In order to attract investment for your business, it is critical to set out an exit strategy to investors so they can get their money back (hopefully with a healthy return) and exit your company. The exit strategy section of your business plan should also outline your long-term plans for your business.
Begin by asking yourself why you are getting into business. Do you see yourself running your company twenty years from now, or are you interested in moving on after a few years? Are you in it for the big money at the end of the rainbow, or are you more interested in running a solid and steadily growing family business?
It is important to think through these issues and decide what you intend to do with your business before you can adequately answer the questions, and address the issues, concerning how your investor will exit your company.
Exit Strategy - Types Of Investors
The requirements of each investor will vary in terms of return and exit strategy they seek. Two examples follow:
Venture Capital – These investors look for a high return and an exit strategy of approximately 3-7 years. They work almost exclusively with companies that may go public or can be sold for a significant profit. However, keep in mind that going public is very rare and is unattainable for most companies.
Angel Investor – These investors typically are looking for a high return but are more flexible with the terms of the exit strategy. Angels are typically less sophisticated than venture capitalists or institutional investors, and will become involved in your business because of a personal relationship with you.
Here are some possible exit strategies to consider:
- Initial Public Offering (rarely realistic from investor's standpoint)
- Buyout by partner in business
- Franchise your business
- Hand down the business to another family member
- "Going out of business sale"
The following are several common mistakes found in the exit strategy section:
- Assuming you have a business with the potential to go public.
- Failing to explain how your investor will specifically recoup their investment and a sufficient return.
- Failing to take your personal goals into account when planning your exit strategy.
Completely ignoring this section in your business plan or having no exit strategy at all.
The Importance of an Exit Strategy
Small Business Secrets
Exit Strategy - Step By Step
Pen the business plan, search for investors, build the business, and figure out how your investor will cash out later - right? Well, not exactly. Investors are interested in the growth of your business, but ultimately their commitment of capital hinges upon their ability to recoup their initial investment and a healthy profit. The lack of a solid and realistic exit strategy demonstrating how investors can accomplish this goal can immediately turn off many sources of capital. Your chances of cashing in with an investor are seriously reduced without a clear definition of how they will cash out their investment.
Entrepreneurs rarely place the same level of importance on the exit strategy in a business plan that an investor would. Business owners are focused on raising the capital needed to launch and expand their venture. Solid business plans with thorough marketing, sales, operations, management, and concept analysis can, and will, fall short when little consideration is given to the exit plan.
In our experience, entrepreneurs and business owners most often list "going public with an IPO in five years" as their intended exit strategy. Although this is an optimistic and hopeful goal, this outcome normally remains just that - a hope. Providing realistic exit strategies will result in instant credibility and helps reassure investors concerned with receiving a significant return.
The book "Finding Your Wings" by Benjamin & Margulis addresses the IPO misconception, noting that, "Acquisition or buyout is the predominant method for achieving liquidity for small company shareholders. The primary method of achieving liquidity is not IPO - far from it. But the misconception remains. Too often, entrepreneurs and their business plans say they will take their company public in five years. The odds are that such an event will not occur. So entrepreneurs need to consider how that investor is going to achieve liquidity."
Because each business is different, a realistic exit plan should take into account your particular industry, business life-cycle, competitive environment, management needs, and more. It is also important to consider your personal and financial goals, and how they relate to the future of your business.
Do you value privacy and autonomy? Then an IPO, with its heavy public disclosure and extensive outsider demands, may be an unsuitable fit for you and your venture. Does building your business from the ground up excite you, but the prospect of managing it over the long haul turn you off? Exiting with a sale of your business may be your best bet, freeing you to pursue other entrepreneurial projects and allowing new owners to manage the day to day operations in the future.
Ultimately, the most effective exit plans will take into account business, personal, and investor goals. Keep in mind that the business plan is the road map for your company and a well thought out exit strategy simply clarifies a future destination when your investor can expect to reach liquidity.
