Business Exit Strategy: Key Types, Best Practices, and Examples

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exit strategy

It is not news that any operating organization, not depending on its level of business performance, should have a clear exit strategy. So, what’s an exit plan? How can an exit strategy align with the overall business development? Why is an exit strategy important?

The answers to these and other questions, including types of common exit strategies, their strengths and weaknesses, examples, and tips for implementation, can be found below.

What are business exit strategies?

An exit strategy is a plan designed by a business owner, trader, or investor to liquidate or sell a financial asset once specific requirements related to this asset’s performance have been met.

Typically, entrepreneurs develop several different exit strategies to sell their ownership stakes. As a result of this business venture, entrepreneurs reduce or liquidate their involvement in the business and potentially yield significant profits in the case of success or limit losses in the event of failure.

An investor or business may choose to execute an exit strategy for various reasons — from economic downturns to more straightforward factors like an investor is dealing with a liability lawsuit or they’re looking to retire and want to redeem their investments.

Types of business exit strategies range from strategic acquisitions, mergers, and initial public offerings (IPOs) to management buyouts and sales. Additional types of exit strategies include liquidation or resorting to bankruptcy filings.

In this article, we’ll take a closer look at each business exit strategy type, defining the specifics, pros, and cons of each.

Top 8 business exit strategies to consider

Determining the best exit strategy depends on various factors, including the nature and scale of the business, its growth opportunities and needs, as well as the interests of additional stakeholders, such as multiple founders or significant shareholders. Their points of view should be considered for both proper exit strategy planning and execution.

While there are many different business exit strategies to choose from, the motives behind each vary drastically. Let’s review the most common exit strategies.

Acquisition mergers

Mergers and acquisitions is the process of consolidating companies through various transactions, including:

  • A strategic acquisition. From an exit perspective, a business may choose to follow an acquisition exit strategy to sell its ownership stake or a complete entity to another company. This business exit strategy provides liquidity to the owners while maximizing profits and leveraging synergies between the merging entities.
  • A merger. A struggling business may decide to merge with a stronger partner to maximize profits, increase its competitive potential, and improve its reputation in the eyes of venture capitalists and potential buyers.

Initial Public Offering (IPO)

An IPO is the process of offering shares of a privately held company to the public for the first time. It involves listing the company’s stock on a public stock exchange. From an exit standpoint, an IPO allows small business owners to sell assets to the public, providing liquidity and potentially generating significant value. It also enables the company to raise capital.

Acquihires

Acquihires refer to acquisitions primarily made for the purpose of acquiring talented individuals or a team rather than the company’s products or services. In this strategy, a business allows itself to be acquired by a larger company, primarily to gain access to its skilled employees. From an exit perspective, the business owners can benefit from the acquisition by receiving compensation for the acquisition of their company and potentially securing employment within the acquiring company.

Family succession

Family succession transition involves passing on the ownership and management of a business to another family member from the next generation. Family succession planning allows the business owners to exit the company while maintaining its legacy and ensuring continuity. A successful transition may be arranged through a business sale, gift, or other plan of action.

Selling a part to an investor or business partner

In this strategy, a business owner may choose to sell a portion of their company to an investor or business partner. This approach provides an opportunity to secure capital for expansion or other business needs while allowing the owner to retain partial ownership. It can offer liquidity and expertise from the investor or partner while reducing the owner’s stake in the business.

Employee buyouts

An employee buyout involves the purchase of a company by its existing management team or employees. This strategy allows the current employees to acquire ownership and control of the business, often with the help of external financing. It offers a succession plan for the current owner and provides an opportunity for the employees to become owners and benefit from company profits.

Bankruptcy

Bankruptcy is a strategy used when a business is unable to pay its debts and seeks legal protection from its creditors. From an exit perspective, bankruptcy involves the liquidation of the business’s assets to repay its debts. This strategy allows the business owners to cease operations and exit the business, but it typically results in little to no value for the owners, as the proceeds are used to settle outstanding liabilities.

Liquidation

Liquidation refers to the process of winding down a business and selling off its assets to pay its debts. It is often used as a last resort when a business is no longer viable or when the owners wish to exit but cannot find a buyer. Liquidation provides a way to distribute the remaining value of the business to creditors and shareholders, effectively closing down the company.

Pros and cons of business exit strategies

ProsCons
MergerSynergy creation opportunities
Enhanced market competitiveness
Access to new resources
Integration challenges
Cultural clashes
Diluted decision-making power
AcquisitionImmediate financial gain
Expanded market reach
Access to established infrastructure
High acquisition costs
Integration complexities
Potential resistance from stakeholders
IPOIncreased capital infusion
Liquidity for shareholders
Enhanced brand visibility
Regulatory compliance requirements
Loss of control
Market volatility risks
AcquihiresAccess to an extended talent pool
Potential for innovation
Quick integration process
Cultural integration challenges
Limited focus on business
Potential talent retention issues
Family successionContinuity of legacy
Preserves family values
Smooth transition process
Potential conflicts of interest
Limited fresh perspectives
Succession challenges
Selling a part of a business to another investorInfusion of capital
Access to new expertise
Potential for business growth
Loss of ownership stake
Reduced control over decisions
Potential clash of cultures
Employee buyoutsSmooth transition of ownership
Preserves company culture
Increased employee morale
Financial burden on employees
Limited access to external capital
Potential lack of expertise
BankruptcyRelief from debt obligations
Opportunity for a fresh start
Protection of assets from creditors
Negative impact on credit rating
Potential loss of business reputation
Limited control over the outcome
LiquidationClosure of business in an orderly manner
Distribution of assets to repay debts
Opportunity to settle financial obligations
Loss of ongoing business operations
Limited value realization for assets
Potential job loss for employees

When is the best time to plan an exit strategy?

