Creating a Business Exit Strategy [+6 Ways to Do It]
A business exit strategy is important to understand at any stage of running a company.
You may have heard about the need to develop an exit strategy, but you’re unsure exactly what it is. You may not know if you really need one. You may have heard that there are different types of exit strategies, but you’re not sure which one is right for you.
Either way, this is the right article to read. Below, we’ll outline exactly what a business exit strategy is, why you need one and 6 common exit strategies for business owners that you can put into place.
What is a business exit strategy?
A business exit strategy is a plan that outlines how an owner of a company can sell their investment in their business. It is essentially a roadmap on how to walk away.
If you’re a business owner and wanting to sell or close down your company, you’ll need an exit strategy to make it work. Ideally, you should create this plan even before starting your business, so that you can make adjustments as the market evolves. But if you haven’t even thought about make one yet, there’s no need to worry.
Why a business needs an exit strategy
All companies need an exit strategy because nobody lives (or works) forever. One owner might want to retire, get a job somewhere else or maybe even start a new business in a different industry.
But without a plan, leaving a company can be stressful. Business owners who’ve spent years building an empire can get emotional about their exit and have clouded judgment, resulting in poor decisions as they walk out the door.
When creating an exit strategy, you’ll need to consider:
- How long you plan to be part of the company
- Your current financial situation, and what you expect it to be in the future
- Any creditors the company has who will need to be paid back if your business closes (this may even include your own employees)
- Any investors in your business that are expecting returns
If you develop a robust roadmap in the early days of your business, it can help you make the right decisions throughout the lifetime of your company’s operations.
You should revisit your strategy as often as you can to see if it still fits within your goals and current situation. You may start a company with one investor but end up receiving hundreds. That will be a crucial factor that will impact an exit strategy.
6 common exit strategies for business owners
There is no need to reinvent the wheel when it comes to business exit strategies. There are many types of common ways to leave a business, and each one has their own advantages and disadvantages.
Below, we’ll outline 6 common business exit strategies to consider.
1.Sell the business to a friend or family member
You may like to sell your business to a friend or family member. Keeping your business in the family is a common way to walk out the door, but it’s important to know that this will not under all circumstances keep your legacy continuing.
- An easy transition
- You can still be involved informally as an advisor
- The usual issues that can happen of mixing business with family (and friends)
- Can result in in-fighting as emotions become involved
- Family members or friends may not have the skills or acumen to run a business
- Business may be perceived as nepotistic
- Tempting to sell the business at ‘mate’s rates’ below what the business is worth
2.Sell the business to an employee or manager
Another common route people take when devising an exit strategy is to sell the business to an existing employee or manager within the business.
- Employees and managers already know the business
- They may be more proactive and eager to make the business a success
- May be more objective than friends and family members
- You can still be involved informally in some way
- Situations still may become emotional if you’ve been working with a manager or employee for a long period of time
- May be tempting to sell the business for a discounted price
3.Merge with another company
A merger involves two companies combining into one company. Typically, this tends to increase a business’ value and investors tend to prefer these types of exit strategies for this reason.
Mergers generally require you, as the business owner, to still be part of the business. You’ll manage the business through the merger itself, and your employees may still remain in the employment of the new company.
- The business merging with your company may be willing to pay a high price
- Merger can save a business if it is failing
- Difficult for employees to adapt to a new company culture
- Some employees may lose their job as the merger happens
4.Acquisition (selling to another business)
Sometimes, another business or even a competitor may wish to acquire your business. This could work well for you, as the business may be a strategic part of that company’s expansion – and may be willing to pay a high price to fulfill that strategy.
Sometimes, you will be offered a job in the company buying your business. If so, you’ll want to make sure you are happy with the new role and understand the culture of the new business. It can be difficult to be ‘bought out’, and no longer be in control of a company that was once yours. This is something you would need to be prepared to do.
The pros and cons tend to be similar as those listed under the merger heading.
5.Sell to the public (via Initial Public Offering)
An initial public offering (IPO) refers to when a business sells stock to the public for the very first time. Business owners typically don’t use IPOs as an exit strategy, but rather as a way to raise capital.
IPOs are a massive and expensive endeavour for any business. It also means becoming public, and so subject to even more federal reporting requirements such as rules in the Corporations Act 2001 and the ASX listing rules. So this is not something to take lightly.
- It can lead to huge profits
- Can enhance publicity and reputation for your business
- IPOs are hard work – tedious, lengthy and expensive
- New public reporting obligations
- Shareholders have a say over the direction of the company
Liquidation is the procedure of shutting a business down forever, selling all of its assets or redistributing them to the company’s creditors. One judge of the Federal Court of Australia said that liquidation “usually spells the death of a company”.
Liquidation can occur if a company is solvent (i.e. able to pay off its debts when they become due and payable) or insolvent. It is typically a clear strategy because you don’t need to negotiate or sell your business to somebody else. Put very simply, your company stops running, your assets are sold, and the money goes to the people you owe money to.
So, who exactly gets the money from a liquidation? In Australia, there is a priority of payment as follows:
- The liquidator – The liquidator, who becomes in charge of a company in liquidation, pay themselves out of the company first.
- Secured creditors – these creditors get priority after the costs of liquidation are paid. These are the creditors with security interests (for example, a mortgage or charge) over the assets of the company, and typically include companies like banks.
- Employees – employees are a form of unsecured creditor who receive priority under the law. This includes payments of outstanding wages. If there are enough funds available after secured creditors are paid, employees are next on the list.
- Unsecured creditors – These creditors have no security or collateral over the company’s assets. They could include people like trading partners. These creditors will be paid on a pro rata basis if there are any funds left over after secured creditors, employees and the costs of liquidation are paid.
- Simple exit
- Can be quick
- Loss of business and individual reputation
- Value of business assets will be low
- Owner will receive lowest returns on investment
Seek expert advice for your business exit strategy
A robust exit strategy for business owners requires careful consideration, and many factors are involved.
We cannot underestimate the importance of seeking advice from professionals. They are equipped with the expert guidance necessary to navigate you through the trenches, minimising the risks of making costly and avoidable mistakes.
While there is an initial cost for tailored advice, good strategists can help you leave the business with more money in your pocket.
Our financial experts at 2account have unrivalled experience when it comes to helping businesses figure out the right exit plan, helping owners walk away satisfied and knowing they’ve made the right choices.
Book in a strategy call with our team today and let’s discuss the future of your company.