Incorporating a variety of well thought-out exit strategies is typically the best approach to build investor confidence and increase your chances of successfully raising capital. .
At this point, the idea of running a small business may not seem very attractive. Don't let the negatives get you down. Running your own business provides you with a tremendous source of self-satisfaction and pride.
Most small-business experts urge prospective business owners to carefully and completely analyze their potential to succeed.
Typically, you will begin by analysing yourself as a future entrepreneur. What kind of person are you? What technical or special knowledge do you have?
Self-confidence and drive, innovative thinking, goal-orientation, and business and technical knowledge are necessary to succeed. These traits must also be tempered with realism. Knowing the limits of your own abilities and not being afraid to ask for help is imperative.
Successful people as well as business owners know what they want to achieve in life. They determine where they are going by setting goals, paying attention to details and motivating others around them. It is wise to understand and follow the lead of those successful people around you.
Starting your own business is risky.
Of all firms started, just about a third fail within one year, and half fail within two years. By five years, approximately two-thirds are gone, but after five years the rate of discontinuation drops rapidly.
Lack of management experience accounts for nearly 90 percent of all small business failures. This does not mean that all small business managers have poor management skills. More accurately it refers to the person's ability to deal with the "unknown" that is so likely to occur.
A recent example is the poor national and world economic situation. In tough times, Some small businesses are surviving it. Others are not.
Desire and persistence along with innovative thinking improve the odds. In tough times, a small business can quickly change direction by introducing new ideas and creating better methods to help move its product and sustain an adequate income.
Developing an Exit Strategy
Entrepreneurs choose to exit their businesses for a variety of reasons—personal, financial, and professional. Whatever your reasons are for exiting your business, it's important that you carefully develop your exit strategy. How you handle your exit can impact your financial well-being and sense of personal satisfaction. It can also affect those you care about—your employees, partners, and customers.
In this milestone, you'll clarify your primary reason for leaving your business. You'll then review the major exit strategies available and choose the one that works best for you. Finally, you'll identify a time frame for implementing your exit strategy.
- Action 1: Clarify Your Reasons for Exiting Your Business
- Action 2: Select an Exit Strategy
- Action 3: Determine Your Exit Time Frame
Building a successful exit strategy begins with understanding your primary reason(s) for leaving your business. These reasons will help determine your exit strategy, how you'll involve others in your exit plans, and your timing. These factors play a big part in the kind of deal you'll make when you sell or transition your business to someone else.
Sometimes the rationale to exit a business is obvious. You want to retire, your health requires that you stop working, or perhaps the chance to sell at a healthy profit is just too appealing to pass up. Whatever your reasons, a successful transition plan begins by getting in touch with what's driving you to exit the business.
Explore your reasons for exiting your business. Imagine it's 18 months into the future and you're attending a social gathering with your friends and business acquaintances. You're talking about how you successfully exited your current business. What would you say was your main reason for exiting?
Exit Strategy - Reasoning
Review the list of typical reasons for exiting a business. From the list below, pick the reason that best fits your personal and business situation. Consider your response to step 1 above. If you don't see the reason that best fits your situation, add it to the list.
- I want to start another business and I need the capital I get from selling this one to fund it
- I'm burned out; I don't have the enthusiasm I once had for this business
- I'm bored; I need more challenge
- I'm not being as successful as I want to be
- I want more time to spend with my spouse/family or on other things that interest me
- I want to leave the business to a son or daughter as my successor
- This business is successful now and I want to cash out while things are going so well and the market conditions are good
- My health is causing me to leave the business
- I'm ready to retire
- I want to relocate to another part of the country
- My business won't continue to prosper as a stand-alone; it needs to combine with other businesses to really thrive
- I've had several offers and I plan to take the next really good one
Consider your exit strategy as a form of risk management or investment protection. You might have to leave your business abruptly because of health reasons or to take advantage of another opportunity. Without adequate foresight and planning, you might leave your successor a business that's in poor condition, with inadequate records or critical decisions pending. You might be forced to sell at a "fire sale" value, leaving money on the table because you're unprepared.
