It's better to be prepared for the end of your business ownership than risk coming up empty-handed.
- When creating your business plan, along with the inclusion of your business goals, it is equally important to include an exit strategy should you need to or decide to relinquish ownership of your business.
- Although you cannot predict the future of your business, you can prepare for certain events, such as your retirement or the business accruing more debt than you can overcome. Knowing the steps to take for an exit strategy may help you avoid the unknown.
- It's important to choose the best exit strategy for the type and size of your business. There are many options, such as merging with another business or selling to family or employees.
As a small business owner, you probably don't want to think about your business ending, but it's best to prepare for different exit scenarios anyway – even if you're just now launching your brand.
Starting with an end in mind
It might seem counterproductive to think about the end of your business, especially when you're first launching it, but it's never too early to plan.
Sarah Brennan, founder and principal strategist of Accelir, said that the first question she asks startup founders or leadership teams is, "What is the end goal for you – to grow, stabilize or sell?”
"Even if the exit plan is five to 10 years out, working with the end in mind impacts how you approach everything from product and go-to-market strategy to who you partner with and what clients you target first," she said. "Companies can run into obstacles when they haven't thought through what they are working toward when offers to buy come in or, worse, when they haven't built the business in a way to be bought."
"You should always have an exit plan in mind, from the moment your business idea is conceived," added Adam Wilkinson, CEO of Hollywood Mirrors. "Then, when you start your business, your sole focus and No. 1 question every day should be, 'How can I maximize the value of my business?'"
Clark Vitulli, founder and CEO of Music City Chief Executives, works with a client who started his company two years ago and built it to $12 million. At the age of 30, the client is already meeting with others to discuss his exit plan.
"Within two years, he'll have all the groundwork laid to have a happy exit on his own terms," said Vitulli. "He’ll be able to decide when he exits, and which of the four ways to exit – pass his company to family, sell to inside buyers, sell to outside buyers or strategically close it – again, on his terms, and on his timetable."
Steps to take to plan your exit strategy
"You don't have to know the exact exit strategy, because you can't predict the future, but you can plan for it," said Seth Levine, founder and president of SL Design X and a member of the business.com community. He added that you should consider how long of a venture you want it to be and explore the different types of exit strategies, like different investor plans, acquisition and IPO.
Wilkinson outlined six steps to follow when planning your exit strategy:
- Mitigate risks.
- Reduce unnecessary expenses.
- Retain existing clients.
- Increase average order value.
- Increase average order frequency.
- Ramp up word of mouth and referrals.
"Even if you don't exit the business when you wanted or ... you want to be in the business for your whole life, your business should be in a stronger position with this focus and mindset in growing the business," said Wilkinson.
Vitulli recommends recruiting legal, accounting and financial planning help, and an M&A expert and certified exit planning strategist. They'll help you coordinate while you continue to run your company successfully day to day.
Types of exit strategies
An exit strategy is a plan that a business owner develops to sell their investment in their business. It is generally part of the business plan and used as a predetermined "out" should you choose to retire or leave the business or if the business fails. An exit strategy is also important for lenders and investors because they want assurance that their money is protected. Not only is it important to know how long it takes to exit, but there are different types of exit strategies. The type of exit strategy you choose should depend on your company's size and business structure, so it's important to know the differences between them to choose the best one for you.
Mergers occur when two businesses join to become one new business. A merger may increase the value of your business, which is why shareholders and investors tend to like this option. For a merger to be an exit strategy option, you need to still be part of the business. When a merger occurs, you are still the manager or owner of the new business, but your employees may be employed by the new merged business. If you intend to completely do away with your business, a merger is not the ideal exit strategy for you.
There are five types of mergers:
- A conglomerate merger means there isn't anything in common between the two businesses.
- A horizontal merger means both businesses are in the same industry.
- A vertical merger is when both businesses make parts for a completed product.
- Product extension mergers mean the products of the two businesses go well together.
- Market extension mergers mean that the two businesses sell the same products but compete in different markets.
A liquidation exit strategy simply means you are completely closing the business and selling all of the assets. This type of exit strategy is often the best option for a business that can no longer pay its debts. With liquidation, the business operations cease and the liquidation value of your assets is divided among the creditors.
The advantage of liquidation is that it is simple and the business can be wound up rather quickly, depending on the sale of the assets. The disadvantages of liquidation are that it has the lowest return on investment to the owner, the secondhand value of assets is generally low, and the creditors have the first claim to funds from the sale of assets.
An acquisition is when a company buys another business. Opting for an acquisition exit strategy means that you are giving up ownership of your business to the business buying it from you. One of the advantages of acquisition is that, as the current business owner, you can often name the price for the business, and some companies may be willing to pay a higher price than the actual price your business is valued at.
An acquisition may be the best option for you if the idea of not being in charge of your business anymore appeals to you. You may be required to sign a noncompeting agreement, though, which means that you promise not to start or work for a business that is similar to the one you are selling.
There are two types of acquisition:
- Friendly, which means you are agreeing to your business being acquired by another (usually larger) business
- Hostile, which means you don't agree with the acquisition
The first step in developing an exit strategy is to decide what, if anything, you want to walk away with. If your goal is to only walk away with money, then an exit strategy such as selling your company to another business or on the open market may be the best option. If you goal is to see the business continue as your legacy, then your best option may be to sell to your employees or family members. Whichever exit strategy you opt for, it's important to begin working on it immediately; advance planning will give you the time to do it right and maximize your returns.