What is your Business Exit Strategy?

As part of their business plan, entrepreneurs should think of what their ‘exit strategy’ will be.

In other words, how they plan to one day remove themselves from their business completely.

A business exit strategy is an entrepreneur’s strategic plan to sell their ownership of their business to investors or another company. An exit strategy gives the business owner a way to reduce/liquidate their stake in the business and, if  successful, make a significant profit.

You may like your business to continue operating without you for the sake of your employees.

Or you may have personal goals that include getting a big pay day when it comes to departure.

No matter their goals, entrepreneurs must have an exit strategy as part of their business plan.

In this blog, we’ll discuss why you should plan for an exit strategy and the benefits of having one. We’ll also talk about the different types of exit strategies and pros vs cons of each one.

Why Plan for the End at the Beginning?

You may be asking “why would I consider an exit strategy when I’m just starting a business?”

Think of it this way: Your business is an asset, like any asset, in which you’ve invested money.

It has a revenue stream that supports your salary and possibly a distribution of yearly profit.

It should be increasing in value so when the time comes, you’ll be able to harvest its wealth.

Planning an exit strategy is the most commonly overlooked consideration of a business plan.

However, an exit strategy is a key role in determining the strategic direction of the business.

By not planning an exit strategy entrepreneurs may find their options in the future are limited.

Some founders think of their exit as the transition of their business to the next stage. In this perspective founders don’t necessarily leave the business but their role changes dramatically. 

Every entrepreneur will exit one day. Plan for this rather than letting it be planned for you. 

Benefits of an Exit Strategy

Choose an exit strategy that aligns with your goals. To prevent your company from taking an unexpected turn, you can integrate an exit plan into your business’ vision, goals, and strategy.

Just because you define your exit now, doesn’t mean you have to execute it any time soon.

You should determine the expected outcome, parameters, and results before you execute it.

Besides having peace of mind that you can exit profitably, other benefits of having an exit are:

• Protecting the value of the business you’ve built.
• Creating a smooth transition for your management team.
• Generating a potential income for retirement or disability.
• Enhancing the future worth of your business.
• Creating a strategic direction for your business’ growth.

Types of Exit Strategies

A successful business builds wealth for its owners by accumulating assets and by building future profit potential. The most common types of business exit strategies are:

• Sell the business.
• Sell the assets of the business.
• Merge the assets of the business.
• Sell shares in the business to the public.

Some entrepreneurs exit the business for reasons other than wealth, retirement, goals, etc.

Each exit strategy has its advantages and disadvantages, as explained in the next paragraphs.

These exit strategies can take your business to its next stage. As the business transitions to its next stage, you may end your involvement or remain with the business but in a new role.

Merger with Another Company

This is where your company joins or in other words ‘merges’ with another existing company.

This is common where companies want to have a bigger market share in a particular industry.

The advantages with a merger are that the business owner may receive cash and/or stock.

The resources of both companies are combined and some management may remain constant.

The disadvantages of a merger are that the new owners may have different ways of operating.

Existing staff may have less control, and blending the two cultures may be quite difficult.

For example, a merger between Heinz Co. and Kraft Group created The Kraft Heinz Company.

In 2016, it was expected to enter the one of the world’s top 10 largest food companies.

However, the deal that cost approximately $100 billion turned out to be quite disappointing.

Experts put problems down to missed opportunities due to changing consumer preferences.

Acquisition by Another Company

Unlike a merger, an acquisition is where a company is bought by another company or group.

This is quite common where a big multinational company buys out a competing smaller brand.

Similar to a merger, the advantages are that the owner receives cash or stocks for the sale.

The management contact is also negotiable for the owner to stay during the transition period.

The disadvantages are that the ‘fit’ may not be appropriate for the business or the employees.

As well as that, the identity or brand of the bought company may diminish or die out entirely.

An example of this is when Google acquired Android for an estimated $50 million in 2005.

At the time Android was an unknown mobile startup company so the move came as a surprise.

However, the acquisition gave Google the tools needed to compete with Microsoft and Apple.

Google is more than used to acquisitions of this kind, but this is one of its most successful.

Sale of the Company

The sale of a company refers to when the business is sold to an individual or individuals.

