Exit Strategy

Posted by Simon Rowell on 7 December 2014

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An exit strategy is an essential part of any effective commercialisation strategy which is often overlooked. A great business plan will integrate an exit strategy for investors, thus showing them that the model will result in benefits and profits for them, no matter what happens. An exit strategy can have various forms, depending on the investment, the general climate and the business. A good exit strategy, well matched to the characteristics of the business and market, will:

  • improve the probabilities of success 
  • shorten the time to exit, and
  • often significantly increase the ultimate exit valuation

A clear exit strategy is especially important before developing a financing strategy. Not all investors are compatible with the business needs and ultimate goals of the owner of the business and in such situation exit strategies can provide a good measure for testing the compatibilities. Creating a misalignment between the types of investors and the exit strategy may result in a complete failure of the company.

While choosing an exit strategy following things need to be considered:

  • How would you like to exit your company (full sale, partial sale, asset sale, initial public offering, etc.)?
  • Who would you like to sell your company to (competitor, experienced owner, family member, etc.)?
  • How long are you willing to stay on to help the buyer?
  • What is your target profit on the sale after paying off any debt?
  • Are you willing to provide any vendor finance for the buyer?
  • What are your plans for your employees?
  • What do you want to do once you are no longer involved in the company?
  • Where will your income come from once you exit the company?

Based on the above mentioned considerations there are a number of options available for you such as:

Trade Sale:  In a trade sale other players in your industry are offered the opportunity to purchase your business as a going concern. You have the option to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.  You have to be careful executing this strategy if your business will remain in operation, as staff and suppliers may get nervous if word of the potential sale of your business gets out.

Merger: Sometimes, two businesses can create more value as one company. A merger is similar to a trade sale, except one of the companies is merged into the other company after the sale occurs.  This happens where for example one business has an existing infrastructure and can service all the customer needs of the merged business, allowing better economies of scale by adding the revenues of the merged company while potentially shaving staff and infrastructure costs.  If you believe such an opportunity exists for your firm, then a merger may be your ticket to exit.   Again, care is needed in executing this strategy.

Go public:  While you may be sitting on the next Google, IPOs take much time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. However, the costs can often be covered by intermediate funding rounds.

Sell your shares: This works particularly well in partnerships such as law and medical practices. When you are ready to retire, you can sell your equity to the existing partners, or to a new employee who is eligible for partnership. You leave the firm cleanly, plus you gain the earnings from the sale.

Let it run dry: This is perhaps more of a last resort option, and may work well in small sole proprietorships. In the years before you plan to exit, increase your personal salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply close the doors and liquidate any remaining assets. With the larger income, naturally, comes a larger tax liability.

Liquidate: Sell everything at market value and use the sale proceeds to pay off any remaining debt. This is a simple approach, but also likely to reap the least return. Since you are simply matching your assets with buyers, rather than selling your business as a going concern, you may not reap any strategic value that the combination of those assets generates.