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The importance of having a Business Exit Strategy in 2022

What is a Business Exit Strategy?

Simply put, a business exit strategy is a plan for what will happen when you make the decision to leave your business. Alongside your business plan, which guides your business throughout its life, your exit strategy guides your business to its conclusion.

Don’t worry though, your business exit strategy doesn’t have to mean disaster or failure, or even something that requires imminent action, but many business owners actually start their businesses with the purpose of existing after a certain number of years. This doesn’t mean that they are less committed entrepreneurs, it just simply means they have a plan in place.

An exit strategy also isn’t just about how you’ll leave your business. Some other factors that are involved in the process could be things like will you make money when you exit your business and how much will that be? What will happen to your business after you leave and will it continue under new ownership? Or even how long will your exit take and what kind of transition period will there be?

But what if things change within your business? Don’t worry, your exit strategy should be reviewed periodically, the same as your business plan, and make any required changes to suit your current and future situation.

Whichever route you decide to go down, planning your exit in advance will mean you have a strategy and a plan that will help you reach your goals.

8 Potential Business Exit Strategies

The important thing to remember when creating your business exit strategy is that there is no right or wrong way to exit the business, but there are certainly options that may work better for you depending on your particular situation.

We’ve broken down eight different exit strategies for you below, highlighting what each one may look like and the pros and cons of each option:

1. Keeping It Within The Family

Lots of people get into business with the goal of being able to keep the business within the family long term, which means making plans for the transition of the company to a child or other relative at a certain point. This is normally quite an attractive business exit strategy as it allows you to train and develop your successor over time, although it is important to remember to be practical about who is really the best person to run your business.

Pros:

  • You can choose the person you want to succeed you in advance and prepare them in due time.
  • You wouldn’t have to completely remove yourself from the business and could stay on in some sort of advisory role either temporarily or permanently.

Cons:

  • You may not be able to find the right family member who either wants to or is capable of taking over the business.
  • This process could bring a lot of emotional, financial and general stress to your family relationships.
  • Your employees, business partners or investors may not support the individual that you choose.

2. Merger or Acquisition

If your business exit strategy revolves around a merger or acquisition, this is where your company will either be purchased by or merge with a company that has similar goals and values to your business. This strategy does also provide you with the potential opportunity of staying involved in the business, but is dependent on who you decide to merge with or sell to.

The benefit of this strategy is that you have the ability to negotiate the price of the sale, but it’s important to remember that around only 20% of businesses that are listed for sale actually sell, so it may be worth considering a Plan B exit strategy too.

Pros:

  • You have the option to have a clean break from the business.
  • You can negotiate the terms, price and other details of the merger or acquisition.

Cons:

  • This can be quite a time consuming and costly process, which is not always successful.
  • Your business may cease to exist as it once was.

3. Management or Employee Buyout

Although this is a difficult exit strategy to plan for, there is the potential option that the people who work for you may want to buy the company from you. As these individuals know you and how to manage the business, this exit strategy could mean a smoother transition and even increase the loyalty to your business’ legacy.

Pros:

  • You can hand the business over to someone who has the required experience and you hopefully trust.
  • As you are still selling the business, you have room to negotiate the price and terms.
  • There is the potential that you can still stay involved in the business if required.

Cons:

  • It can prove difficult to find an employee or manager who is in a position to buy the business from you.
  • You may find it difficult to implement the management changes without negatively affecting your customers.

4. Partner or Investor Sale

If your business isn’t solely owned by yourself, it could be possible to sell your share of the business to another partner or investor. In most cases, this exit strategy allows a ‘business as usual’ approach with minimal impact.

Pros:

  • Your legacy within the business remains and, in most cases, business should continue as normal.
  • You can fully exit the business and hopefully make money in the process.
  • You will be dealing with a buyer that you already know, meaning the sale should be much easier to negotiate.

