What is Exit Business Planning? How To Develop an Exit Plan For a Small Business
Business Exit Planning is part of every successful business plan. Exit planning guides you on how you can leave your business. You do not want to bear the loss when you close your business.
It answers the question of what you will do after ending your business operations.
It helps you make a graceful exit without risking your investment. Strong exit planning will help you to convince investors that their investment is in safe hands.
No matter if you are running a successful business or handling failure, an exit plan will be part of your business strategy.
Want to learn more about exit planning? keep reading.
This guide will clarify everything from smart exit strategies to how to develop an exit plan.
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What Is Business Exit Planning?
” An exit planning allows an entrepreneur to sell his business to maximize the value of Company “
An exit strategy differs from business to business. It depends on the size of the company or what type of involvement you want in your business.
If an entrepreneur wants to sell a 100% share of his company, an exit planning strategy should remove all his involvement from the company.
For example
If you have a company that is not making a profit; It is suggested to make an exit plan to get rid of the business. The exit plan for the non-profitable company should try to minimize loss.
If your company is generating good profit, an exit plan should maximize the profit.
A good exit plan gives maximum value to the entrepreneur when he sells his company.
Importance of Having an Exit Plan
Are you still unclear about why you should have an exit plan? Go through these points for having a clear idea about the importance of exit planning.
- An exit plan allows investors to be on the safe side when unexpected circumstances seize them.
- Changes in the market and economy can be a reason for selling a company. However, selling your company needs preparation. A strong exit plan will make you prepared for that time.
- You might not have started your company for selling, but if you receive an attractive offer from a potential buyer, this could be a topic of discussion. You are making a good profit and know the value of your company. At that point, an exit plan helps you decide whether you should sell your company or not.
- Illness and bad health can push you to get out of the business. Having an exit plan will prepare you for that time.
- An exit plan will urge you to focus on your targeted goal. It helps you end your business operations at the right time. You can work on your exit plan along with the business plan. An exit plan assists you to make a graceful exit from your business. Exit planning helps you to understand the value of your assets.
- You do not want to be on the losing side when you shut down a company. It is recommended to make your exit planning clear at the beginning of the business.
7 Smart Business Exit Strategies
There is no right or wrong exit plan. Whenever you are ready for an exit, choose the strategy that will work for you.
There are many factors that you must take into consideration when choosing a strategy. Such as :
- Time: what is the right time to sell your business?
- Money: How much money do you need to fulfill your financial needs?
- Business involvement: how much business involvement do you need after an exit?
These three factors will help you choose an exit strategy smartly.
Let’s discuss the smart strategies to exit your business.
- Mergers & acquisition
- Initial Public Offering
- Management buyout
- Sell to someone you know
- Liquidation
- Bankruptcy
- Acquihires
Merger & Acquisition (M&A)
- A merger means when two companies consolidate and become one. Ex: Exxon & Mobil
- The acquisition means when a company purchases another company. Ex: Google & Android
Merger & Acquisition is referred to as M&A. The process of merger & Acquisition is different.
In a merger, two companies join hands for better benefits and rapid growth. All their resources, brand name, tax, liabilities everything become one. In a merger, money is not exchanged from both sides.
The acquisition is different from merging. In acquisition, a company purchases another company. Ownership will be changed. Everything will be transferred to the new owner. In acquisition, money is exchanged. A company can purchase a portion of the share or the whole company.
M&A benefits both companies. You can merge or sell your company to another big company.
Larger companies often hunt small companies to be purchased. They want to eliminate the competition and increase their geographic footprint.
For example:
In the digital world, Google and Android merged for better benefits. Google was a large IT company. However, Android was a start-up and struggling to make a name in the market.
Android was taken by Google for $50 million. After the acquisition, Android made a noticeable share in the mobile phone market.
Pros:
- More room for business price negotiation
- You can set your own terms
- If there is significant demand for your business, you can increase the price and get a better deal
Cons:
- A time-consuming process with a lot of corporate politics involved
- Costly with hefty attorney fees
- You may not get merged or acquired in the first run
Merger And Acquisition M&A Business Plan
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Initial Public Offering (IPO)
IPO is an exit strategy that allows companies, and private Investors in companies sell their Share to public Ex Alibaba IPO raised $21.8 billion on Sep 2014
Private investors hold equity in companies. They can sell their private equity (PE) to the public when they need cash.
Companies also use this strategy to raise funds. Take Alibaba for example. Since its IPO in 2014, they have significantly increased its products and services portfolio and its revenue has increased
Pros:
- IPO can be very lucrative in the right settings
Cons:
- Intense, ongoing scrutiny from shareholders and regulators
Strict reporting for the company performance is necessary
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Management Buyout
A management buyout is referred to as MBO. In this strategy, the current management of the company can purchase a portion of the shares or the whole company if they can pool the resources.
This exit method benefits both seller and buyer. MBO selling process can be done quickly as the management team is already familiar with the business and its potential.
The current management will assume more senior roles in the new company.
As they are already running the company, an MBO will increase their loyalty towards the company and you may also be able to retain a position like an advisor, etc.
Pros:
- You will have the peace of mind that your business is in good hands
- MBO is generally a smooth process
- You can still keep working in the company as an advisor
Cons:
- Management may not be interested in buying the company or they may not have the resources
Big management changes will produce short-term problems
Selling to a Partner or Investor
You can sell your stakes in the company to your business partner or an investor. However, this applies to you when you are not a sole proprietor.
The partner or investor buying your share is called ‘friendly buyer’. Mostly, this person is from your circle of friends or family or someone you trust.
Pros:
- Smooth transition, no visible changes in company operations or revenues
Cons:
- Not as lucrative as other exit business strategies
Liquidation
Liquidation means closing your business by selling all your assets to get cash.
