What is a Business Exit Strategy?
A business exit strategy is basically a well-thought and well-planned strategy designed and formulated to simply get out of the business or sell a business either by exiting, transfer, succession, or any other mode.
Examples of Business Exit Strategy
In this article, we discuss how having a business exit strategy planned in advance can help save many businesses from dying untimely death.
Let’s take an example of how a business exit strategy can work in our day-to-day lives.
Example #1
Mr. SPC is in the business of trading household products all over the country. Mr. SPC has been in this field for quite a few decades now.
Now, it so happens that he is not able to devote much time and is unable to travel due to his physical limitations.
In such a scenario, it would definitely be right for Mr. SPC to hand over the business to the next generation for carrying on with the business. However, it is not so easy that one day, simply his children can come and take over the reins of the business.
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Thus, having an exit strategy planned in advance would help Mr. SPC smoothly transfer the business reigns to his children.
Example #2
Continuing the above example, say Mr. SPC children may not want to continue with the business. In such a case, he will have to either shut down the business or sell off the business to either his employees (who may be willing to take over the business) or maybe some outside party for consideration.
Now, in such a situation, having a pre-planned exit strategy can be very helpful such that Mr. SPC would be aware of the value of his business, a market of his products, his legal documentation would be in place, an estimated price that his business should be worth.
These things will help him in getting better offers and also assist him with better negotiation power.
On the contrary, if he does not have an exit plan, or in case of any sudden requirement leading to the closure of business, it is possible that he may end up selling the business for a price lower than its business worth.
In either of the examples above, it can be seen that, whether it’s a decided succession of business or a sale and transfer of business, an exit plan is definitely something that needs to be there with every business owner.
What factors should be considered in Business Exit Strategy?
Deciding on merely a purchase consideration or a sale price will not be enough when you plan for a business exit strategy. One needs to consider various factors in order to have a smooth business exit plan in place.
Following points are some of the factors to be considered for smooth, efficient and effective business exit:
Deciding on the mode of exit:
- Transfer of ownership or business
- Sale of the business – as a whole business,
- Sale of assets – individually,
- Selling a part of business,
- go for merger / demerger etc.
Find out about the prospective buyer
- To existing stakeholders/partners,
- To family members of existing stakeholders/partners,
- To the third party
- To a party who is in similar business
Deciding and analyzing factors such as
- The estimated price/consideration for transfer or sale of business
- Who will take in the reigns of the new business?
- synergizing the business
- optimizing the business worth
- selling of business at the right time
- how the business will benefit by change of hands
- type of competitors out there in the market
- any specific training requirement for business
- any important key performing parameters
Planning and preparing for the aforementioned factors will help the businesses in having a good exit strategy in place for timely and smooth transfer of the business.
Importance of Business Exit Strategy
- A pre-planned business exit strategy is always helpful in times of sudden trend change in business.
- It keeps all stakeholders aware and aligned in terms of what steps will be taken in case if there is a plan to sell the business anytime.
- It is always good to have an idea beforehand about who might be interested in buying out / taking over your business.
- Pre-preparation of legal work and documentation in place always comes in handy.
- Avoids getting into trouble and dangers when unable to scale up the business due to inexperience in running a business.
Key Takeaways for Business Exit Strategy
- A plan for selling the stake or the company itself to existing or outside parties.
- It can be executed either by transfer, merger, demerger, takeover, total buyout, or acquisition.
- If a business ends up running into losses, an exit strategy can help restrict/limit losses.
- If a business is getting profits, it helps the owner in diluting his stake by still getting profits.
- It helps in knowing the market beforehand for prospective sell-off.
- It helps in determining the company’s value and business demand in the market.
- It helps in capitalizing the business value at its maximum.
- It helps in being prepared for unexpected proposals and offers.
- Helps in better negotiations.
Conclusion
All in all, it is never a bad idea to have a business exit strategy in place. Also, having such a plan in place at the beginning itself is a great idea.
Exiting a business does not always mean closing or shutting down of business. Instead, it simply helps to be prepared in advance regarding the estimated right value and time for selling or transferring your business for its development and potential future growth.
On the other hand, if the business has not really taken off well in the market, it is better to ask for assistance or exit the business. Remember, it is better to exit a business than continue running a failing business.
Ultimately the focus is on maximizing the benefits and value of the business, and an exit plan is as integral to the business as it can be.
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