Business Exit Strategy – What Is It and Why Do You Need One?

Nothing excites an entrepreneur more than seeing the successful fruition of his idea. As much as it thrills you to see your business thrive, you also need to plan for a proper exit strategy to account for the days when you might no longer want to run your business.

What is a business exit strategy?

Investopedia defines exit strategy as “the method by which a venture capitalist or business owner intends to get out of an investment that he or she has made in the past.” It is a detailed plan of how you will leave your business, or sell your company.

A sound business exit strategy ensures that you have a plan for unforeseen events and for successful transfer of ownership of the business when it’s time for you to retire.

 

Why do you need an exit strategy?

Yes, we get it. Your business is your baby and you wouldn’t even dream of giving it up. But even if you’re not thinking about selling your business now, you still need to plan for how and when you will be moving on. In the end, you simply will have to do any of these – sell, transfer, close down the business, or die.

Here are some good reasons why you need to seriously think about an exit strategy.

To provide a solid plan for the future

An exit strategy can provide for the future. When you start running a business, a number of people come to rely on you and the success of your company. Your family members depend on you to maintain their lifestyle, and your employees for their livelihood. An unfortunate event of your disability, death, or personal bankruptcy, can turn out to be quite tragic for them. An exit strategy will make sure that the business will continue in your absence and provide for your future as well as those of others who rely on it.

For start-ups to attract the best investors

Start-ups must particularly pay attention to creating an attractive exit strategy because venture capitalists are very interested in this section. To attract good investment for your business, it is important to supply a safe exit plan to investors so that they can exit your company with a healthy return. Venture capitalists typically look for an exit strategy which gives a high return within about 7 years. Angel investors may be more flexible and probably invest because of a personal relationship, but they will still expect some significant return within a particular time period.

To let you know when you need to quit

Sometimes, despite your best efforts, your business may not flourish. It can be tempting to keep pumping money into it hoping for better results. But there are times when it is better to pull the plug. An exit strategy is a way to plan for this contingency well in advance. When you have clear milestones to achieve, it will help you gauge how well you are doing and whether you’re going better or worse than what you planned for. When it is time to quit, you will know it and the exit strategy that you formulated earlier will tell you exactly how to do it without burning your fingers.

To motivate you

It is not easy to run a business. The going can get very tough at times. But knowing that you’re working toward a specific goal can help put things in perspective even in times of crisis. Things may seem to go wrong, but you can calmly do what you need to, knowing that even if nothing works out you still have a safe exit.

 

Exiting the business is not as simple as you not turning up for work one fine day. The IRS guide to closing a business will tell you exactly what you need to do as you close down.

Of course you do need to remember that even the best laid plans may not come to pass exactly as intended them to. Be flexible, and don’t be married to your plans if they no longer suit your purpose. During the course of running your business, you may want to review and modify your exit strategy. Planning for a good payday will give you a solid goal to work towards and motivate you to make it happen.

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