Considering your Exit Strategy

An exit strategy is a strategic plan by an entrepreneur to sell ownership in a company, allowing them to reduce or settle their stake in the company and make a substantial profit if the firm is successful.

It's usually not the first thing on the mind of an entrepreneur as they start a business. However, a time comes when they have to leave the business for various reasons. Circumstances may change, or they may get an offer they can't resist, making it necessary to step down from their position.

Other reasons you might consider an exit strategy would include:

• Positive reasons like new competition, a sustained drop in profits, or an economic crisis
• Financial debt
• Health or family crisis.

When creating an exit strategy, it's crucial to remember that the business is a separate entity from the business owner. It has employees, investors, customers, accounts, and tax filings. An excellent exit strategy that works should protect all these functions and components of the business. Hopefully, it should also generate a substantial reward in profits for the owner. Exit strategies vary from business to business, so it's important to think about your needs and requirements.

Preparing for an Exit Strategy

Before you get going, ask yourself these three critical questions:

• How long do you want to remain involved in the business?
• Do you have creditors or investors you must pay off before exiting?
• What financial goals do you have in place?

The answers to these questions will come in handy in helping you choose the best exit strategy.  The process can be overwhelming and bring up emotions.

Exit Strategy Methods

The real job is deciding the best option to settle for when stepping out of your business position. The following are the alternatives you can choose from:

1. Sell to a New Owner

You may choose to sell your business buy a new, trusted owner. It could be a current employee or a member of your family. Either way, selling allows you to transition out of the business's operations without over disrupting the process. Ideally, the buyer should share your passion and vision of the business to continue your legacy.

Selling provides you with three options to complete the process:

• Private equity: This entails the sale or issuance of shares to a financial investor.
• Initial Public Offering (IPO): You may choose to sell or issue your private company shares on a public stock exchange.
• Selling to another business: You can sell or issue shares to another operating company. The option provides more value for business owners who want a clean exit at the highest possible value.

In a setting that involves a seller financing agreement, you can allow the buyer to pay for the business over time. This arrangement is ideal because:

• You can continue making money while the buyer runs the business without a huge upfront investment.
• You can stick around as a mentor while providing overall business direction.
• It provides a smooth transition for customers and employees, especially if the buyer already has a stake in the business.

However, selling your business this way may tempt you to sell it at a lower value than its worth. It may also cause financial tension if they can't pay as agreed.

2. Passing the Business to a Successor

A successor to your business can be a manager of the company or a family member. This method is ideal if you want to reduce third-party involvement. It also provides a possibility for you to exercise some power and influence over business.

On the other hand, it may be challenging to identify a suitable successor. The plan may also create strife in business or family.

3. Transferring Business Ownership Through Management

The business management can team up and pool resources to acquire the business. This option works best if you don't have a successor who can take over. It may also be your best option if your interest is to preserve the organisation's corporate culture.

The strategy requires limited due diligence since you are already acquainted with the business management. It is also a way to reward them for their long-term support throughout the business.

On the downside, the management may have limited fund access, affecting the price and terms. If the attempt by the management to buy the business fails, it could affect morale and productivity.

4. Liquidating and Closing the Business

It can be hard to bring yourself to shut down a business you worked so hard to start and grow. However, it may be the best option for you. The proceeds will go towards repaying your investors and still give you some profit.

One way to liquidate the business would be to do it over time, also known as a "lifestyle business." It works by paying yourself, investors, and creditors until the business funds run dry and you close shop.

The second option is to sell the assets and close the shop as quickly as possible. This approach is fast and easy but may limit the amount you get from the business. You also must pay off what you owe.

To develop an excellent plan, consider these steps:

• Position your finances to account for your personal and business money accurately.
• Share your intent to exit the business with your business investors. Your exit strategy should be clear about how you plan to repay them.
• Evaluate the various exit plans to see the one that best suits your financial situation in the two steps above.
• Choose the new leadership and start transferring some responsibilities as you finalize your exit plans.
• Inform your employees about your plan and be prepared to answer their questions.
• Let your customers know about your move and introduce them to the new leadership or owner. If you plan to close the business, ensure you provide your clients with alternative options.

When choosing a business exit strategy, the best is the one that fits your goals and expectations. If you want more insights to help you reach an informed decision, a consultant can help. Contact us at TMD Coaching, to schedule a consultation.