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Exit strategy - What is an exit strategy?

In business, an exit strategy is the plan that an entrepreneur has to sell their ownership of their business to investors or another company

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An exit strategy is exactly that - a strategic plan for someone who has ownership of a business to liquidate their shares in return for money. To be ‘bought out’ of their part of the business for profits.

When to create an exit strategy

Many small businesses are started with an exit strategy in mind - they are built to develop into something of interest to potential investors and other businesses and the ultimate aim of the founders is to sell the business.

For several reasons, it is recommended to have an exit strategy before launching a business. Namely, that it may help to make decisions along the way, as well as set your company up to be profitable in the event that you decide to part with your business.

But an exit strategy can also occur when a small business owner is ready to move onto the next project or business and realises they are ready to sell their current business.

Different kinds of exit strategies

There are in fact, several different types of exit strategies, but all involve the selling off of the major share of the business. The main forms this can take include:

Strategic acquisitions:

Relatively straightforward, an acquisition is when a business buys or acquires more than 50% ownership of another business. Essentially, the business is bought out by another company.

Initial Public Offering (IPOs):

You have likely heard about this exit strategy that involves previously private companies choosing to go public. What this means is that the owners of the business held all of the ownership shares. When they go public, they allow some or all of these shares to be sold to outside investors.

Management Buyouts (MBOs):

An exit strategy often favoured by large corporations and by private business owners looking to completely leave the company. In this exit strategy, the other members of a management team combine their resources in order to buyout a portion of the business. This transitions them from being employees to being part owners.

Which exit strategy should I choose?

The exit strategy that is right for your business depends on a number of different factors. The main one possibly being whether you still want any kind of role in the business, including whether you wish to have a say in how the business progresses.

A strategic acquisition exit strategy, for example, will usually mean that the owner give up not only their controlling share but also any control over the roadmap of the business itself.

When to use an exit strategy

Deciding to part with your ownership of a business is inevitably a difficult choice, and can even be somewhat unfathomable when you’re just starting out. But further down the line there might be several reasons to use an exit strategy, such as:

  • You’re ready to move on to a different business
  • You’re looking to retire
  • You started the business with a partner and want to dissolve the partnership
  • You realise that the business now needs skills and expertise that you cannot offer
  • You’re going through a divorce and need to pay a cash settlement
  • There is no longer enough capital to continue

As you can see, there are a variety of reasons that might lead you to consider an exit strategy at some point down the line in running a business.

How to follow an exit strategy

While it is possible to undertake the necessary actions to begin the process of an exit strategy on your own, it’s often advisable to work with a professional depending on the size of your business. Business brokers can provide useful support in the form of tax and legal regulations, protect privacy, and more.

If you know that you plan to initiate your exit strategy, it’s best to plan ahead. Take some time to ensure that the necessary documents and data are organised and clear. This will help to provide a smooth experience for both you and the buyer/investors.