Entrepreneurs often spend most of their time dreaming up ways to start and grow their businesses. However, it’s not quite as common to talk about leaving these businesses once it’s become successful. One way to ensure a seamless transition (when the time comes) is to have an exit strategy laid out far in advance. It’s recommended even to include this step in your initial business plan before launch.
Why Have an Exit Strategy
Why should you think through how you’ll leave a company before the company even exists? There are a few reasons to have an exit strategy in mind. First, it can come in handy if you have an unexpected need to sell or close the business or if you need to step down for any reason.
Second, an exit strategy helps with reassuring investors who want to support your business. Having an exit plan in place is a safety net for investors’ funds. It reassures that there is a strategy in place to secure their investment.
Third, your exit strategy can inform your regular business strategy. You may make different choices in day-to-day business decisions depending on which exit strategy you plan to take. With these benefits in mind, let’s take a look at a few of the most common options.
With these benefits in mind, let’s take a look at a few of the most common options.
With a liquidation strategy, when you’re ready to move on from the company, you’ll shut down the business and sell off any of its remaining assets. The proceeds from selling the assets are then split between investors (after any credits are accounted for). Liquidation is quick, making it attractive to entrepreneurs who want to move onto another venture right away.
IPO (Initial Public Offering)
With an IPO, entrepreneurs can sell their company shares directly to the general public through a stock exchange. IPOs are popular choices for an exit strategy, but they tend only to be accessible to large-scale companies. Filing for an IPO is also expensive, which further restricts smaller companies from this option.
Selling Your Stake
Another option is selling your stake if you want the company to continue in your absence. It is not uncommon for business owners to sell to colleagues or family. This person will take over, and your familiarity with them beforehand often leads to a more seamless transition than some of the other options on the list.
Finally, with a merger or acquisition, your company will either merge with or dissolve into another company—often a competitor that wants to scale up by absorbing your business to offer new services or products to their client base.
7 Steps to Preparing an Exit Strategy for Your Business
Many entrepreneurs question how to get started creating an exit strategy. Here are 7 steps that professionals recommend business owners take while preparing their exit strategy:
- Prepare your finances
The first step to develop an exit plan is to prepare an accurate account of your finances, both personally and professionally.
- Consider your options
Once you have a complete picture of your finances, consider several different exit strategies to determine your best option.
- Speak with your investors
Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid.
- Choose new leadership.
Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans.
- Tell your employees
When your succession plans are in place, share the news with your employees and be prepared to answer their questions.
- Inform your customers
Finally, tell your clients and customers. If your business continues with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.
- Organize a change management strategy
The transition into new management and processes can be difficult for employees to navigate. Make sure you have a change management strategy in place to assist your team as your exit takes effect. Read this article on Indeed to learn more about how to create this for your business.
No matter what you choose, make a plan to revisit your exit strategy periodically. Chances are, your preferences will evolve as the trajectories of your business and your life become more apparent. By reviewing your plan periodically, you’ll be prepared for whatever comes your way. Merritt Business Solutions offers a wide array of executive benefits including buy-sell agreements, to protect your company’s longevity. Learn more about executive benefits through MBS here.