily tradable on the stock exchanges like NASDAQ and NYSE..
- Capital market increases which in turn helps in gathering low-cost funds.
- It is the most difficult exit strategy requiring time, money, and lots of compliances.
- Becoming a public company means following up lots of formalities which may not be a small business owner’s cup of tea.
- The success of an IPO is very difficult for small and medium businesses.
#3 – Liquidation
It is the strategy under which the owner wind-up the business and sells all the assets and utilizes proceeds to clear off its debts. The proceeds from the assets realized must be used to pay off creditors. LiquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order. may be either voluntary or under adverse circumstances.
- It is the simplest way of the exit strategy.
- Negotiations may be less as compared to other exit strategies.
- No transfer of control is there.
- Assets may be realized at improper values i.e. selling at cheaper rates.
- Business reputation gets destroyed at the time of liquidation.
#4 – Selling of Business to Managers / Employees
Selling a business is easy if there exists a large number of potential customers willing to take over business like employees, vendors, etc. As these people have worked with the company, they know the work trends and how to manage and handle the business. Therefore, this exit strategy could lead to a fine business legacy and a smoother transfer. Under this, the selling norms might be easy and convenient for both parties.
- Business is handed over to some experienced known person.
- Money could be made as to its final settlement of business.
- Involvement in the business to some extent might be easy.
- Finding a suitable candidate to buy the business is somewhat difficult.
- There might be legal restrictions which do not allow such transfer.
#5 – Bankruptcy
A situation where there does not exist any future earning potential or a situation where one is unable to repay its liabilities. This is considered the last stage of the exit strategy. Bankruptcy has no business plans as no other strategy worked. It is an unplanned and unwanted exit, and no one is prepared for it.
- This will release the business owners from all its liabilities.
- One can move on from the current business and start the new business.
- All debts are not paid off or a portion of it is paid.
- Future credit borrowing capacity is affected by bankruptcy.
- Damages the reputation in the market with clients and customers.
Reasons for Business Exit Strategies
- IPO Ready: It is the situation where a business has grown to a large scale where it thinks of public investments for further success.
- Market Uncertainty: Sometimes businesses are sold off due to future uncertainty of business.
- Business Failure: If the business is suffering from losses and after trying all acceptable chances to overcome business, it may go for exit strategies.
- Exhaustion: Many businesses are left with financial crisis due to which they go for exit.
- Lifestyle Change: Change is the need of life. One may exit the business for a reason like wanting a change due to any reason like boredom, loss-making, low satisfaction with regards to return generated, etc.
Importance of Business Exit Strategies
It is very crucial for any business to have a well-defined plan of action at each and every stage of business operation. Working without a plan will be disastrous and may lead to a wind-up of business. One needs to ensure which business exit suits best at the prevailing circumstances. Once after thorough evaluation only, they should proceed further otherwise would end up incurring losses. Sometimes, to generate immediate cash, business owners exit running businesses. An exit strategy will guide such business owners to decide how to proceed further and help them to realize best while exiting the business. Sometimes it becomes the need of many venture capitalists to plan exit due to upcoming uncertain business circumstances.
Therefore, in every situation, exit business strategy plays a great role in the process of wealth maximizationWealth MaximizationWealth maximization means the maximization of the shareholder’s wealth as a result of an increase in share price thereby increasing the market capitalization of the company. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits..
Exit Business strategy is strategic planning to get funds extracted out of any running business due to varied reasons. There are lots of exit strategies under which selling off is most prevalent. Some common strategies are selling via acquisition, transfer, IPO, wind up, bankruptcy (unwanted exit) mergers, etc. One must evaluate each strategy and select the best one according to prevailing circumstances requirement in such a manner that it does not hamper future aspects of other running business or person credibility itself. Each exit strategy has its own pros and cons which must be thoroughly studied before implementation.
This has been a guide to what is a business exit strategy and its definition. Here we discuss the top 5 business exit strategies with advantages, disadvantages, and reasons. You may learn more from financing from the following articles –