Business development · 22 December 2016

What is an exit strategy, and why do I need one?

Having an exit strategy pays off
Having an exit strategy pays off

Whether it lasts a few years or a working lifetime, small business owners must understand that business ownership is often a finite concept and it is best to have an exit strategy. In many cases, the owner’s direct involvement will cease and the business may close, or pass on to someone else.

Although it seems cynical to pre-empt the end, entrepreneurs who plan their business exit from the outset retain control over what many analysts believe is a lucrative phase of the business cycle. So, let’s look at the notion of a ‘business exit’ and consider some of the available options.

The company as a simple concept

In fundamental terms, a company is a simple input/output model. There are two possible major inputs – entrepreneurial effort and investor’s cash – yet the company’s cash value (as realised in the exit sale) is the only significant output. No matter how complex, creative or worthy the business may become over its lifecycle, the selling price on exit is the final summative assessment of the entire enterprise.

The compelling truth exemplified by the above model is that a well-planned exit strategy always pays off. So here are five possible options for selling a business:

Liquidation

As a planned option, this is the least likely. However, many businesses do simply close down with no potential buyer in sight. Though the owner can (nominally) control the process and there are no complex negotiations, this last-ditch solution often represents a complete waste of valuable assets – and a shareholder’s investment.

The ‘lifestyle’ alternative

Certain entrepreneurs may succeed in creating a business which generates a high income without a pressing need for ongoing investment. Combined with a minimalist approach to overheads and a decision to forsake growth, this clears the way for a business owner to draw a handsome salary and extract all possible cash benefits as they become available.

Provided there are no large investors – who could complain that their investment was being put at risk – this strategy will fund a lavish lifestyle. If the enterprise is planned and there is a strategy for minimising any adverse tax implications, then this model can conceivably achieve its purpose.

A friendly sale

This convenient exit strategy allows an owner to pass the business on to a trusted and like-minded entity. The usual candidates could include a family member, an employee or staff consortium, or perhaps a long-standing customer. If well planned, such arrangements can work well and allow a flourishing business to continue. Sometimes there can be an element of owner-financing involved (e.g. with a staff buyout) and family successions need to be carefully drafted to protect all concerned. Nevertheless, this method does preserve the inherent value of the company and allows the owner to gain some investment return.

A business acquisition

Building a business to make it an appealing acquisition on exit can be an effective strategy. This approach often involves ‘positioning’ your business so that over time rivals come to see your operation as a desirable ‘add-on’. Though an exit sale that starts a bidding war is good news for the departing owner, carefully planning and regular reviews are essential. For example, it’s worth noting that a niche company subsequently refused by the sole prospective business buyer may then have little inherent value on the open market.

An Initial Public Offering

A theoretical option, the Initial public offering (IPO) solution applies mainly to professional investors, well-heeled entrepreneurs and ground-breaking digital innovators. However, most businesses seeking a profitable exit will find an IPO a highly impractical distraction.

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ABOUT THE EXPERT

Adam manages all editorial content on BusinessesForSale.com as well as on all other titles in the Dynamis stable, chief among them BusinessesForSale.com. He has written and commissioned content on a wide range of business topics, producing news, comment and market analysis.

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