Cons:

  • You may not be able to find a buyer or investor that is willing to purchase your share.
  • It could be difficult to stay involved in the business if that is what you want to do.
  • If you and the partner or investor you decide to sell to have different views, the sale could become difficult.

5. Go Public with an IPO

Many business owners dream of one day selling their business for a large profit. An IPO makes this a possibility, but your business conditions need to be just right for this to even become an option.

Even if your business is super successful, that doesn’t guarantee that it will appeal to the public in a way that gets stock buyers excited, therefore devaluing your company. On top of that, IPOs are quite rare, with the number of companies going public decreasing in recent years.

However, if you are in a position to take advantage of this exit strategy, it could prove very lucrative.

Pros:

  • From all of the business exit strategies, this is the one most likely to earn you a substantial profit.

Cons:

  • This is probably the one of the most difficult exit strategies as it requires certain conditions along with lots of time, money and effort.
  • Going public will result in lots of intense scrutiny from shareholders and analysts.
  • IPO success is very rare, especially for small to medium sized businesses.

6. Acquired for Talent

Sometimes called an ‘Acquihire’ and different from a traditional acquisition, this exit strategy is one where another company buys your business for the sake of acquiring its talent or skilled employees.

This strategy may not ensure your legacy by name, but it will help to take care of your employees. In this case you will normally have to negotiate terms with your employees’ specific needs in mind, as remember these people came to work for you.

Pros:

  • This exit strategy allows you to negotiate the terms, which hopefully means profit for you and a successful future for your employees.
  • You will have a clean exit from the business.

Cons:

  • Finding a buyer interested in this exit strategy can prove difficult and time consuming.
  • You will be losing the legacy of your business as you created it.

7. Liquidation

When it comes to exit strategies, this one is the most final. If you liquidate your business this means you will be closing the business down and selling all of your assets. Although it is important to remember that liquidation doesn’t always mean defeat, but just the end of a chapter.

If you decide liquidation is what you want to do, remember that you will need to use any cash that you generate to pay off any debts and pay-out any shareholders. It is important to also remember how this may affect your employees and any clients that rely on your service.

Pros:

  • If you’re looking to completely cut ties with the business, this strategy will mean you never have to worry about it again.
  • Compared to some of the other exit strategies, this is one of the more simple and quickest methods.

Cons:

  • It is unlikely that you will get a significant return on investment with this exit strategy.
  • This exit strategy means you will more than likely destroy any relationships you have with employees, partners, clients and anyone else involved in the day-to-day running of the business.

8. Bankruptcy

When it comes to business exit strategies, this is the one method that you can’t really plan for. Nobody wants to file for bankruptcy; however, this may be your last resort if something goes wrong, or you never managed to plan ahead with any of the other exit strategies we’ve mentioned.

In reality, sometimes the necessity for going bankrupt comes before you are ready, but remember, in the lifecycle of a business it’s not the end of the world. Although the process may mean having assets seized and credit needing to be rebuilt, you will be relieved of the debts and burden of the business if things have become really bad.

Unfortunately, the possibility of bankruptcy is one of the many risks involved with starting and owning business. If the option of bankruptcy does become a reality for you, it is important to make sure you understand what exactly happens when you file for business bankruptcy.

Pros:

  • It will officially relieve you of all the responsibilities and debts of your business.
  • You’ll be able to move on from your business and start to rebuild.

Cons:

  • There is the potential that you will not be able to relieve all of your debts.
  • Your future borrowing capabilities will more than likely be affected.
  • This process will likely mean the untimely end of any relationships involved with your business.

It is important to ask yourself some questions when planning for your business exit strategy. For example, do you want to stay involved with the business forever and what are your financial goals? Remember, there is no one-size-fits-all for exiting your business, there are a number of factors to be considered and getting professional help will increase your chances of success.

Here at SKS Business Services we have vast experience in both helping business owners successfully exit their businesses, as well as exiting a struggling business in a way that allows them to move on with their life.

If you have any questions or would like to speak to an expert about our Retirement or Exit Planning service please get in touch.