Business Exit Strategy: Definition, Types, Benefits And Challenges

Jack started a tech startup business three years ago and is now going for a merger and acquisition with a competitor. 

Further, with the partial selling of his company, he decided to remain closely involved with the business. 

This is the perfect example of a successful business exit strategy, helping Jack to diversify his business offerings and use the business infrastructure on a major scale. 

So, as you can see, a timely business plan exit strategy can help a business develop and diversify.

However, it also helps a business owner limit losses when the company is struggling or make a profit by selling the business or cutting a stake when it is making profits.

Do you want to know the other benefits of business exit planning and how to do it? Here is our Real Wealth Business guide on the definition, types, benefits, challenges, and everything you need to know about business exit strategies.

What Is A Business Exit Strategy?

A business exit strategy means the strategic move of an entrepreneur to transfer their ownership to investors or another company. 

In a business exit strategy, you have two options: sell the business to someone or to a company that will continue your legacy. 

Your family members or trusted employees are the best choice in such cases, as they share your values and passion for your business. 

Further, you can liquidate your business, also called a lifestyle business, and continue receiving a paycheck to support your lifestyle. 

However, this is not a business exit plan if you want business growth, as it creates a bad reputation in the market and makes the investors and employees unhappy. 

Another option to liquidate your business is to shut down the office and sell assets like real estate, inventories, vehicles, equipment, etc., for a quick cash flow.

Nevertheless, this exit plan only works if you have minimum credit in the market. Otherwise, most of the money will be used to repay the debts. 

Here, we compare liquidating your business by selling vs. closing it. 

Selling Your Business	Closing And Liquidating Your Business
• Here, the buyer will pay the business over the decided time.  • The buyer gets to run the newly bought company without huge initial investments.  • The seller continues to make money periodically.  • As the seller, you can remain closely involved with the business as a mentor or consultant.  • The transition will be easier for your employees and customers.	• Here, you will file all the documents for business dissolution. • Further, you must cancel the business name, registration, licenses, and expenses you will no longer need. • Make the payments to your employees according to state and labor laws.  • File the final taxes and keep the records handy.

When selling your company, you must choose a bigger company as a target to optimize your business exit strategy. Selling it to a family member or someone known may cause emotional strains and sometimes undervalue your business. 

Further, ensure a strategic fit or alignment between you and the buyer of your business.

What Is The Purpose Of A Business Exit Strategy? 

A business exit strategy is a purposeful business practice fixed on goals. The following scenarios explain the purpose of a business exit strategy. 

Scenario 1: Your business is running well, and you plan a business exit strategy. It will help you to reduce or sell your stake in the company to earn profits. 

Scenario 2: Your business is struggling. To limit your losses, you can plan an exit strategy and transfer ownership. 

Scenario 3: You are a venture capitalist or an investor. A business exit plan will help you plan for cash flow out of investments. 

Scenario 4: You have made some business development decisions, and you need to choose a business exit plan that will help you achieve the development goals. 

Scenario 5: You want to liquidate or reduce your business ownership but still want to continue the legacy. A successful business exit plan will help. 

When Do You Need A Company Exit Plan?

You need a company exit plan in the initial days of your business. In other words, you must have a business exit plan before starting the actual operations. 

A strategic exit plan with contingency strategies from the beginning helps you make an early exit based on market conditions and personal situations. 

Further, an early exit plan always helps startups and other businesses because there is a lot of groundwork to do before a business exit. 

However, you can also plan a long-term business exit to raise capital. Your investors will look into your business exit plan to ensure the potential/scope of the return on investment (ROI). 

Having said that, it is not always possible to determine the right time for a business exit. Market conditions and other external and internal factors may require quick decision-making. 

This uncertainty further establishes the importance of being flexible and having a plan ready to execute the exit whenever required. 

Why Do You Need A Company Exit Strategy?

You need a company exit strategy because it has targets, goals, and specific timelines. It also helps you navigate unexpected conditions, maximize your profits, and minimize losses. 

