When opening a business, the last thing on your mind is planning your exit. Some business owners assume the term implies a negative event. However, an exit strategy reduces stress for everyone involved in the event of a major shift.
What is an exit strategy in business dealings? When do you need one?
At Top Hat Business Brokers, our team specializes in buying and selling businesses. Although business exit planning requires extensive preparations, we have provided a brief guide detailing various circumstances that require an exit plan and steps you can take to create one.
Prepare for the future by proactively strategizing for pertinent shifts by exploring the helpful information we provided below.
What Is an Exit Strategy in Business?
An exit strategy refers to the plan a business owner puts in place to facilitate a close or business transference. Ideally, the plan protects the business’s future and the satisfaction of all parties involved. It should account for the brand’s value, assets, and profits.
Additionally, your plan should evolve with the business. That means you may change certain aspects to better fit your company’s current and future growth. A strong exit strategy is a constant work in progress until the foreseen shifts solidify and the transfer takes place.
Why Should You Create an Exit Strategy
A predetermined exit strategy holds numerous benefits for all parties. For example, you plan to sell your business to another party. While no official selling-a-business guide exists, your strategy offers a playbook to make the transaction smooth and fair.
You’ll reap some tangible advantages, including:
- Personal and professional achievements: As a business owner, your business’s progress and future tie directly into your personal finances and well-being. Developing an exit plan protects your personal financial achievements.
- Establishing your business’s value: All aspects and components of your business have monetary value, including your workforce, equipment, and other assets. Your exit plan helps you keep track of your brand’s true worth and avoid settling for less.
- Attracting quality buyers: Buyers will pay more to acquire a business that doesn’t create new, unnecessary headaches. While all transitions have some unexpected hiccups, you can prevent the considerable ones that devalue your business.
- A more concrete future for the brand: You might have an ultimate vision, but do you know how to realize that vision? An exit strategy helps you hit various goalposts throughout your business ownership.
Additionally, you may not foresee the intense emotions and experiences that often accompany a business shift. After all, you either built this company from scratch or enabled its growth and progress. The process of bidding farewell can cloud your ability to make sound decisions in the heat of the moment.
When Do You Need an Exit Strategy?
Various situations require a thoughtful exit strategy. Many of them are positive and signify a new beginning. Explore some reasons behind business transformations and shifts below.
Mergers and Acquisitions (M&A)
Mergers and acquisitions (M&A) occur when one company acquires another and its assets. Typically, the purchasing company is larger and more established than the selling company. Business owners in charge of startups or small brands often prefer mergers and acquisitions.
When a large company acquires a smaller one, it often aims to increase its number of storefronts or obtain other pertinent assets within the smaller company. While mergers and acquisitions give sellers more control over prices, they are volatile and often fall through. An exit strategy may ensure a successful M&A.
If you want to close your business quickly, you should explore liquidation options. This approach completely removes your business from the economy. You sell any appreciable asset to other parties.
Unfortunately, a liquidation has less value than other options. It also means the end of all professional relationships and potential profits connected to the brand.
If you have a business partner or prominent stakeholder, you might sell your business ownership to one of these individuals. Many business owners choose this option if they want to release their responsibilities and authority to someone they trust within the business. This option helps maintain operations and the general status quo.
You might not earn as much selling your ownership to a co-owner or other internal party. However, the buyer fully understands the business’s current state and will ensure it remains lucrative and productive.
Initial Public Offering
An IPO involves allowing the public to purchase business shares. This strategy may produce more profits than other exit strategies. After all, what is an exit strategy in business without some substantial profit?
However, an IPO lacks the niche network of interested parties that other strategies offer. IPOs work like all-or-nothing approaches. If the public can’t see your brand’s value, they will not purchase shares at the going price. Meanwhile, the other strategies provide security and stability.
If you started your business with your family’s future in mind, you might consider a family succession plan. This exit typically occurs when the primary owner of a family-owned business retires or pursues different interests. They can legally transfer it to another family member.
Succession planning in business ownership may have a few pitfalls. For example, your close family members may not care to take on ownership responsibilities. Family businesses also blend the lines between your personal and professional life.
However, family businesses provide an excellent way to procure generational wealth and financial stability. Transitions may go more smoothly, especially with both parties invested in the company’s continued success.
Employee and management buyouts often have similar benefits and consequences to family succession. You spend lots of time at your business. Therefore, you get to know your staff well.
You can identify the individuals with strong leadership and operational skills. As they move up the business ladder, you can prepare them to take on ownership responsibilities, preparing for your departure.
Employee buyouts ensure that someone who knows the company well is at the leadership helm. Plus, your employees have a vested interest in their employment security.
However, these transitions can also negatively impact the internal hierarchy. One dissatisfied employee could turn the buyout upside down.
Like liquidation, bankruptcy offers speedy relief of all business-related debts and responsibilities. However, it negatively impacts your credit in a significant way. Business owners typically file for bankruptcy when they are desperate to put a swift end to a resource-sucking business.
What Is Your Strategy Goal?
Under most circumstances, you want to avoid business exits like liquidation and bankruptcy. These situations prevent you from earning value from your brand and negatively impact your financial health. The other circumstances facilitate substantial profits and sometimes continued business growth.
Choose a few exits that best suit your future needs. Then, develop strategies that facilitate them.
How To Create a Well-Rounded Exit Strategy
Although you can choose from many types of business exit plans, most plans involve the following steps. Use these steps as a blueprint for your exit strategy. Then, work with a reputable business broker to improve your original design.
Work with an accountant to determine your business’s overall value to ensure potential buyers don’t lowball you during negotiations. You’ll also gain perspective on your personal and professional net worth and how to price various assets.
Choosing the Best Action
Explore the exit strategies that best suit your situation and needs. For example, you want to pass your business to a trusted family member to keep the company within the family name. While a succession plan best fits the circumstances, you could explore stake selling and buyouts as well.
If your chosen family member currently works within the business, they may work with you to combine two types. A hybrid approach may generate the greatest benefit for both parties now and in the future.
Discussions With Stakeholders
Communicate an exit strategy explanation to prominent stakeholders. Your discussion points should include:
- Stakeholder repayment plans
- Key players within the exit
- Documents to support your plans
These discussions ensure everyone stays on the same page and understands how to respond when the time comes.
Next, determine who will overtake leadership positions in your wake. The key players you choose will largely depend on your exit explanation. Inventory various people and what they do within your business operations.
If they demonstrate the necessary skills to continue operations and achieve progress, they may perform well in leadership roles. Communicate your plans and prepare them for these events. Proactive planning provides you with plenty of time to train and mentor these staff members.
Don’t complete this final step until you are ready to set your exit plan in motion. Every prior step was simply part of preparation and setting up your business for continued success. Only stakeholders, investors, and the individuals taking on your responsibilities need to know.
However, once you set a date for your departure, begin communicating with other employees and customers regarding the transition. Outline what they can expect and how things may change going forward. Remain transparent, empathetic, and open to the concerns and questions they express.
If some employees lose their positions, they may seek security in your authority. Determine acceptable measures you can easily take to protect their income. Some business owners do the following before leaving:
- Write letters of recommendation
- Provide a reference for exiting employees
- Connect employees with connections to help them secure employment elsewhere
Let Top Hat Business Brokers Streamline Your Business Shifts
What is an exit strategy in business? It is a comprehensive plan to secure your brand’s future and its full value. Contact Top Hat Business Brokers at (916) 905-4997 to proactively protect your business.