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6 Min. Read

Exit Strategy of Business: Overview & 5 Strategie

Exit Strategy of Business: Overview & 5 Strategies

Are you a business owner? Or are you an investor, venture capitalist or trader? There are many different reasons you might need to develop an exit strategy for your business. You might want to liquidate financial assets or get rid of tangible business assets. This can sometimes happen if your business has met or exceeded any predetermined goals and objectives.

Simply put, an exit strategy is a plan that you put in place to rid yourself of any investment in a financial asset or business venture. The most effective strategies involve planning for each positive and negative contingency. And this is regardless of the type of business venture, investment or trade.

Here’s What We’ll Cover:

Overview of An Exit Strategy

5 Exit Strategies for Your Business

Key Takeaways

Overview of An Exit Strategy

Have you met or exceeded your business goals? Have you achieved your profit objectives? Maybe there have been some significant changes to the market conditions. Or, maybe you have put in your time and are ready for retirement.

There are a broad range of reasons someone might need to develop an exit strategy. A business exit strategy allows you to liquidate or reduce your stake in a business. You can stand to make a substantial profit if the business has been successful. Usually, you would sell your ownership to other investors or another business.

And the exit strategies work in the opposite way, as well. If your business isn’t successful or isn’t reaching its goals, an exit plan can help limit any potential losses. For example, a venture capitalist might put an exit strategy in place to cash out of a previous investment.

One of the best things that you can do to get prepared is to develop your exit strategy when you complete your initial business plan. The type of strategy that you put in place can influence future business development decisions.

For example, the factors taken into account could include things like how much control or involvement you want to retain. Or whether or not the company will operate in the same way after your departure.

5 Exit Strategies for Your Business

Some benefits can come with developing a proper exit strategy. This is especially the case if you are looking into small business financing. Any potential investors or future lenders are going to want to know what’s going to happen to their money. They also want to know what will happen and how their money gets protected should the business fail.

Here are 5 exit strategies for your business.

1. Through a Merger

A merger can be common in business as they help to increase your business’s overall value. Investors like mergers because when two businesses merge into one it provides more opportunities. But, the most important thing to consider is that the business you are going to merge with is a good fit.

There can be five main types of mergers for you to consider.

  1. Horizontal: where each business operates within the same industry
  2. Vertical: where each business is part of the same supply chain
  3. Conglomerate: where you have nothing in common with the other business
  4. Market extension: where you sell the same products as the other business but operate in different markets
  5. Product extension: where the products or services sold by each business work well together

Mergers can be a great way for your business to expand and grow. However, if you wanted to cut all ties with your business then a merger might not be the best strategy to take.

2. Through an Acquisition

With this strategy, you would give up all the ownership you have in your business to the business that purchases yours. Similar to a merger, it’s important to try and find a potential buyer that you feel comfortable selling to. You might have spent the past 30 years building your business.

The last thing you want to do is have it get acquired by another company that doesn’t align with your values. Your business’s reputation could get negatively affected. That said, there are two main types of acquisitions: hostile or friendly.

A friendly acquisition is just that. All the details have been agreed upon and you are satisfied with getting acquired. A hostile acquisition, however, basically means that you either don’t agree with the details or you don’t want to sell. The business trying to acquire yours can buy stakes in the company to complete the purchase.

3. Through an Initial Public Offering (IPO)

When a company decides to go through with an initial public offering, or IPO, it means that they are going to start selling stock to the public. It’s often referred to as ‘going public’ and involves selling part of the ownership in the company to stakeholders.

Publicly traded companies often tend to be larger. But by initiating an IPO you can secure additional funding for future expansions or pay off debt.

4. By Selling to Someone You Already Know

Selling your business to someone that you already know and trust could be the most important thing you care about with your exit strategy. Maybe you are getting close to retirement and have spent decades building your business from the ground up. And you want it to live on.

Think about some of the people closest to you. Other family members, a friend or even a loyal customer. You might even have a long-term employee who is interested in taking over once you decide to step down.

Just keep in mind that it’s important to disclose any risks or liabilities, as well as the profitability of the business.

5. By Liquidating Your Assets

An important distinction to consider with liquidation is between creditors and investors. With liquidation, all your business operations end and any assets you have get sold off to creditors and investors.

But, it’s the creditors that get the first crack at your liquidated assets, not the investors. Liquidation might be one of the most clear-cut exit strategies for you to use. There’s no need for any mergers or ongoing negotiations. Basically, everything comes to a full stop and your assets get sold to creditors.

Key Takeaways

As a business owner, you are going to need to have an exit strategy at some point down the road. It could be once you reach certain goals and objectives or if you just decide to retire. It can be a stressful process to go through and emotions can run high.

But a good exit strategy developed in advance can help you navigate through the situation. One of the first things that you should do is determine when you want to execute your strategy. Once you figure that out you can determine which exit strategy will work best.

There are pros and cons to each strategy and one might work better for one business than the other. Take a look into mergers, acquisitions, liquidations and IPOs to get a better understanding of what is involved in each.

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