What is an exit strategy?
An exit strategy is a plan put together by an investor or business owner to remove a financial or business asset once the outlined criteria have been met.
In many cases, these assets are removed due to an investment performing poorly or a business becoming unprofitable. However, in some cases, exit strategies can be more positive. Investors or venture capitalists may use an exit strategy to plan for a company to go through an initial public offering (IPO).
When planning an exit strategy, investors and business owners may use a brokerage trading platform to forecast asset performance or market conditions. This information can determine which assets could be removed and the timeline for doing so.
Types of exit strategy
There are several different types of exit strategies that a business could use. Depending on the asset being removed, some of the most common options are:
- Merger or acquisition. For successful businesses, merging or being acquired by a larger company can be a lucrative exit strategy. Owners often leave the business at this point after selling their stake in the company, while others may take high-level positions within the acquiring business.
- Selling shares. Companies with multiple owners can use this exit strategy to sell to a partner or investor. This type of sale is usually between individuals the business owner already knows.
- A succession plan. Also known as a legacy exit, business owners may plan to keep their profitable business within the family and pass the company to a child or other relative. This is often the case when the business owner is looking to retire.
- Liquidation. When a business is failing, assets will likely need to be sold to pay off debts or shareholders in the company. This is a final resort strategy, as once the business has been liquidated, it no longer exists.
- Bankruptcy. Filing for bankruptcy isn’t often a planned exit strategy and is instead a final act to relieve the business of debts. This is usually a forced-upon exit with all assets seized.
Basic elements of exit strategies
The type of exit strategy used will often determine what is included in the plan. For most strategies, the same standard details should be included. These are:
- When the exit will happen. All plans should include a detailed timeline that outlines when important milestones will occur. Communication with stakeholders, employees, and customers should be included in the plan, along with information detailing when the final exit will take place.
- Who will be taking over the business. If the business continues to operate following the exit, information must be noted on who will be taking over the management of the business and its operations.
- The business’s current financial status. Most businesses have an exit strategy for a financial reason, so it’s important to note the most important details about the company’s current financial health. This is especially the case if the organization is in debt.
- How to inform employees. Internal teams must be notified of any exit strategies once plans are in motion. The exit strategy should include details on how employees will be told and allow for questions or concerns to be addressed.
- How to inform customers. Likewise, customers of the business must also be kept informed of changes to the business’s ownership or management. Introduce them to the new business owner if possible, and if the business is closing, provide customers with alternative options.
Benefits of exit strategies
Regardless of why an exit strategy is being put in place, there are several benefits to creating one. These include:
- Removing emotions from business decisions. Particularly for founders, leaving a business they’ve built can be especially difficult. This often comes with personal feelings that can impact decision-making. A clear exit strategy avoids rushed decisions that could negatively affect the business.
- Having a plan for unexpected changes. Even if an exit isn’t being planned, having an exit strategy for dealing with sudden events like an owner's illness or death can be useful. This stops any decisions from being made too rashly and gives the remaining team clear directions for the next steps.
- Giving a successful business great value. Especially when it comes to succession exit strategies, having a defined exit strategy can make a business look more attractive to potential investors. With details already outlined, investors may feel more confident in the direction the business is heading in.
Best practices for exit strategies
Being prepared is one of the smartest moves a business can make. Incorporating these best practices into exit strategies can make the process simpler and more straightforward.
- Plan as early as possible. Companies should give themselves the most time to transition from one stage to another. The earlier plans are put in place, the easier it is for everyone involved, and it minimizes some of the risks of removing an asset or owner.
- Track data across the whole business. When looking to sell a business, the more data available, the better. Potential investors or buyers will want to know exactly what they’re getting into before committing to a purchase, so it’s best to provide market and customer-relevant data upfront.
- Consider multiple exit strategies. While a final exit strategy should be clearly outlined, stakeholders and business owners should consider different approaches before settling on one. This may mean planning for a best and worst-case scenario, with detailed outlines that consider several possible outcomes.
Provide current and future investors with detailed reports and financial records as part of your exit strategy planning using investor reporting software.