If you own a startup, you may need an early exit strategy. However, if you have an established business, you need a comprehensive business exit strategy.  

If you have a comprehensive exit strategy, you need to review it periodically to ensure that it suits changing market conditions. 

Nevertheless, here are four major reasons you need a company exit strategy. 

1. Setting Definite Goals

A business exit strategy helps you set a timeframe and a goal you want to achieve. In other words, you may have a goal to achieve before planning an exit. 

Now, with a set goal, you can manage your operations and reach your goals, such as specific research developments, revenues, or customer volumes.

2. Ensuring Certainty In Changing Scenarios

A defined exit strategy ensures a smooth transition of the business, creating certainty for the company’s owner, employees, investors, and other stakeholders. 

Even if you have to make a sudden exit in changing scenarios, this plan will keep everything streamlined.

3. Confident Decision-Making

With a strategic exit plan, you have clarity over the following elements.

• Business goals for the exit
• Due diligence
• Profit you want to make
• Lasting legacy
• The entire transition phase

Further, clarity about these elements helps you make confident decisions. 

4. Succession Planning

Your business may go through generational changes. Now, a business exit plan helps you to define family succession plans or mergers and acquisitions. 

Thus, your business exit becomes smooth, risks become less, and profits get maximized.

What Is The Importance Of Exit Strategy In Business?

A business exit strategy relieves an owner of the burnout caused by years of effort. Further, it is important to understand the revenue stream, develop leadership, and make the operations more efficient. 

Let’s delve deeper into the importance of a business exit strategy. 

1. Relieving Company Owners Of Their Burnout

A company owner may face burnout after putting their efforts and money into the business for the owner. 

The owner will now seek a quick exit, which, with a strategic plan, they can achieve. The prospective buyers will investigate the plan to check the revenue history, performance metrics, and other important data.  

2. Giving Better Insights Into Revenue Streams

A business exit plan contains all the data about the company’s performance. Thus, the new owner or successor will have a clear idea of the activities earning the revenues and how the revenue is being spent. 

This information further helps the new owner or the successor in the following matters.

• Efficient management of cash flows
• Plan seasonal fluctuations
• Improve result-driven marketing efforts
• Focus on business operations that matter
• Choose short, medium, or long-term income projects

3. Ensuring Smooth Operations

An exit plan has all the information the successor will need to run the company. Thus, managers or leaders will not have to waste their time gathering basic information about the finances and salaries of employees or partners.  

So, the new leader can take charge of the operations as soon as the previous leader leaves.

4. Developing Leadership 

With an exit strategy in place, a business can focus on developing leadership based on the succession plan. It is crucial for a seamless and successful transition of a business. 

The leadership remains familiar with the company’s chain of command, the basics of operations, company goals, and the decision-making process.  

So, even if the previous leader or mentor leaves, the operations have no chaos. 

Key Steps To Develop A Business Exit Strategy

Planning a business exit strategy starts with outlining the objectives and outcomes. You then need to do valuations and decide on your business’s differentiating factors. 

Also, you have to conduct comprehensive due diligence. 

Finally, you can make an exit plan that ensures a smooth legal, financial, and operational transition for your business. 

Do you want to learn more about it? Here are the actionable steps to build a business exit strategy.

1. Clean Up And Ready Your Finances

Follow the generally accepted accounting principles (GAAP) and keep your books clean while planning an exit strategy. 

Further, when quoting your price, be transparent about your personal and corporate numbers and your company’s financial performance. 

2. Decide On The Differentiating Factors For Your Business

Here are the key differentiating factors you must highlight while making a business exit strategy. 

• The target market of your brand
• Unique attributes of your products/services/brands
• Brand story/heritage
• Patents or signature technologies
• Awards and endorsements

3. Talk To Your Investors

Talk to your investors about your desire to exit the business and share a strategy for repaying them. 

Also, keep your finances clean at this stage to help them find evidence supporting your business plan and convince them about the return on their investments.

