Do you need an exit strategy?
While some ambitious entrepreneurs start a business solely with the aim of building it up to a point where it’s profitable and attractive to potential buyers, many small business owners have different motivations for setting out on their own.
Hearing the stories from many Debitoor users, it’s fair to say that the main impulse to start a business stems from one of several reasons: a passion for that type of work, a potential opportunity for becoming more independent, quitting the day job.
Developing an exit strategy
No matter when you decide to move on from your business, whether it’s to start something new, spend more time with family, or to retire, an exit strategy can provide some useful guidelines for what steps to follow to ensure your departure from the business goes smoothly.
An exit strategy from the beginning
It is often recommended that you don’t start a business without an idea of how you will leave that business. In this respect, an exit strategy becomes an important part of your planning from even before you launch.
Having an exit strategy clear from the start is also important if you plan to be looking for investors at any point in the development of your business. Investors want to see that they can essentially ‘cash out’ - this can occur with the sale of the company or sooner.
An exit strategy when you’re looking to sell
Although it is recommended that you have an idea of an exit strategy when just starting out (to garner investor interest further down the road, for example), there are of course also many small business owners who set out on a course to do something they love. Something they plan to devote their life to and can’t see themselves selling for profit or giving up the reins, for example.
Yet even in these cases, there will come a time when it’s necessary to bow out of the business, and an exit strategy will be necessary. Even if it comes at retirement, it is perhaps even more important - it allows you to have a better idea of how much you will have for your retirement.
An exception to this could be if you make the decision to keep the business in the family and pass the chain of command on to a relative. However, this is still considered an exit strategy.
What are the main exit strategies?
Most businesses tend to go with an Initial Public Offering (IPO), a strategic acquisition, or a managerial buyout (MBO). You’ve likely heard of at least a couple of these, but let’s take a closer look:
An Initial Public Offering is also commonly referred to as taking a company public or ‘going public’. It means that the shares of the previously private company are now open for public purchase. This is generally used as a means for a business to raise capital.
A strategic acquisition occurs when one company buys the majority of shares of another company, effectively changing the ownership of that company. A purchase of over 50% of the shares means that the purchasing company can make decisions without approval of the other shareholders.
A Management Buyout is slightly different in that it occurs when the management of a company pools their resources to purchase the assets of the business so that they become the new owners of the company that they have been managing.
Is there a ‘right’ exit strategy for your business?
The answer is: probably. There are a number of different exit strategies that are quite common for businesses, but choosing the right one for your business is the goal. The best way to ensure you’ve done so is research. There’s no easy one-size-fits-all solution.
Ultimately, the exit strategy you choose depends on several important factors. The main things that you should consider when selecting an exit strategy, no matter when it occurs, include:
How involved you want to be. If you’d like to remain an active part of running the business as a manager, for example, an IPO or managerial buyout are options that generally mean you can maintain your position. If you opt for a strategic acquisition, however, the purchasing company can hire in new employees for any role, which could mean that you will not be able to continue on in your current role.
The financial benefit you’re looking for. When a business owner implements an exit strategy, there is generally an expectation of a financial return. Yet in some cases, it may mean waiting for your money. With an IPO, for example, the owner’s shares are typically not available to sell due to a ‘lock-up agreement’ that lasts around 6 months after a company goes public. A strategic acquisition on the other hand, would mean cash almost instantly.
The market conditions. Understanding the current environment (demand for your products/services, whether investors are looking for new IPOs) will allow you to better decide on whether to go public - while companies do tend to go public in all types of market environments, a downward trend might prompt you to wait. Discuss the current market with professionals you can trust. If you prefer not to wait, a strategic acquisition might be a better course of action.
Undecided? Try both. If you’re unsure about the best option - maybe there are questionable market conditions or other factors playing a role, it is possible to pursue both options to see which materialises. While making your business appealing to investors in the event of an IPO and pitching the benefits for a strategic acquisition are quite different, it is feasible to do both.
These are just a few factors that should be considered when deciding on an exit strategy. You should still work closely with those who can help you make an informed decision and plan. Running a business is hard work and an exit strategy can have an impact not only on you and other managers, but on your employees and your customers as well.