An “exit strategy” is defined as a method by which a business owner intends to exit or get out of the business. It is a strategy to cash out the investment made so far.
Often, people wonder why they would want to exit a business which they started after undergoing so much trouble. But the thing is, it makes sense for entrepreneurs to chart out a clear exit strategy precisely because they love the whole idea of starting a business from scratch and growing it. Once the business reaches a stage where it runs on its own, it would no longer challenge you. That is the best time to cash out.
Also, venture capitalists and other investors will want to collect their return. Exiting the business is a way for them to cash out.
The following are the most common exit strategies that businesses use:
Initial Public Offering (IPO)
While this route is not suitable for all businesses, Initial Public Offering can be a viable exit strategy for some. By issuing an IPO, you take the company public. Before the Internet bubble, this used to be the most preferred exit strategy. But now the IPO rate has reduced and shareholders have also become increasingly demanding. Start-ups can still use IPO as an ex-it strategy, but only after due consideration.
Merger and acquisition
You can exit your business by merging it with a similar company or selling it to a bigger one. This type of exit can be a win-win situation for all concerned, especially when the firms can save resources by merging and have complementary skills. For a big company, buying out a well-established small company is the quickest and most efficient way to growing the revenue and increasing their market share. If you’re a small business who is doing exceedingly well, merger and acquisition can be a viable exit strategy.
Keeping the business in the family
Many small business owners do not want to give up what they built after a lot of struggle. They want to ensure that their legacy lives on by keeping the business in the family. This too can be a good exit strategy if the successor is adequately groomed. Bear in mind that there may be a lot of issues in a family succession plan because of the emotions involved. You could also sell the business to a friendly individual, perhaps a friend, who has the necessary interest and skills to scale the business.
Make it a cash cow
If the business consistently generates a lot of revenue, you can use that money to pay off the investors and keep it with you to continue reaping the profits. Find someone capable to run the business for you while you use the cash to fund your next idea. You will need to pump in some money into the cash cow so it remains healthy.
Liquidate and close
This is the simplest, but often overlooked exit strategy. Simply shut down the business and liquidate. In order to make money with this strategy, the business must have enough assets to sell and profit from. For many small businesses that are dependent on a single individual to perform, liquidation could possibly be the only option.
Plan for an exit strategy when you start the business itself. Don’t wait till you’re in trouble to think about how to leave.