Exit Strategy - The Ultimate Cheat Sheet for Businesses

Business owners are now gradually embracing the idea of having an exit strategy, with 69% of respondents in a recent survey indicating that it was on their priority list.

Having an exit strategy is a fundamental aspect of any business plan. It helps you plan for what will happen to your business when you can no longer manage it.

In this article, you’ll learn additional reasons why an exit strategy is essential, the core elements of a plan, and how to prepare one for your business or investments.

Ready to exit from your business? Get expert help to ensure you get the best deal while safeguarding your stakeholders’ well-being.

At Exitwise, we help founders, business owners, and investors looking to exit their companies hire the best teams to oversee the process. Our team has experience in handling mergers and acquisitions across 200+ industries.

Book a one-on-one consultation and learn how we can help you maximize your financial gain from your next exit!

What is an Exit Strategy in Business?

An exit strategy entails a comprehensive plan to help you transition from your business or company where you own a substantial stake.

It outlines how to transfer ownership or management roles while minimizing the impact on business operations.

Additionally, it recommends the best-case scenario for liquidating your stake for maximum gain or minimum losses, depending on the company’s performance.

Overall, a well-thought-out exit strategy aligns with the company’s and your long-term investment goals.

Common Reasons Behind Developing Exit Strategies

Below are essential incentives for crafting a comprehensive exit strategy:

Attracting the Best Offer: An exit strategy outlines how to position your business to get the highest possible financial return. This includes improving operations efficiency and cash flow, which indicate a healthy business and help maximize company value.
Minimizing Risk: Planning your exit helps mitigate financial losses from selling your stake during economic downturns. It also reduces the risk of making hasty decisions, which could compromise the company’s sustainability.
Business Continuity: Exit strategies outline favorable conditions for ownership transfer to ensure the business is stable and retains its market position even after founders or key investors hand over control.
Transparency to Stakeholders: A well-defined exit strategy helps reassure stakeholders, including investors, employees, and the community, about the future direction of the company.
Aligning with Strategic or Personal Goals: A clear exit plan lets you consider how the transition impacts your personal or long-term investment goals. For example, you could plan your exit to align with your retirement.

Key Elements of a Successful Exit Strategy

Curious about what to include in your business exit strategy? Here are the core pillars:

Clear Goals: Your exit strategy should establish what you want to achieve from the sale, including personal and investment goals. For example, your goal for exiting could be to retire in the next 10 years.
Business Valuation: Request a business valuation to determine how much you can sell your business for or quantify your company’s worth. This provides negotiating leverage when engaging potential buyers.
Exit Options: Develop several exit strategies, highlighting each option’s pros and cons. This allows for flexibility when responding to changing market circumstances or unforeseen events.
Tax and Financial Planning: Include a financial plan that reduces tax liabilities and maximizes returns. For family succession, include ways to shield the beneficiaries from avoidable inheritance or estate taxes.
Stakeholder Communication: The strategy should have a detailed plan for engaging stakeholders about your impending exit from the company. This includes highlighting the best communication channels and effective strategies for addressing stakeholders’ concerns.
Detailed Timeline: Establish a time-bound roadmap of how you will exit from the company. This includes specific timelines for completing the valuation, communicating with stakeholders, and receiving and considering bid offers.
Succession Plan: To ensure business continuity, a well-crafted exit strategy should outline how the ownership transition will happen.

Types of Exit Strategies

Now, let’s explore tailored exit strategies for startups, small business owners, and investors:

Exit Strategy for Startups

Startups often experience rapid growth, straining the available resources. An exit strategy provides the safest way to maximize your returns (as a founder or early investor) while ensuring the startup’s long-term growth.

Common exit types for startups include:

Initial Public Offering: Sell shares to the public to cash out from the startup while maintaining considerable control over the company.
Mergers: Get an industry leader to acquire your startup. This allows you to relinquish some of your ownership for financial gain and leverage the parent company’s infrastructure to accelerate your growth.
Recapitalization: You can restructure your startup’s debt or equity to enhance its credit profile or manage tax liabilities.