An exit strategy helps you make the transition smoothly and profitably. This can be a critical step, especially if you intend to use the proceeds from selling your business for your retirement.
Your reason for exiting your business has important implications for your exit strategy. If you plan to sell your business to cash in on your investment, your exit strategy will include steps to sell your business at the right time to achieve the best price. If you plan to exit by handing your business over to a successor, your strategy may include carefully choosing your successor, preparing him or her to be successful in your business, and protecting important business relationships. By understanding why you're moving to exit, you increase the odds of achieving your exit strategy goals.
The best way to plan an exit strategy is to be proactive. Think about exiting your business as a logical evolution of being an entrepreneur. Don't wait until your business performance has declined to a level where you feel you have to bail out as your only response. Being proactive means you consider your exit as an opportunity to achieve goals that are tied to your reason for leaving. By understanding your reason for leaving, you have a starting point for choosing how you want to proceed with a sale or transition.
As you develop a personal exit strategy, it's helpful to consider what others have done. In this step, you'll review commonly followed exit approaches, examine factors that will influence how you plan to exit your business, and select the strategy that is the best fit for your personal and business circumstances.
Common Exit Strategies
Review common exit strategies. Commonly used exit strategies are listed below. Scan the list to get an understanding of some of the options you might consider.
- Sell / transition the business and play no future role in it
- Sell / transition the business while keeping an active role in its operations
- Transition management of the business to a hand-picked successor, such as a family-member
- Hire / appoint a professional manager to manage the business, maintaining your ownership
- Sell the business to your employees
- Liquidate the business by selling its assets, terminating all employees and closing the doors
Do any of these options sound right for you? Is there another strategy that you have in mind?
Consider key factors in determining your exit strategy. It helps to think about your exit strategy in the context of your personal and career goals and your business situation. Answer the questions given in each section below. Use your answers to help you select an exit strategy that's right for you.
My Personal Role
- To what extent do I personally want to continue working in the business?
- What tasks and activities (setting strategy, marketing and sales, financial management, operations, etc.) do I want to stay involved in? Do I want any future role at all?
- If asked to stay on as part of the sale or transition, would I be willing to do so? For how long?
- To what extent is continued customer support and loyalty to the business an important consideration?
- Will the business perpetuate my name or reputation after I exit?
- Does the choice of successor or buyer include considerations of how certain customers will be treated? Is this a major concern or issue that could be a "deal breaker?"
- To what extent is achieving maximum return from the sale of the business a key consideration? If I had to choose between selling at a lower price to someone who would grow the business on the same path I've established or selling at a higher price to someone who would change the focus and direction of the company, whom would I choose?
- Am I willing to be patient with the sale to obtain the best price?
- Am I willing to make tough decisions about choosing a successor who has the management skills required to keep/make the business financially successful?
- To what extent is protecting and furthering the interests of stakeholders in the business a key consideration?
- Do I need those with an interest in my business to approve my exit strategy before I move forward? Sense of Urgency
- In terms of my current personal situation and business circumstances, to what extent is it critical that my exit strategy be implemented and completed immediately or in the very short term?
- Are there considerations of health, finances, or other factors that compel an immediate exit, or can I afford to carry out the strategy over an extended time frame? Is the extended time frame best measured in months or years? To what extent is the selling price or selling attractiveness of the business dependent on a market-driven "window of opportunity?"
- If planning to transition the business to a successor (family, employee, or group) as your exit strategy, how soon will that person(s) be ready?
Select a strategy that best fits your personal goals and business circumstances. Consider the exit pproaches you've reviewed and your answers to the questions in step 2. Identify the exit approach that best matches your personal goals and business situation. Describe your exit strategy in a short paragraph.
Succession or Sale - What is the Difference?