This is a rare moment, but happens, when a wealthy person wants to purchase your business.

The advantages are that the owner can receive the cash immediately or over a period of time. 

You may also have a few bids, where you have a choice of prices and visions for the business.

The disadvantages are finding the right buyer, offering at the right price, and at the right time.

Changes in ownership may also be difficult for the employees who may decide to move on.

It’s common to buy businesses. In fact there are online marketplaces for different industries.

For example, people start online businesses, build them up, and sell them a few years later.

Once you make a decent monthly income, you can potentially sell your site for 35x your MRR!

Check out my blog post where I talk about: How to Calculate the Value of your Business.

Franchise of the Company          

This is where your business concept is legally replicated by a third party to use your brand.

The company starts to expand locally, regionally, nationally, and eventually internationally.

The advantages are that the owner receives cash for each franchise and management is maintained. Franchising is a great way for a business to achieve large scale growth worldwide.

The disadvantages are that the process may be difficult, time consuming, and cost a lot.

Also, not all businesses are suitable for franchising. It tends to be food and drinks companies.

There are many franchises, the most famous and probably the most successful is McDonalds.

McDonalds started off as local burger place is California until Ray Kroc wanted to franchise it.

Not a fan of how Kroc treated the founders of McDonalds, but he eventually bought it 1961.

The rest is history. McDonalds became the most successful fast food corporation in the world.  

Employee Stock Ownership Plan (ESOP)

This is an interesting concept where employees receive shares or stock of the company over time. You tend to find this with start ups as a way to entice employees they can’t pay as much.

The advantages are that key employees are rewarded for their contributions, they receive incentives for staying in the company, and share in the profits of the company they’ve grown.

The disadvantages are that the owner can borrow funds from the plan as a loan to the company, employees may lose their shares if they leave, and the value of stock may go down.

For example, the largest ‘employee-owned’ company in the USA is Publix Super Markets. 

All Publix workers regardless of their position receive company stock after 12 months there.

Employee-owned companies are said to be more successful because their employees have a vested interest. If they perform well and the company does well, then they get rewarded!

Initial Public Offering (IPO)        

This last type of business exit is where company shares are sold to the public on the stock exchange. If you’ve wondered how entrepreneurs became billionaires, this is usually how!

The advantages of this exit are that the shares are converted to cash for investors, major shareholders get to control the company, and investors can see potentially high returns.

The disadvantages however are that the company needs high growth to generate earnings and investors’ interest. As well as that, the process is costly and the outcome is uncertain.

An example of this is WeWork, that had an insanely large valuation at its peak: $47 billion!

When it came to filing for their initial public offering, things started to take a turn for them.

Once this private company became public, its valuation dropped to nearly 1/3 in one year!

You can read more about this one my blog: The Rise and Fall of WeWork: What can we Learn?

Your Business Plan Exit Strategy

Your exit strategy is dependent on your financial plan for growth. While you might not have thought through that aspect of your exit yet, being aware of the types of exists is important.

You will want to carve out your thoughts for your exit strategy as part of your business plan. 

Take some time to take notes on the types of exit strategies that you think may work for you:

• What is your overall plan for growth?
• How will this plan enable you to obtain a wealthy harvest upon exit?
• What are your plans for going public, selling the business, merging the business, etc.?

Having these in mind will help you when you return to your business plan with a clearer vision.

If you aren’t sure, take some time to consider how long you ideally want to keep the company.

How long do you want to be involved? What will your involvement be as the company grows? 

Final Thoughts

Exit strategies are key to both the vision of the business and the goals of the entrepreneur.

In this blog, we talked about why you should have a business exit strategy and their benefits.

We also talked about the types of exit strategies, their pros/cons, and giving some examples.

If you were to ask me as to which type of exit strategy I would go for, I would say it depends:

• If I were building a high growth tech business and wanted to be a billionaire, I would go IPO.
• If I were building a lifestyle business and wanted to make 6 figures, I would sell the business.

So as you can see, there is no right or wrong answer, it is really all down to you and your goals!

Do you have any experience with exit strategies? Please share in the comments below! If you enjoyed reading, check out my blog: What is a Business Accelerator and are they worth it?

Also, if you have any suggestions for future blog topics, please share in the comments below!