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What is an exit strategy in business?
4 examples of business exit strategies – and how to achieve them
Do you have a business exit strategy? NASA’s Cassini, an orbiter sent into space in 1997, certainly didn’t. It collected 635 GB of data, traveled 4.9 billion miles and took over 450,000 pictures in the span of 20 years. Cassini was productive and dedicated to its mission – just like a business owner.
After a seven-year journey through space, Cassini went into orbit around Saturn and stayed there for 13 years. It explored Saturn’s rings and atmosphere, and the information it sent to NASA broadened our understanding of what kind of life might exist on worlds beyond Earth. A 20-year job is no joke, especially in today’s economy.
After 20 years of service, Cassini didn’t come back to Earth for retirement. No one ever wondered “What is an exit strategy for this mission?” It had one job, and it ended its service being crushed and vaporized as it crashed into Saturn on September 15, 2017. This is how Cassini shows the real difference between having a job and having a business. You can’t leave a job behind, but you can leave a business – if you have an exit strategy.
Will you leverage your business into future success? Or will you crash and burn like Cassini? Watch the video from Tony Robbins below on how to tell the difference between a job and a business, and what life without an exit strategy looks like.
What is an exit strategy?
Exit strategy; noun: a pre-planned means of extricating oneself from a situation that has become difficult or unpleasant in a way that limits overall losses.
A business exit strategy does not have to be unpleasant, though. It can simply mean you have accomplished all you’ve set to do with your company and are ready to move on to the next phase of your life. Your goal could be that your business achieves a certain amount of growth. Another common goal is that your business becomes both sufficiently established and marketable so that you can sell it. Regardless, your business has reached a point that it is appropriate for you to move away from it, and it is now time to act on your exit strategy. Your exit strategy business plan needs to benefit you financially and emotionally and fit in with your desired legacy.
Why do I need a business exit strategy?
Think about why you started your company in the first place. Was it so you could sit behind a desk all day issuing orders and signing contracts? Probably not. You likely envisioned how having financial freedom could make your life better. If you didn’t have to worry about money, you could travel more. You could spend more time with your family. You could pursue the interests that fulfill your soul, perhaps by giving back or learning new skills.
Your business exit strategy allows you to begin to take a step back from your day-to-day operations. It allows you to start creating a money machine that can sustain you without you setting foot in the office. And eventually, it allows you to sell your business or pass on something profitable to the next generation.
No one wants to purchase a small, unprofitable business, nor do they want to pass this type of business on. Your potential buyer wants to see a thriving company, one that has returned your investment and continues to expand. If you want to eventually sell your business and use the money to fulfill your dreams, you need to create something you can sell. That means knowing from the start that you want to sell it and knowing what a potential buyer would desire. If you don’t plan on selling it, instead leaving it to your children or passing it on in some other way, you need a business exit strategy that plans for this.
Creating an exit strategy can also help you grow your business faster and be more successful. If you are ultra-focused on selling your company, then you will set goals and make choices that will lead to the growth of your business, rather than stagnation.
Who needs an exit strategy?
In short, everyone.
But if you don’t have an exit strategy just yet, you’re not alone. Many business owners build their companies from the ground up – and then stop. They set out to create a product or offer a service to make their business talkably different, but don’t think ahead any further than that. Why would they? Running a business is tiring work. For many business owners, the thought of leaving their business is unsettling. Because of this resistance, some business owners may never have pondered, “What is an exit strategy?” and “Should I have an exit strategy business plan?” Business owners such as these are likely driven by fear: fear of letting go, fear of failing at a new business venture, fear of retirement – the potential list goes on and on.
For many business owners, the thought of leaving their business is unsettling. Because of this resistance, some may never have pondered, “What is an exit strategy?” and “Do I need a business exit strategy?” Business owners such as these are likely driven by fear: fear of letting go, fear of failing at a new business venture, fear of retirement – the list goes on.
Just as fear can be detrimental in other life situations, the same is true in this situation. Like Cassini, these business owners keep going and going, only to find that when they want to turn around and go back to Earth – or recoup their investment and put it toward what they want to do – they have no ability to do so. Their business might provide them income, but they can hardly walk away from it.
Sounds like a job, doesn’t it? If you want to be a true business owner, not just an operator, you need an exit strategy.
Types of exit strategies
There are two main types of exit strategies: a business exit strategy, for owners who want to move on or retire, and an employee exit strategy, for when employees leave the company. Both have an impact on how your business is perceived and ultimately how profitable it will become.
Business exit strategy
What is an exit strategy in business? It’s your strategy for transitioning your business to its next stage of ownership. At first, it may sound counterintuitive, especially if you are still at the beginning stages of the business. You’re pouring all you have into this new venture; making plans to exit it – seemingly abandoning it – seems like a terrible mindset for a new business owner to take.
On the contrary: While a business exit strategy isn’t like mapping out a plan for your company, it’s a critical component to your success. Most business owners have strategies to scale, to increase market share and to become profitable, but do not have a strategy to make their exit.
