What is a business exit strategy?

Whether you are a seasoned CEO or a budding entrepreneur, you need to consider your business exit strategy. It is a necessity for all types of businesses, due to the unpredictable future. However, according to William Buck’s Exit Smart Survey Report 2019, one in three business owners (34%) don’t have an exit plan, which is a vital mistake. Continue reading to find out how to be proactive and prepared in generating a business exit strategy checklist for your organisation.

Types of exit strategies

Merger and acquisition

This typically refers to a larger company purchasing a smaller company, essentially ‘merging together’. Mergers and acquisitions can be beneficial to an organisation as the buyer has immediate access to the business’s product/service. Additionally, it can also increase the value of the business due to bidding from potential buyers such as competitors and third-party organisations.

Selling to a friendly buyer

Businesses can opt to sell to a ‘friendly buyer’, who is essentially someone the business owner can trust. In other words, this can entail either a partner (co-founder), investor or even a family member. This type of exit strategy allows the business owner to delegate to someone with a vested interest in the success of the organisation. The only downfall is the loss of potential sell-out price at the consideration of the buyer.

Acquisition

This exit strategy refers to a company buying out a business for the sake of acquiring its employees and their skills. This style of acquisition is beneficial for organisations as it ensures the employees are taken care of in the short and long term.

Management and employee buyouts

Buyouts of management and employees are linked to acquisition as it allows those who are already a part of the business to transition into larger roles. This contributes to maintaining the company’s legacy and provides flexibility in the exiting process.

Liquidation/bankruptcy

Liquidating as an exit strategy is where the owner closes the business and sells all its assets – commonly at a lower cost. While seemingly not ideal, liquidation is recommended when time is a key factor. The money from the selling of the business’s assets will however need to be used to pay shareholders and settle any debts connected to the business.

The business exit strategy checklist

1. Pick a target buyer

As seen above, there is an abundance of potential strategies for a business when contemplating exiting. It is important to recognise certain priorities depending on who you’re selling to. For instance, if the transaction occurs between family or a staff member, the priority would be to maintain the personal relationship and overall viability of the business. If the business sells to the highest bidder, then the priority would solely be on the operation of the business.

2. Determine the time frame

In order to maximise financial and non-financial business goals, an exit strategy is necessary within the planning stage of creating a business. This way, if complications arise there is a contingency plan for the business owner. When ready to leave, allow a year for the business exit strategy to take effect. It is also important to set a closing date – which will keep planning on track.

3. Get the business in shape

Within the year after deciding to leave, it is important to get the business in prime condition in preparation for selling. This encompasses paying debts and getting rid of unnecessary elements of the business such as obsolete stock and assets. It is also important to ensure all processes are running efficiently so that whoever takes over can do so seamlessly.

4. Business valuation

Ultimately, the value of your business will never be known until it is sold – but estimates are helpful. Comparisons of businesses in the same industry are a constructive way of determining worth. Also hiring external industry professionals such as accountants or financial advisors can provide a formal valuation with realistic selling expectations. Experts also recommend obtaining this appraisal in the form of a written report as opposed to verbal communication. This allows other professionals in the team such as accountants and attorneys to view a detailed recollection of information.

Final Thoughts

Assembling a business exit strategy checklist is essential for any organisation. If unforeseen circumstances arise, it is important to be in control and have a contingency plan. Selecting the ideal buyer, getting the business in shape over a period of time and assessing the value of the business are all vital elements of a business exit strategy checklist.

If you are considering exiting your business or creating an exit strategy for the future – BUSINESSNAV can assist. Contact our experienced mergers and acquisitions team today.