Exit Strategy Key Terms

Consider various options when planning your exit strategy

One of the key sections of any business plan is deciding on an exit strategy. The investors need to be assured that the money they put into the business is safe and their monetary investment will continue uninterrupted in the event you leave the company. When planning an exit strategy, the most important considerations are maintaining continuity and profitability.

Many different exit strategies exist, but the main choices are ownership transfers to third parties or to insiders (children, key employees or co-owners). Advantages and disadvantages exist for either of these option, so consider all the implications of this major decision to be sure your final choice is the best one for everyone involved.

Transfer ownership to family members

Many entrepreneurs want their business to stay in the family. They may spend time training their children or other relatives to take over when they retire. This strategy not only keeps the business under the family name, it also provides inheritance tax benefits.

Franchising

When you franchise your business, you sell your business concept to other entrpreneurs to replicate. You not only net money from the sale, but you also keep the business running as it always has. Franchising can also result in large scale growth for your company, but it involves more work and legalities.
Federal Trade Commission has a list of articles on the legal aspects of franchising.

Buy-out

A buy-out occurs when one or several stockholders buy your share of the company. This exit strategy provides cash and keeps the majority of the company's stockholders in place. A buy-out is an excellent exit strategy if the other stockholders are in agreement and have the capital to close the sale.

Merger

In a merger, your company combines with an existing company. This exit strategy may give you some cash and stock. In some cases, current management remains the same. When joining forces, however, the original partners in your company may end up with less control.

Acquisition

An acquisition occurs when your business is bought by another company. Although this exit strategy provides you with cash or stock, it often means management changes for those in the original company, because the new owners generally appoint their own officers and managers. In addition, the company itself may lose its corporate identity as it becomes a subsidiary of the purchasing company. Many times the company also undergoes a name change.
Knowledge @ Wharton lists some of the major challenges of acquisitions. Altman Weil also offers a case study of an acquisition.

IPO (Initial Public Offering)

An initial public offering allows the company's shares to be traded on the stock exchange. Depending on the amount of shares offered, the major shareholders usually maintain control of the company. An IPO has the potential for a large return if the company has experienced tremendous growth in recent years, but it is the least-used exit strategy.
Inc.com has an article about exiting through an initial public offering.

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