Employee exit strategy
Just as you need a business exit strategy when you’re ready to move on, you also need an employee exit strategy to deal with team members who resign from your company. Whether they leave because they are unhappy at work or to take on a new position that provides them the fulfillment they need, handling their exit sends an important message to your team and can help you retain or even strengthen the loyalty of your other employees.
The key to a successful employee exit strategy is to remain calm and professional, to ensure knowledge gets transferred from the employee who is leaving to whomever will take their role. An exit interview with the employee leaving, as well as interviews with those remaining in their department who are directly affected by the person’s departure, are excellent employee exit strategy tools. When you ask the right questions of both your exiting employee and those they worked with, you can use the departure as a way to improve your organizational culture.
Key elements of a business exit strategy
Your exit strategy is more than a few thoughts you had one night or a quick discussion with your business partner. It’s a written plan of action that accounts for the following:
- The date you plan to enact the exit strategy
- The business valuation you will reach before exiting
- SMART goals and an actionable plan for reaching that valuation
- All viable options for exiting the business (such as the four examples below)
- Potential buyers for your business
If you’re creating an exit strategy years in advance, know that things may change. Business triggers like changes in the economy and in your life will happen. Your exit strategy can actually help you stay on track by providing a clear path to follow – and you can always update it.
Examples of business exit strategies
To fully answer the question, “What is an exit strategy?” take a look at these four common plans and the pros and cons of each.
Exit strategy #1: Lifestyle company strategy
The lifestyle company strategy involves taking the biggest salary you can, rewarding yourself with bonuses and issuing special shares that produce very high dividends. The reasoning behind this business exit strategy is to take whatever you can from the business while it’s thriving and leaving nothing to sell once you’re ready to exit.
You can live a pretty good lifestyle and you don’t have to worry about putting a lot of thought into developing a massive action plan for growth.
You may be taxed for money you pull out and you’ll have no big pay-out when you’re ready to leave the business. You’ll also be leaving your team high and dry as your business will close when you leave.
Exit strategy #2: Liquidation
If you’re ready to call it quits and don’t owe money, you can simply close your doors and be done with the business. Liquidation is often what happens when a business fails to anticipate problems, does not have an exit strategy business plan or when things don’t go as planned, but it can be something you choose.
It’s easy and there is no need to transfer anything to new owners.
Your business ends up having no value in the end and your reputation and business relationships could suffer. Just as with a lifestyle exit strategy, your employees will be out of a job with this strategy.
Exit strategy #3: Selling to a friendly buyer
If you’ve created a business based on meaning and purpose, it’s likely that others believe in what you’re doing. When you’re ready to put an exit strategy in place, these like-minded individuals could be willing to buy it from you and continue your vision. Often, these buyers are employees, family members or colleagues. You can finance the sale over time to give them the opportunity to pay a fair market value while giving you the freedom to leave the business as they pay off the loan.
You already know the buyers and therefore less background checking is needed. You also can see your business continue to fulfill your vision.
You may end up selling it for less than it’s worth because you want to help out a friend or family member. You could also do major damage to your family or friendship if problems occur with the business and the buyer blames you.
Exit strategy #4: Acquisition
Acquisition is the most common form of exit strategy and involves finding another company to buy yours. If you seek out a strategic fit and are able to convince them of your value, you could make a tidy profit off your business.
You could get much more than what your company is actually worth, and you don’t have to worry about maintaining personal relationships with those who buy the business. Because this is the most common business exit strategy, you can find a number of professionals to help you complete the process.
Acquisitions and the subsequent transitions can be messy and uncomfortable and you may have to watch your valued employees being laid off. They can also come with non-competes or other stipulations that could make it difficult for you to start another company.
What are my next steps?
Now that you’ve reviewed the different business exit strategies, it’s time to be clear with yourself. Take the advice of business guru and marketing mogul Jay Abraham. The first thing you need to do is review your goals and priorities. Your goals for your business exit strategy may be different depending on your stage of life. Whatever your priorities may be, make sure your exit strategy is leading you toward the life you want.
Another bit of advice from Jay Abraham: Don’t value your business yourself. Instead, hire a professional to evaluate your business and all its assets to get a clear picture of its worth. This process will also help you understand which parts of your business are ripe for improvement. If you’re fortunate, you might be able to make a few minor adjustments based on the evaluation to add real value to your business before you take the next step in your exit strategy.
If your business is not as valuable as you think it could be, it might be wise to set aside six months or a year for potential adjustment. Using Jay Abraham’s internal exponential growth factors, you can potentially add real value to your business in a short time.
Now that you’ve got a clear sense of value, decide which of the exit strategies above best suits your needs. Remember, as you proceed with any deal, exercise full disclosure to potential buyers. If you withhold information, it’s possible the entire deal may fall through.
When you answer “What is an exit strategy in business?” and “Which exit strategies are the best fit for me?” you can be proactive in moving toward another stage of growth as you build your business.