Business Liquidation is often considered a quick strategy to get out of business. If your business is going well, you can sell off your assets at a good price and can maintain cash flow.
Liquidation is a clear-cut strategy to end your business journey. However, if you have creditors, the money will go to pay off the debt first before you pocket anything.
Before liquidation, make sure to do these things for a smooth transition.
- Make payments to the employees.
- Clear your taxes, and keep a record of them in case you need them in the future.
- End all your business expenses such as registrations and licenses.
- File the business abolition document.
Pros:
- A liquidation ends your business in toto.
- Liquidation is a faster way to exit your business.
Cons:
- You may not get the right price for your business
- Creates bad rapport for you in the business community overall
Acquihires
Acquihire is when someone buys your company with the sole purpose to acquire your team.
An acquihire benefits skilled employees of your company as it provides them with growth opportunities and you can be sure that they will be taken care of.
Pros:
- You can get a higher price for your business from an interested party
- Company employees get the opportunity for long-term growth
Cons:
- Not many team buyers in the market
- Costly process
Bankruptcy
Filing for bankruptcy is your last resort in exiting your business. A bankruptcy is filed when you cannot pay your debts or liabilities and the court sells your business assets and give creditors pennies for a dollar.
Bankruptcy comes with bad consequences for your credit report. It might become hard for you to start a new business after bankruptcy unless you are Donald Trump.
Pros:
Settles your debts and liabilities
Cons:
Makes it hard for you to get credit in the future
How to Develop an Exit Plan?
A good exit plan provides you maximum value when you sell your company. Before starting to develop, you need to ask a few questions to yourself.
- Do you want involvement in your business?
- What are your financial goals?
- Do you have to pay the creditors or investors back?
These three questions will clarify things. Answering these questions will help you find the right exit strategies for your business.
If you do not want any involvement in the business, all shares could be sold. You can liquidate the company, and remove your involvement.
Objectives of your Exit Business Strategy
To get maximum value for a company, you should set your exit business strategy objectives.
These objectives will help you understand your requirements. You want maximum return on investment, and knowing your goals will support you to sell your company for a good profit.
Make Business Finance Report
Prepare your finance report for a better understanding of your company’s account and assets.
A clear finance report will enable you to understand your business performance and value. Having a clear idea of finances will help in negotiations with buyers.
As you are going to sell your business, it is recommended to have clear finances. Pay off the creditors if you have any. Less debt will attract more buyers.
Market situation
The market situation should be taken into consideration while making an exit plan. If the market condition is good, there must be a lot of potential buyers and you can sell your company at a higher rate.
Adopt the Right Strategy and Timeline
There are many strategies to adopt, you need to choose the one that will work for you. Select the time when you are prepared for the transition.
If you do not want to sell a 100% share of the company, it is advised to adopt an IPO strategy. Through this strategy, you can stay connected with your business. IPO helps you to sell a portion of your shares.
Likewise, choose a time when you are prepared to sell your company.
Business Evaluation
Business evaluation is another crucial step. Business evaluation gives you an idea about the value of your business. After making the finance report, you can easily examine your company.
You can not put your business for sale without a proper idea about the value.
Bonus Tip: Know the worth of your small business by using our business evaluation calculator.
Speak with your Investors
Once you are clear on what you want to do with your business, take your investors and stakeholders in confidence.
Tell them how the investors’ share will be repaid. You’ll need your business finance report to convince investors of your claims.
Choose new Leadership
Starting with choosing new leadership for your business as you continue with the exit business plan.
You can transfer responsibilities to new leadership smoothly if your business operations are already documented.
Tell your Employees
Your employees have an emotional attachment to the company. Tell them about your business exit plan. Face them with empathy and be transparent in your answers. This will make them feel valued and increase their loyalty to the business.
Inform your Customers
Announce the changes in your business to your customers. Introduce them to the new business owners to keep their confidence.
In case of liquidation or bankruptcy, educate your customers about alternative businesses that offer the same or similar products or services as you did.
What Is the Best Exit Plan?
The best exit plan is the one that gives you maximum profit. A plan that is according to your expectations and goal is best for your business.
The best strategy is the one that keeps on updating as per your need.
In the beginning, you may want to merge your company with another corporation for better results. Later on, one of your close relatives wants to buy your company. His offer might be tempting. You change your mind and are ready to sell.
The best plan is always an updated plan. You can make their exit plans themselves according to their goals. Consult a professional if you feel stuck in the process.
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FAQs:
Exit business planning refers to the strategic process of developing a plan for the eventual transition or exit from a small business. It involves setting goals, evaluating options, and implementing strategies to maximize the value and ensure a smooth transition when the business owner decides to exit.
Developing an exit plan is important because it allows business owners to proactively prepare for their eventual exit, whether it’s through selling the business, passing it on to a successor, or closing it down. It helps maximize the business’s value, minimize potential risks, and ensure a smooth transition for all stakeholders involved.
An exit plan typically includes determining the desired exit timeline, identifying potential buyers or successors, valuing the business, addressing legal and financial considerations, and creating a comprehensive succession or transition strategy.
Developing an exit plan involves assessing your business’s current state, setting clear goals for your exit, seeking professional guidance from accountants or business consultants, considering tax implications, and creating a detailed plan outlining the steps and timeline for your exit.
It is advisable to start developing an exit plan as early as possible, ideally when starting or acquiring a business. However, even if you haven’t done so yet, it’s never too late to start. The earlier you begin the planning process, the more time you have to implement strategies that can increase the value and ensure a successful exit when the time comes.
I exited from my first business and didn’t know these strategies before. I suffered from huge financial damage. As I know now, I will definitely keep all this in my mind.