What is a Business Exit Strategy?

Explanation

A business exit strategy is a medium by which any proprietor reaps invested funds out of business. The main purpose of an exit is the evaluation of the business. Any 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. Still, simultaneously, he also loses all the controls over the business.

Top 5 Best Business Exit Strategies

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#1 – Merger & Acquisition

The acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more 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 mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm.read more 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 acquisitionMerger And AcquisitionMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more mean merging with the same company or selling to a larger company. It is a purely winning situation as, under this, the acquiring company already has skills and can cope 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. However, the acquisition is a great exit strategy on its own but maybe negative if there are misunderstandings between potential buyers and sellers.

Advantages:

  • If the business has strategic points that an acquirer is looking for, it may be paid more than expected.If there is more than one buyer for the business, the seller may increase the price to some extent.

Disadvantages:

  • Suppose the business targets a specific company and prepares products required for the same targeted company. In that case, 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 IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more. It 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 to issue IPOs and even after stock listing. There are many 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.read more.Capital market increases which in turn helps in gathering low-cost funds.

  • It is the most difficult exit strategy requiring time, money, and many compliances.Becoming a public company means following up many formalities that 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

Liquidation may be either voluntary or under adverse circumstances. It is the strategy under which the owner wind-up the business, 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.

  • 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 many potential customers are willing to take over business like employees, vendors, etc. As these people have worked with the company, they know the work trends and 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 that do not allow such transfer.

#5 – Bankruptcy

A situation where there is no future earning potential or a situation where one cannot repay its liabilities. It 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.

  • It will release the business owners from all its liabilities.One can move on from the current business and start a 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 business uncertainty.Business Failure: If the business suffers from losses and after trying all good chances to overcome business, it may exit strategies.Exhaustion: Many businesses are left with financial crisisFinancial CrisisThe term “financial crisis” refers to a situation in which the market’s key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more 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 boredom, loss-making, low satisfaction with regards to return generated, etc.

Importance of Business Exit Strategies

Any business must have a well-defined plan of action at every stage of business operation. Working without a plan will be disastrous and 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, they would incur 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 realize best while exiting the business. Sometimes, many venture capitalists need to plan an exit due to upcoming uncertain business circumstances.

Therefore, in every situation, exit business strategy plays a great role in 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.read more.

Conclusion

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. 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 requirements so that it does not hamper future aspects of other running businesses or personal credibility itself. Each exit strategy has its pros and cons, which must be thoroughly studied before implementation.

This has been a guide to 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 –

  • Mergers and Acquisitions TypesStatutory MergerSuccessful Mergers and AcquisitionsVertical Merger