Exit Strategy for Small Business Owners

Small businesses have increased flexibility when creating and executing exit strategies. They are also easier to align with your personal goals, such as early retirement, legacy, preservation, or relocation.

Below are the applicable exit strategies for small business owners:

Family Succession: You can pass the business to your children or relatives, ensuring your family retains control over its operations.
Employee Stock Ownership Plan: This involves encouraging your employees to buy shares in the business, earning them partial ownership.
Management Buyout (MBO): You can offer the current management team to buy you out of the business. This ensures a seamless ownership transition, reducing disruptions in company operations.
Recapitalization: This entails restructuring your company’s capital profile to bring in new investors without transferring all your shares.

Exit Planning Strategy for Investors

Oftentimes, investors’ primary exit goal is maximizing the return on their investments. Large shareholders must also consider how their exit could impact company performance, especially where they are key investors or co-founders.

Here are applicable exit planning strategies for investors:

IPO: If you are an early investor in a startup, you can wait for the IPO to liquidate all or part of your shares.
Mergers: Following a successful acquisition, you could receive a profit split proportionate to your capital share.
MBO: If you own a private company that might be unsuitable for an IPO, you could offer your management team to buy you out of ownership directly or through external financiers.
Liquidation: This is a last resort if your company is underperforming and there are no suitable exit options. Consider selling the company assets to offset your debt.

Examples of Exit Strategies

Below are real-world examples of founders who implemented successful exit strategies, ensuring their companies’ long-term success:

Example #1: Family Succession

The Ford Motor Company remains one of the best examples of an exit strategy involving family succession.

The founder, Henry Ford, ran the company from its incorporation in 1903 until 1945, when he transferred leadership to his grandson, Henry Ford II. The company remained under the family’s leadership until 1980 when it transitioned to the first non-family CEO, Philip Caldwell.

However, Henry Ford II’s exit strategy involved placing some of the company’s shares under a trust and Class B shares, ensuring the family retained control and protected the founder’s legacy.

Example #2: Initial Public Offering

Google’s initial public offering (IPO) illustrates how a well-planned and executed exit strategy can propel a company to long-term success.

The founders, Larry Page and Sergey Brin wanted to scale Google’s operations globally while still retaining control over the company. They organized an IPO in 2004 and raised $1.9 billion, providing a profitable exit for the founders and early investors.

Larry and Sergey still have significant control over the company and continue to influence Google’s strategic plans.

Example #3: Mergers and Acquisitions

MOD Interiors, an award-winning architectural, design, and engineering company, was acquired by Big Shoulders Capital and Iroquois Industrial Group in February 2023.

The goal of the acquisition was to enhance MOD Interiors’ capacity to handle larger projects comprising metalwork, stonework, and woodwork.

The acquisition was an opportunity for the owners to make a profitable exit from MOD Interiors while remaining central to the company’s operations.

Our experts at Exitwise played a vital role in the success of this acquisition. Exitwise hired and managed the mergers and acquisitions team that implemented this exit strategy, creating a win-win situation for the involved parties.

Check out our other success stories to learn how Exitwise helps its clients get the most out of their exit strategies.

How to Create an Exit Strategy Business Plan

A comprehensive exit strategy should outline how you plan to transition from your business in line with your personal or investment goals.

Below is a step-by-step guide for crafting an exit strategy for your business:

1. Define Your Exit Goals

Identify what you aim to achieve with the exit. For example, your exit goal could be to merge your business with another company or sell the shares to the public through an IPO.

Other times, the primary goal for the exit is to achieve a personal milestone or goal. For instance, you could exit from your company to start your retirement, focus on your health, or spend more time with your family.

Regardless of the motive, ensure the goal is SMART (specific, measurable, achievable, relevant, and time-bound.

Example: I want to exit my business with a $50 million IPO within three years.

2. Conduct a Business Valuation

Contract professional appraisers to establish the current value of your business.

