July 10 , 2024
A detailed exit strategy doesn’t seem like the most important part of a business plan. However, whether you are an experienced CEO or the founder of a micro-sized startup, this is something you’ll need to consider. ‘Exit strategy’ has something of a negative connotation, so first let’s reframe how we’re looking at it. Having a detailed exit strategy isn’t a sign that you don’t care about your company’s future or are ready to jump ship at the first sign of trouble. Instead, it’s a vital bit of preparation for future transitions, whatever form those may take. There are many different types of exit strategies — let’s look at three of the most common.
Initial Public Offering (IPO)
This is generally considered the most difficult and the most lucrative exit strategy. With an IPO exit, you are taking your company public and selling shares to potential bidders. Ideally, you’ll get a private investor who sees huge potential in your business.
However, this potential profit comes with risks. It’s extremely difficult to break into the wider industry, and how your company is received will affect public perceptions as well as interest from buyers. As such, you and the company will be closely scrutinized from many different angles — the public, investors, the industry, and regulatory bodies.
Additionally, IPO due diligence is costly, labor-intensive, and exhaustive. There are many reporting requirements, all of which will be public. The US Security and Exchange Commission (SEC) will need to approve a registration statement before going up for sale. These links contain the relevant information for IPOs and SEC Requirements.
A Transaction
This strategy isn’t going to be feasible for many. Transactions refer to any kind of sale of the company such as a merger and acquisition or an employee buyout. The easiest transaction is generally to sell to another stakeholder or employee already at your company. If you have someone internal who would be interested and able to buy your company, that is.
An outside investor is always an option, but this requires you to go to market and undertake a due diligence process which can be costly. Some business owners will elect to sell to a partner or competitor who already understands the company and industry. Sellers in this position will want to take care to ensure minimal disruption to business operations to keep revenue streams flowing normally.
To sell a company, you’ll need to perform a business valuation, as well as pay off any debts you may have. This way you’ll know exactly what the company is worth, and you won’t have to justify your sell price to friends or employees.
Liquidation
No business has liquidation as an end goal, but it can be a lifesaver in certain scenarios. Liquidation is a common exit strategy for underperforming or failing businesses. The business is closed down, operations ceased, and all assets are liquidated and sold. Any money earned from the liquidation must go first pay off debts and shareholders.
If you’re seeking a definitive out, this is your option, but once the business is gone, it’s gone. It’s also relatively quick and simple compared to other exit strategies.
Bankruptcy
Used as a last resort, filing for bankruptcy at the very least doesn’t require an exorbitant amount of planning or effort.
If a business is failing desperately, this is a way to immediately relieve yourself of the associated financial obligations. Assets will be seized, and your credit will take a significant hit, but you will be debt-free in the end.
Planning an exit can be overwhelming. Take a moment to take to an expert and see what the best strategy is for your business. Reach out to us today.