4. Assess The Options

Assess the best business options based on your business’s desired future (closure, liquidation, legacy maintenance, etc.).  

Consult a financial professional or a business lawyer if you are confused with the choices.

5. Choose The New Leadership

When you are at the final stage of executing your exit plan, transfer some responsibilities to your chosen leadership. 

This will familiarize them with the operation while you are still there, making the transition smooth for both the business and the employees. 

6. Convey The Exit To Your Employees

Share the succession plan with your employees. Further, be empathetic and transparent while answering their questions. 

7. Conduct Due Diligence

Conducting due diligence means keeping the legal and organizational documents. These documents include:

• Licenses
• Permits
• Customer and Vendor Contracts
• Audits
• Finances
• Insurance Information
• Employee Payroll
• Assets and Vehicle List

8. Tell Your Customers

Inform your customers about the ownership transition and introduce the new owner to them. 

Further, if you are shutting down the business, you must help your customers find other alternatives. 

9. Plan The Exit Strategy 

After all this work, you will plan your exit strategy by documenting the business objectives, timeline, and profit you want to make. 

Further, decide whether you want to completely transfer the ownership or maintain the business as your legacy while chalking the final plans.

Things To Remember While Making A Business Exit Strategy

A successful business exit strategy is based on the pillars of business objectives, timeline, market conditions, and intentions for the business. 

Objectives or Goals of the Owner	• The business exit strategy must be based on your business objectives.  • Do you want to earn profits? Do you want to leave a legacy?  • The answers to all these questions will help you decide the exit strategy you need.
Timeline	• For a short-term exit plan execution, ensure you achieve all the targets within the set time.  • Further, for a comprehensive or long-term exit plan, focus on leadership development and streamlining cash inflow and outflow.  • Moreover, remain flexible about the exit timing in volatile market conditions.
Market Conditions	• Assess the demand and supply of the products and services offered by your business.  • Understand how many potential buyers you have before making an exit plan.
Intentions for the Business	• Decide what you want for the business.  • You need to create an exit strategy based on your intentions for a merger, liquidity, transition, succession, or dissolution.

Types Of Business Exit Strategies

There are many types of business exit strategies, and you will choose the most suitable one based on your business’s health and the buyer’s profile.

The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.

Jacqueline Medina, Contributor, U.S. Chamber of Commerce. 

Further, how much ownership you want to maintain and the deal’s merit are other factors for choosing the right exit strategy.

Nevertheless, these are the different types of business deals.

1. Initial Public Offering (IPO)

IPO is a prestigious business exit strategy for the owners. It also ensures the owners, CEOs, and investors the highest payoff. 

So, for startups, IPO is considered the “Holy Grail.”

Pros	Cons
• It is prestigious and profitable for investors and owners. • Further, it is the best business strategy for startups.	• An IPO process is expensive.  • You must conduct extensive due diligence; the public, stockholders, and regulatory bodies will constantly scrutinize you.

2. Liquidation 

Liquidation is closing the business and selling its assets for a cash flow to repay the debts and investors.

Pros	Cons
• Ensures a rapid exit • Does not impact the credit record of the owner • Relieves you of debts	• The earnings you get are limited to the asset value of the business.  • If you have high debts, most of your money will go into repaying them.

3. Management And Employee Buyouts (MEBO)

Here, the management and employees take charge of running the business and fill the leadership gaps.

Pros	Cons
• Streamlined and quick exit • Minimal impact on operations	• Some amount of risk is involved with the changes in the management.

4. Acqui-hires

A buyer often buys a company to acquire its talents. This process is called acqui-hires. It is beneficial for skilled employees as it often brings career growth. 

However, a buyer will be more interested in acqui-hires when you run unique operations or have patents/rights for unique technologies.

Pros	Cons
• It gives you the leverage to negotiate stronger terms for the acquisition. • It is beneficial for the career growth of the employees.	• Finding a buyer for acqui-hires can be difficult.

5. Family Succession

Family succession means transferring the ownership to your children or any other family member.