Transferring management of your business to a hand-picked successor and selling your business to an independent third party are both examples of viable exit strategies. But there are significant differences between these two exit options.
Generally, management succession means that you hand over day-to-day operation of the business to someone you have selected. Your role in the business can vary from heavy to light to non-existent. What do you receive in return when handing over management to your successor? You keep an ownership hare in the business. Plus, you maintain influence over the future of the firm, commonly exercised through a role on the company's board of directors. The new leader hopefully grows the business and ensures your continued earnings through your share of owners' equity.
Selling your business, on the other hand, means you give up ownership and control in exchange for financial return. You might retain a financial interest in the firm as part of the sale but, more likely, you will not. The new owner might ask you to sit on the company's board, but usually when you sell your business you trade control and influence for cash.
Smart buyers often make their offers contingent upon the continued participation of the founder or key principals of the firm. This helps to ensure continuity of operations, ensures that key client or customer relationships do not end abruptly, and lowers the risk of the purchase. If the sale price of the business is based on anticipated future product development or sales, it's common for key development or selling resources to stay connected with the company. If the owner is one of these key resources, the deal might even be structured to pay out over a time period based on achievement of sales results or other specified deliverables. The seller-owner "earns out" the sale price over a period of time based on results achieved. The buyer, in turn, gains confidence that the sales or development goals will be met.
Once you've decided on an exit strategy, your next step is to select an appropriate time frame for implementing your exit plans. Some strategies require a true sense of urgency and an immediate plan of action. Others are longer-term, giving you more time to prepare and the chance to be more selective.
The unique characteristics and demands of your exit strategy will drive your exit time frame. Does your exit need to be completed rapidly so that you can take advantage of another opportunity? Or do you have a lot of time to prepare your business for sale or transition?
Some exit strategies follow a predetermined path that dictates their implementation time frame. A common example would be a succession-based exit strategy that passes management responsibility for the business to a family member who won't be ready to take on the role for another two years.
Exit Strategy - Time Frame
Select a time frame that's appropriate for your exit strategy. Consider the exit strategy you identified . What time frame fits best with that strategy? Choose one of the time frames below:
- Immediate: My chosen strategy requires that I exit my business as soon as possible. I need to develop an exit plan immediately.
- Short-term: My chosen exit strategy requires that I sell/transition the business in a matter of a few months. I need to start working on an exit plan now and begin implementing it shortly.
- Medium-term: My chosen exit strategy allows me to exit my business in the next 12-24 months. I'll begin planning for sale or transition of my business in the near future.
- Longer-term: Some of the steps in my exit strategy will take awhile to complete. My exit plans are in the "idea stage" now; I'll move toward action planning at a future point when I feel more ready.
- Indefinite: I don't plan to exit my business in the foreseeable future, but I need a contingency plan just in case I have to exit involuntarily.
Document your exit time frame. It's important to write down the decisions you make regarding your exit time frame. This will help you focus on when you need to exit your business and will remind you of why you chose that particular time frame. Be sure to document the following:
- Your exit time frame
- Your sense of urgency to get started
- The target date for developing your exit plans
A strategy that requires an immediate exit from your business will be the exception rather than the rule. If your strategy is to sell your business, you need time to set your asking price, locate quality buyers, and negotiate the deal. (More about preparing your business for sale in Milestone 3: Managing the Sale of Your Business.) Transitioning a business also takes time—time to locate and prepare your successor.
An immediate exit might be appropriate if:
- You need to remove yourself from the business for health reasons
- You receive the fabled "offer I just can't refuse"
- Your business is failing and the best thing to do is close the doors and sell the assets
- The right successor is available and you realize that you've overstayed your usefulness or have lost all enthusiasm for running the business
Some small business owners love what they do, do it very well, and are a long way from retirement. Do they need an exit strategy? The answer is: yes.
