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Business Exit Strategy

A plan for the transition of business ownership either to another company or investors

What is a Business Exit Strategy?

A business exit strategy is a plan for the transition of business ownership either to another company or investors. Even if an entrepreneur is enjoying good proceeds from his firm, there may come a time when he wants to leave and venture into something different. When such time comes, the business can be sold, left in the hands of new management, or acquired by a larger company. Even if it will be decades before the entrepreneur can sell his business, what he does in the present moment can set it up for a smooth exit or make the process more challenging.

 

Business Exit Strategy Diagram

 

What Should Be Considered In An Exit Strategy?

While different businesses will require different tactics in their exit strategy, there are key elements that can be helpful across the board. These elements factor into play the company’s financial circumstances, market conditions, objectives, and timeline.

 

#1 Objectives

One aspect that should never be missed in a business exit strategy is the owner’s individual goals. Upon exiting the business, is the owner interested in getting profits or does he also want to leave a legacy? Establishing the purpose of exiting the company helps to identify the specific objectives and activities to be prioritized.

 

#2 Timeline

Another factor that should be considered is the time frame of the business. When does the owner intend to sell the business? When establishing this time frame, a business owner should allow for flexibility. This way, he will have more negotiating power. However, if the time frame is tight, the business sale might not go through smoothly since everything will be done in a rush. Similarly, the stakeholders might not have enough time to make the business reach its full potential.

 

#3 Intentions for the Business

Does the firm owner want to see his business continue its operations or does he prefer that it gets dissolved? Answering this question will help to establish whether the company will end up being liquidated, merged with another, sold or set up for transition via succession planning.

 

Why a Business Exit Strategy is Important

 

#1 Business owners become weary

Forming a company from the ground up and transforming into a successful and profitable one is challenging. It calls for a significant investment of time and money. Most of the time, entrepreneurs need to wear many hats before they can earn enough profits to invest in recruitment and training.

Considering the amount of effort that business owners put into these ventures, they are often unwilling to delegate tasks. These individuals invest all their time in running the business operations. They work round-the-clock looking for new clients, marketing their products and recording the business finances. Since such company owners rarely take some time off to recharge, they can get to the point of fatigue or burnout.

Burnout can occur at any time and for several reasons. When it does happen, the firm owner will not want to spend another three months getting his business ready for sale. Prospective buyers prefer that the company owners have performance metrics, revenue history and any other paperwork ready. A business exit strategy ensures that company managers have systems in place for recording essential information on a regular basis.

 

#2 Get a better understanding of revenue streams

An exit plan requires that one keeps consistent and up-to-date data regarding the business performance. It means that company owners will always have a good understanding of their revenue streams – both the cash inflows and outflows. They are able to determine the activities that are bringing in the most revenue and how this revenue is being spent.

Having accurate financial data makes for better decision-making. It also helps firm owners to make realistic predictions. They will be able to manage cash flows more efficiently, plan for seasonal fluctuations, and focus their marketing efforts on the projects that matter.

Coming up with an exit strategy helps firm owners decide whether they should go after short, medium, or long-term income projects. This way, if an individual intends to exit the business within the next few months, he can focus his efforts on activities that bring in cash quickly. These would include items such as monthly subscriptions, automatic renewals, and membership models that remain active up to when the customers cancel them. Such income-generating projects require minimal effort, yet they keep money flowing into your business.

However, firm owners who want to remain in business for the next couple of years should focus their efforts on long-term growth activities. Developing life-long client relationships, building a reliable pool of employees, and being innovative will go a long way in helping the company grow.

 

#3 Developing effective leadership

Whether a company owner intends to sell his business or pass it onto his next generation, effective leadership can make or break this deal. To ensure that the transition is a success, the firm owners should outline the chain of command that is to be followed upon exiting. This plan should also lay out the basics of his company decision-making.

When a longtime manager or leader leaves, some firms end up in chaos with numerous stakeholders fighting for power. The players that are left waste so much time deciding who will take over that they forget the primary goals of the firm. By outlining a clear succession plan, firm owners help to minimize such risks and ensure that the business continues to thrive long after they leave.

 

#4 Smooth operations

An exit plan highlights all the information that the company’s successor would need to run it. This way, the new investors or managers won’t waste their resources collecting basic information regarding the employees’ salaries, finances, and partners. If the business exit strategy contains all the necessary information, its successors can hit the ground running as soon as the company leader leaves.

 

Key Takeaways

Entrepreneurs think of themselves as innovators. Their primary goal is to take ideas and turn them into successful ventures. This is beneficial; it’s what helps most firms survive and thrive. However, placing too much focus on the start of a business takes away focus from its end, which can be detrimental. A good number of entrepreneurs don’t have solid strategies in place for how they will exit the industry or company.

Exit plans are crucial in ensuring that firms transition smoothly to the new management. Having an exit strategy also makes it easy to keep tabs on the company’s finances. If an individual intends to sell his business later, he will have to present the firm’s revenue history and performance metrics to prospective buyers.

Also, a business exit strategy is important as it outlines the chain of command to be followed once a leader exits the company. This way, the new owners won’t spend too much time determining who will take over the managerial positions.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Corporate Structure
  • Leadership Traits
  • Management Theories
  • Succession Planning

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