Pros	Cons
• Close association of the new leadership with the business operations • Smooth exit process with minimal disruptions • You can still support the successor or be a mentor in the business.	• Family succession does not work if your children or other family members are not interested in the business.

6. Selling Stake To An Investor Or Partner

If you are not the sole owner, you can sell your shares to an investor or a partner (a friendly buyer). This is the business exit strategy that yields minimal impact on the business operations. 

Pros	Cons
• Minimum disruption • Less impact on revenue streams • A vested interest of the buyer in the company • Buyer’s commitment to the business for long-term success • The due diligence process is shorter.	• Lower valuation with your shares being sold to a friendly buyer.

7. Merger And Acquisition (M&A)

Merger and acquisition (M&A) is one of the best business exit strategies. You can sell your business to a direct competitor or a bigger company to diversify it, scale it up, or improve its geographical footprint. 

Mergers and acquisitions also benefit buyers as they get access to new talents, a set infrastructure, or a customer base without paying upfront fees.

Pros

Cons

• You can remain involved in the business and leverage the scopes and talents of the buyer.  • Or, you can make a profitable exit.  • You can negotiate the true value of your business with perfect due diligence.  • M&A also remunerates shareholders and owners.  • The buyer also gets to increase their market share and reduce competition.  • If there are multiple bidders in an M&A, bidding competition will push your company’s value up.

• M&A is costly and time-consuming. • Further, due diligence can be complicated with regulatory compliance and consideration of the anti-trust laws.

8. Bankruptcy 

Bankruptcy is the last resort to relieve yourself of financial debts. However, if you file bankruptcy, your assets will be seized. 

It also harms the credit and market reputation of the director/owner. So, you will face difficulty accessing credits for your future businesses.

What Are The Benefits Of a Well-Planned Exit Strategy?

A business exit strategy gives your business the right direction. It also ensures a smooth transition for your business. 

So, here’s more to the benefits of a well-planned business exit strategy. 

Ensures A Smooth Transition 

Transition and the transfer of responsibilities become smoother with a proper business exit strategy or succession plan. 

In this, every employee and stakeholder knows what roles they are going to play. 

Prevents Unwanted Consequences

With an exit strategy, you can avoid unwanted consequences like bankruptcy that will impact your future business ventures. 

Makes Your Business More Attractive To Buyers

If you have an exit plan, a potential buyer will see this as your commitment to the business vision and goals. 

Furthermore, the exit plan will help them understand why investing in it will be a profitable proposition. 

Helps You Make The Best Business Decisions With The Right Direction

When you have a business exit strategy in place, you know what goals you must achieve before the exit occurs. 

It gives you clarity, the decision-making power, and the direction in which your business should operate. 

What Are The Common Challenges in Executing A Business Exit Strategy?

Despite all the benefits, a business exit strategy has some challenges. It’s an emotional decision for all business owners. So, choosing the right exit strategy can be overwhelming.

Further, valuing your business correctly and ensuring all regulatory compliances are complex landscapes to navigate.

Internal resistance from employees, investors, and other stakeholders can also be experienced. Moreover, finding the right buyer at the right time can be challenging. 

Some Examples Of Successful Business Exit Planning

Here are some real-life examples of successful business exits. 

Name Of The Company	Type Of Business Exit
Uber	IPO in 2019
Instagram	Acquisition by Facebook in 2012
Whatsapp	Acquisition by Facebook in 2014

Business Exit Strategy Frequently Asked Questions (FAQs)

Here are some frequently asked questions and answers about business exit strategy.

A Business Exit Strategy: Helping Businesses To Survive And Thrive

A business exit strategy gives a business the right direction and helps it survive and thrive even in uncertainties. Further, the exit plan ensures a smooth transition with a minimal impact on the revenue streams. 

Also, it is a great move to diversify your business and optimize your profit for the years of efforts and investments you have made to grow the business. 

Overall, it is never the end of the road. Instead, it’s a step toward a new direction.