The best time to plan an exit strategy is well in advance, preferably during the early stages of starting a business or when a business is stable and successful. This is because the business exit process execution and planning are rather time-consuming.

However, it’s never too late to start planning an exit strategy, even if your business is already well-established.

Best practices for planning an exit strategy

When planning your exit strategy, you have two main approaches to consider — whether to sell a business or liquidate it.

1. Selling to a new owner

Selling your business to a trusted buyer, such as a current employee or family member, offers a smooth transition out of day-to-day operations. This strategy allows you to find a buyer who shares your passion and can continue your business’s legacy. Benefits of this approach include:

  • Seller financing. Allowing the buyer to pay for the business over time benefits both parties. The seller continues to generate income while the buyer takes over with a manageable upfront investment.
  • Mentorship and involvement. The seller can provide guidance and remain involved in shaping the business’s direction.
  • Smooth transition. Employees and customers are already familiar with the buyer’s involvement and experience minimal disruption.

An alternative option is targeting a larger company for acquisition. This approach often yields higher profits, especially when there is a strong strategic fit between both parties. Challenges may arise due to merging cultures and systems, potentially resulting in employee layoffs during the transition.

2. Liquidating and closing the business

While it can be challenging to shut down a business you’ve worked hard to build, it may be the best option for repaying investors while still managing to recoup some of your investment. Two approaches for liquidation are:

  • Lifestyle business. Paying yourself until business funds are depleted and then closing up shop. This method allows you to maintain your lifestyle, but it may upset investors and employees. It also limits business growth and decreases its value if you decide to sell later.
  • Quick asset sale. Closing the business and swiftly selling assets like real estate, inventory, and equipment. While this approach is straightforward, the money generated solely depends on the assets sold. Creditors must be paid before the owner can receive payment.

Regardless of the chosen liquidation method, certain essential steps must be taken before permanently closing the business:

  • File business dissolution documents
  • Cancel unnecessary registrations, licenses, and business names
  • Comply with labor laws when paying employees during closure
  • File final taxes and retain tax records for the advised period

3. Developing your exit plan: Key steps

Creating an effective exit strategy requires careful planning and attention. Follow these six steps to develop an exit plan that maximizes your business’s value:

  1. Prepare your finances. Gain an accurate understanding of your personal and professional finances, including expenses, assets, and business performance. This knowledge enables informed negotiation for offers aligned with your business’s true value.
  2. Consider your options. With a comprehensive financial overview, explore various exit strategies to determine the best fit for your post-exit vision. Seek guidance from a lawyer or financial professional if needed.
  3. Engage with investors. Inform investors and stakeholders about your intent to exit, creating a strategy outlining repayment. A detailed financial understanding will support your plans and provide evidence to gain investor confidence.
  4. Choose new leadership. Start transferring responsibilities to new leaders while finalizing your exit plans. Well-documented business operations facilitate a smoother transition of responsibilities.
  5. Inform your employees. Share the news of your succession plans with employees, being empathetic and transparent. Be prepared to address their questions and concerns during the transition.
  6. Notify your customers. Inform clients and customers about your exit plans. Introduce them to the new owner if the business continues or provide alternative options if you’re closing for good.

By following these steps, you can prepare and execute your exit business plan with clarity and consideration for the various stakeholders involved in your business.

Remember, the best exit strategy is the one that aligns with your goals and expectations. If you desire the legacy to continue, selling is a viable option.

Examples of exit strategy implementation

Now, let’s take a look at examples of successful companies that chose different approaches to exit strategy planning and execution but still achieved their strategic goals:

  1. Instagram — Acquisition Exit Strategy. In 2012, Facebook acquired Instagram — the popular photo-sharing platform — for approximately $1 billion. Instagram’s exit strategy involved selling the company to a larger, established player in the industry. The acquisition allowed Instagram to leverage Facebook’s resources, user base, and technology while continuing to operate as a separate entity under the Facebook umbrella.
  2. WhatsApp — IPO Exit Strategy. The messaging app WhatsApp IPO’d in 2014. This exit strategy involved offering shares of the company to the public, enabling investors to buy and trade those shares on a stock exchange. The IPO provided WhatsApp with significant capital infusion and allowed early investors and shareholders to monetize their holdings while still retaining some ownership in the company.
  3. Ben & Jerry’s — Employee Buyout Exit Strategy. In 2000, the well-known ice cream company Ben & Jerry’s implemented an employee buyout exit strategy. Rather than selling the company to a larger corporation, the founders and board of directors chose to sell the majority of the company’s shares to its employees. This decision aligned with their values of social responsibility and employee empowerment, ensuring that the company remained independent and employee-owned.

Conclusion

  • A business exit strategy is a plan devised by a business owner to sell their ownership stake in a company to investors or another company, providing a means to potentially increase revenue streams in the case of success or minimize losses in the event of failure.
  • The most common types of exit strategies include M&As, IPOs, acquihires, family successions, selling assets, employee buyouts, bankruptcy, and liquidation.
  • Some of the best practices for a successful business exit strategy include deciding on the right exit type (selling an asset or liquidating it) and developing a well-structured exit plan.
  • Key steps for planning a successful business exit strategy include financial preparation and communication with investors, new leadership, employees, and customers.

Author

Ronald Hernandez

Founder, CEO at dataroom-providers.org

Data room selection & optimization expert with 10+ years of helping companies collaborate more securely on sensitive documents.

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