Business Exit Strategy // Here are the 6 Types to Choose From

Business Exit Strategy // Here are the 6 Types to Choose From

Just as important as a business plan is for any business, a business exit strategy is equally important as it helps you as a business owner to work from an end goal.

While a business plan outlines the process of setting up your business and running it, an exit strategy helps you transfer ownership or dissolve your business.

Your business exit strategy doesn’t have to mean disaster or failure, or even imminent action—in fact, many business owners start their business with the express purpose of exiting after a certain number of years. It doesn’t mean they are less committed entrepreneurs. It just means they have a plan in place.

Recently, when we held our last After Office Hours session with Hilda Moraa, Hilda emphasized the importance of having an exit strategy as it helps you work with an ultimate goal in mind. Here is a recap of the session.

Calling it quits may not be in your mind while starting your business, but there can be situations where exiting may be the best choice. 

With an exit strategy in place, you can save time and effort, and stay prepared to make the final move when the moment arrives.

Whether you are a budding entrepreneur with a startup or a seasoned CEO, you need to consider your business exit strategy.

Why is a business exit strategy important:

Understand the market value of your business: Continuous evaluation of the market value of your business is a part of an exit strategy. This information helps you track your financial goals. With it, you can change your marketing strategies or operational plan to reach business milestones.

Make the transition easy and instructive: An exit strategy outlines the operations, employee responsibilities, and chain of command of your company. It helps the successor to understand the workings of the business in a seamless manner.

Make SMART decisions: When you have an exit strategy in place, you can make decisions according to its timeline. Simply put, you can choose which projects to accept, the number of products to manufacture, and the repayment time of your loans.

It is then important to have an Exit Strategy in place and even share it with the company stakeholders like investors or even your board of directors, as they join your company. 

In this article, we have shared with you a list of 7 strategies that you can consider

Family Succession

If you have a family business and want it to continue running after your retirement, this strategy is the right pick for you. 

In this exit strategy, the ownership is transferred to the son or daughter of the owner (if they’re of legal age) or any other eligible family member.

However, it is essential to pick the right successor, one who is capable of handling the responsibilities of the business. Failing to do so can hinder the growth of the company and hurt the progress made so far.

Also Read: Why Entrepreneurs Should Embrace Failure

In fact, in an earlier held #AfterOfficeHours session with Dr. Joyce Gikunda, CEO and Founder of Lintons Beauty, Dr. Joyce encouraged entrepreneurs running family-owned businesses to always have a succession plan as early as now.

Many companies have only the vaguest idea of what they would do if one of their key personnel like a CEO or COO had to be suddenly replaced. 

In the article Right strategies that can position you for business success, Dr. Joyce shared why having this strategy is important as it helps companies establish a trajectory for each role, highlighting the skills needed for optimal performance in each role and how those skills can be acquired. 

It also helps identify top talent in an organization.

Merger and Acquisition (M&A)

In the M&A exit strategy, you sell your company to or merge it with another company whose business strategies and goals align with yours.

If your competitors want to acquire your company, you can leverage this opportunity to negotiate and sell at high profits.

Merging is a good option if you want to continue working in your company without the proprietary responsibility. Conversely, getting acquired allows you to fully disassociate yourself from the business.

Depending on the value of your business, you have the negotiating power and freedom to set your own prices and terms. You have the freedom to choose your level of involvement in the business.

The process is time-consuming and expensive, and there’s a high risk of failure. You have the freedom to choose your level of involvement in the business.

There can be drastic changes in the management and operations of your business.

Initial Public Offering (IPO)

Unlike other exit strategies in this list, an IPO is more of a progressive step than an exit. If your business is doing well and you want to attain high profits by selling off your stakes to the public, this is your best bet.

However, this strategy is complex and challenging to implement.

IPOs are usually seen as a positive indicator of the company’s increasing value and help boost brand image.

 You cannot control the volatility of the market acting upon the price of your share.

You’ll be under the public eye and receive criticism from shareholders and analysts.

Acqui-hiring

Acqui-hiring is similar to the acquisition exit strategy, but the motive to buy the company is to acquire its skilled employees. 

If you want to sell off your business while ensuring that your employees don’t lose their job, the acqui-hiring exit strategy is a suitable option.

Pro-tip: Negotiate terms with your buyer taking into account your employees’ needs, benefits plans, and insurance to ensure a smooth transition and healthy work environment for them.

Third-Party Sale

Selling your company to a third party on the open market is, for many owners, the dream. 

After all, it results in an instant successor with a keen interest in succeeding, a potentially lucrative selling price, and negotiated terms.

That said, the current business market is in a state of generational transition as baby boomers head toward retirement. That can mean lower prices.

The other major complication of third-party sales is the time factor. It can take years to find a buyer — and when you do, that’s when negotiations begin.

Employee Stock Ownership Plan (ESOP)

An ESOP offers a unique path that allows a business owner to sell, transferring ownership of all or part of a company by setting up an ESOP trust, which becomes the legal entity that holds shares of company stock on employees’ behalf. 

The sale can be structured using borrowed funds, or it can be seller-financed or some combination.

An ESOP offers the seller liquidity, a significant tax advantage, and the flexibility and choice to remain involved in the business as a leading employee, ensuring a smooth transition and succession plan can be executed.

Setting up an ESOP can be complex, and because they’re a qualified retirement benefit, ESOPs are subject to specific regulatory oversight, so they call for specialized guidance from experienced advisors, a designated fiduciary ESOP trustee, and long-term, expert third-party management.

But selling your business to an ESOP also helps ensure a predictable timeline for the sale and control over your exit and succession planning preferences.

Besides that, ESOP sales have mechanisms in place to ensure that you’ll get a fair price for your company.

Liquidation

If all the previous business exit strategies don’t work, it might be time to liquidate your company. Liquidation refers to the permanent closing of your business by selling off all the assets to pay off debts and other obligations.

Liquidation is a deliberate decision made by the entrepreneur in case they want to wind up the business for any reason. 

For instance, you might want to dissolve one business to invest its resources in a more profitable one.