An exit strategy is a form of risk management, a contingency plan of sorts. If you were injured in an accident or died, your business may not be able to continue without you. Your family, employees, suppliers, and customers may all be counting on you to have a continuity plan. The best strategy is a combination of personal disability insurance and a management succession plan.
The best business resources to consult about your exit strategy are your attorney and accountant. If you decide to sell the business, they'll probably be involved in the transaction. Also, be sure to discuss your exit plans with your family and close friends. They can provide you with candid feedback and advice, acting as a sounding board for your ideas and plans.
The complexity of the exit plan will naturally vary from company to company. Complex exit plans will require the creation of a team, simpler propositions can be handled by the individual. Clarification of authority and responsibility is important at an early stage – how far can the individual/ team go before consultation with others? How will progress be reported? What are the milestones? Again it is important that where there are a variety of shareholders that transparency is emphasised - otherwise resistance to the final deal will be considerable.
The enterprise must be prepared to allocate the necessary time and resources to the exit plan – and this means that individuals with considerable day to day responsibilities are not the ideal choice – as the individual must be able to concentrate on making the exit plan work, and not see it as a part time chore.
Exit Strategy - Expertise and Information
The transfer of value from one set of owners to another is an area of considerable specialisation. The current management will often need specific support in key areas such as:
- Accounting (often especially in taxation planning);
- Valuation expertise (especially where there is complex IPR);
- Personal financial planning;
- Corporate finance;
- Business transfer agents;
and, we would suggest, business planning (but then we would).
At this initial stage it is vital that senior management find individuals and teams with whom they can work, and whose advice that they will accept. Such a search will be time consuming, but will provide valuable information which management can use to refine their thinking and produce a more coherent and realistic route to a successful exit. Such experts will expect the potential user to pose the following questions:
- Have you handled this type of problem before?
- What sort of valuation can we hope to achieve?
- What are the major problems that we should try to avoid?
- How long will it take?
There are also additional sources of information on achieving success and avoiding failure. Among these may be:
- Trade associations (including chambers of commerce and local business groups),
- Specialist magazines,
- How to literature,
- Business advisers (small business support services),
All of these sources of information and advice will do much to clarify which of the alternative options is likely to yield the best results based on the objectives of the key stakeholders/ shareholders. The clearer the objectives, the better the information that will be received.
Agree with key shareholders/ stakeholders on best route
An exit plan will generally involve one of four options (though there are five – the worst case being the closing down of the operation). Each of them will be appropriate to particular companies in specific circumstances. In most cases, the emphasis for the SME is likely to be in the top three – trade sale, MBO and MBI. The Ibis preference is for an MBO as it can provide a substantial level of control over the exit plan, but it has a longer time scale.
It is useful to summarise the initial findings in a chart such as the one below to focus management on the route that has the best balance between the probability of success and value.
So the exit strategy plays an important role in the business plan, especially in the eyes of your potential investors.
Exit Strategy - IPO
Sell the shares of the company to the public to be traded on a stock exchange
- Conversion to cash for investors,
- major shareholders usually maintain control,
- high potential return
- Company must have tremendous growth potential to receive IPO,
- costly process,
- uncertain outcome.
- Major shareholders may be limited as to how much, when, and how they can sell stock
Business bought outright by another existing company
- Receive cash or stock,
- often purchased by strategic partner,
- management contract can be negotiated
- Fit must be appropriate,
- potential management changes,
- corporate identity may disappear
Business bought by other individuals
- Must find willing buyer,
- normally results in new management
Join with an existing company
- May receive stock and some cash,
- resources are combined,
- current management may stay
- New partners or bosses,
- less control,
- may receive little or no cash
One or more stockholders buy out the others
- Seller receives cash,
- other owners remain in control of the company
- Seller must be willing,
- buyers must have sufficient cash to buy others
Sell business concept to others to replicate
- Receive cash,
- retain current management,
- opportunity for large scale growth
- Concept must be appropriate for franchising,
- legally complex
A strong Business Plan may not guarantee success; but it could certainly prevent failure!
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