The valuation should account for tangible (premises and machinery) and intangible assets (brand value and goodwill). An objective valuation report helps you set realistic expectations when evaluating bid offers.

Use our valuation calculator to estimate your business’s worth in real-time.

3. Compare Exit Options

Identify the most suitable path that leads to your personal or investment goals. For example, consider family succession if you want your beneficiaries to retain control over the company.

However, assess how the selected exit options impact the company’s long-term performance and your expected financial gain.

4. Update Your Financial Documentation

Organize your company’s financials, including updating your balance sheets, cash flow reports, and profit and loss statements.

You could outsource auditing services to keep the process transparent. This helps boost buyer confidence, enticing suitable investors to submit their bid offers.

5. Optimize Business Operations

Identify ways to maximize the value of your business to increase your expected financial gain. Some practical strategies to boost your company’s value include:

Resolve inefficiencies
Reduce operating costs to improve profitability at current capacity
Strengthen customer relationships
Improve your personal and company branding
Grow your company culture

6. Develop a Succession Plan

Outline a plan for ensuring business continuity after your exit. This includes identifying and training key personnel in the incoming management team to facilitate a smooth transition.

Also, identify ways to address possible challenges, such as cultural differences and resistance to change, which could disrupt operations.

7. Communicate with Stakeholders

Engage stakeholders about your planned exit, highlighting how it aligns with your personal goals and vision for the company. Facilitate open communication where stakeholders can voice their concerns.

This provides an opportunity to buy their goodwill, reducing resistance to the exit. For example, you can assure employees that your exit will not impact their job tenure.

8. Commence the Exit Strategy

Put your plan into action, prioritizing time-intensive steps. For example, you cannot revamp your company’s brand image one week before your exit.

This requires preparing and implementing a branding strategy that could start up to a few years before the transition.

9. Review and Improve

Update your exit strategy regularly based on changes in your personal goals, market conditions, and business performance.

For example, suppose you initially planned to retire at 65 but later decide to do it at 60. You might need to modify your exit strategy to reflect the change.

Also, consider updating your exit strategy in response to unprecedented business performance, such as a significant market share or revenue increase.

Looking to exit your business but find the process overwhelming?

Let us help you hire the best-fit team to execute the exit strategy. At Exitwise, we’ll help you set up a team of reputable accountants, investment bankers, and attorneys to make the process seamless.

Schedule a free consultation with us today!

Frequently Asked Questions (FAQs)

This section answers commonly asked questions about creating business exit strategies:

How Do You Align an Exit Plan Strategy with Personal Goals?

Here’s the best way to align an exit strategy with your personal goals:

Evaluate how giving up ownership impacts you from a holistic point of view: professional, financial, and personal.
Define your ideal outcomes, like financial independence or legacy preservation.
Next, pick an exit strategy that helps you achieve your goals.
Review your exit strategy regularly and modify it where necessary to realign it with your personal goals.

What is the Role of a Business Valuation in an Exit Strategy?

A business valuation is vital to your exit strategy in several ways:

Provides an accurate assessment of what your company is worth.
Helps you set realistic expectations when negotiating with potential buyers.
Highlights which areas need to be improved to maximize the valuation.

What Is the Difference Between a Planned and Forced Exit Strategy?

A planned exit strategy is a proactive approach where you prepare for ownership transition at near-ideal market conditions, ensuring it aligns with your professional and personal goals.

In contrast, a forced exit strategy is unplanned and is often triggered by unforeseen events, such as financial crises, health issues, or market disruptions. These events may prompt you to make rushed decisions to mitigate your losses.

Conclusion

Creating an exit strategy is the best way to maximize your financial gain and ensure the departure aligns with your personal goals. However, to achieve this, you need experts to help you streamline the exit process and ensure you get the best possible offer.

At Exitwise, we understand that setting up a winning exit management team can be challenging, whether you’re a first-time startup founder or a seasoned investor.

That’s why we streamline the process by helping you hire and manage the best exit management team. We have an expansive network of specialized M&A experts globally who can help you exit your business faster and maximize your financial gain.