Business Exit Strategy

A business exit strategy can be defined as an exit plan whereby any person running 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 loss-making exit business or to meet immediate cash requirements.

Business exit strategy options include liquidation, sale of the company to employees, and Initial Public offerings (IPO) among others. The departure of the existing owner is either to maximize gains, limit losses or make sure the company becomes profitable after their exit. They are also meant for entrepreneurs to avoid future losses or minimize their exposure to risky businesses.

• A business exit strategy is a plan to divest or transfer ownership of a business where the owner no longer has a financial or legal interest. It can involve selling the business, merging with another company, going public through an IPO, liquidation, or selling to managers or employees.
• The top five business exit strategies include merger & acquisition, IPO, liquidation, selling to managers or employees, and bankruptcy.
• Having a well-defined exit strategy helps business owners plan their future actions and better understand the process of leaving the business. 

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 suit their environment by looking into factors such as after exit plan, the quantum of control and ownership they want 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 they are paid the fair price for their share of  business.

Under the acquisition exit plan, the key person who started the business gets relieved from the ownership and related duties. Still, simultaneously, they also lose all  control over the business.

Large or small business exit strategy is a plan to extract funds 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 and 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.

From the plethora of business exit strategy options, business owners use the options that fir their financial conditions and the betterment of the company’s future prospects. As each business is different in its operating style and nature, the options could vary from company to company. Let us discuss the top 5 strategies with their advantages and disadvantages through the discussion below.

#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 merger 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 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 IPO. 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.

Advantages:

• Improves business value as it becomes listed security.
• Capital market increases which in turn helps in gathering low-cost funds.

Disadvantages:

• 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.

Advantages:

• 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.

Disadvantages:

• 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.

Advantages:

• 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.

Disadvantages:

• 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.

Advantages:

• It will release the business owners from all its liabilities.
• One can move on from the current business and start a new business.

Disadvantages:

• 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.

Large and small business exit strategy is implemented by business owners for various reasons, both positive and negative. However, it is almost always for the betterment of the company in the larger scheme of things. Let us understand the possible reasons for such departures through the explanation below.

1. IPO Ready: It is the situation where a business has grown to a large scale where it thinks of public investments for further success.
2. Market Uncertainty: Sometimes, businesses are in the selling process due to future business uncertainty.
3. Business Failure: If the business suffers from losses and after trying all good chances to overcome business, it may exit strategies.
4. Exhaustion: Many businesses are left with financial crisis due to which they go for exit.
5. 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.

The business world is a world of uncertainty at every step at the highest degree. Sometimes entrepreneurs consider business exit strategy options to tackle their personal exposure to a risky business or exit because it can maximize their profits from the business. However, it is also important to understand the timing, exit type, and the best interest of the company. Let us understand the importance through the discussion below.

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 in 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 the 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 maximization.

This has been a guide to what is a Business Exit Strategy. Here we explain the top 5 business exit strategies with advantages, disadvantages, and reasons. You may learn more from financing from the following articles –

• Mergers and Acquisitions Types
• Statutory Merger
• Successful Mergers and Acquisitions
• Vertical Merger