What is an Exit Strategy in Business?

Business owners always plan how to start and run a business. However, this initial planning won’t automatically include what the business will do once it fails or ends. In this article, you’ll learn about an exit strategy, its benefits, examples, and why it’s important in any business.

What is an Exit Strategy in Business?

An exit strategy refers to transferring or selling ownership of the business, including a limited liability company (LLC). It provides owners a way to liquidate their stake in the business. If an LLC is successful, an exit strategy should maximize its profits. On the other hand, an exit plan should minimize losses if the company is struggling.

Take note that a business should have an exit strategy based on the type and size of the business. Examples of these include initial public offerings (IPO), strategic acquisition, management buyouts, selling to a partner or investor, liquidation, merger, or filing for bankruptcy.

Why do Businesses Need an Exit Plan?

Although you won’t use the exit strategy within one or two years, it still provides the following benefits:

Protects the value of the business

Having a thorough exit strategy helps you to maximize the value you get from your company. An exit plan also allows you to transfer ownership when the business is doing well, thereby preventing considerable loss.

Moreover, it requires you to perform a valuation of your company based on its advantages and the future of its industry.

Creates a strategic direction for the company

An exit plan facilitates a smooth transition by providing all roles within the company. In effect, no one will be confused regarding their responsibilities when you choose to exit the business.

It also informs all stakeholders and employees of the future transition processes. Hence, it serves as a security that they will not be left in the dark should you terminate the business or sell your shares.

Attracts more potential buyers

Prospective buyers will consider your business valuable due to its robust commitment to vision and goals. An exit strategy shows that you have planned for your company end to end and manifests a clear objective from the members.

Minimize potential tax impact

An exit plan helps minimize tax burdens. It enables you to choose the most tax-efficient way to transfer ownership or sell your business. You might even get more out of tax relief claims if you have a well-planned exit strategy.

How to develop an exit strategy?

The operating agreement of an LLC and other business entities should include an exit plan. Here are the factors you must consider in drafting your exit strategy::

Objectives

You should consider individual goals when creating an exit plan. If you establish the purpose of your business early on, you can naturally specify your priorities and get specific returns on investment.

Timeline

It would also help to have a time frame for the business to grow. You can plan how long you intend to be involved in the company. But take note that you should allow flexibility to have more negotiating power.

Moreover, a planned timeline ensures a smooth transition, especially since several persons are involved in terminating a business.

Intentions

You must also include what you intend to happen to the company. For instance, you may want to merge with another business, liquidate the assets after you leave, or transfer ownership to another family member.

Market conditions

Like your timeline, market conditions are also flexible. That’s why you must always revisit your exit plan regularly and adapt to current events, conditions, needs, and other changes. For example, you might have initially arranged for a merger, but suppose there are potential buyers of your business and make selling your company more profitable.

Exit planning for business owners can be challenging because there are several options available, but consider your objectives, intentions, timeline, and market conditions as guidelines.

What are Examples of Exit Plans?

Here are some common examples of exit strategies companies adopt to end their respective businesses.

Acquisition

An acquisition exit strategy involves fully absorbing a business. This means relinquishing one’s rights to run the company, including an LLC. You must conduct a business valuation to know how much your company is worth. Fortunately, you can sell the business higher than its worth if you offer it to a competitor. 

Initial public offering (IPO)

This kind of strategy is also known as your company going public. An IPO happens when a business sells its shares to the public. Unlike acquisitions, an IPO does not require you to give up your right to run the company. It can also help in business growth.

However, it requires a huge amount of money and is not a fast and easy exit strategy.

Liquidation

Liquidation is usually the last resort for business owners. It involves selling your assets on the open market and paying creditors of different debts the company has. You may choose this option when your company has no potential mergers or buyers.

The steps to liquidating your assets include preparing an inventory, estimating net sale proceeds, choosing a sale type, and hiring an auctioneer.

Merger

A merger involves uniting two companies into one entity. This type of plan usually happens between companies in the same industry, with one of them merging with the larger brand. As a result, the value of your company will increase, and it is not for businesses looking to end their terms completely.

Selling the business

It’s also possible to transfer ownership by selling your business to a colleague or a family member. Take note that you’ll need to have an accurate valuation of your LLC or property before selling it. You are also required to prepare a sales agreement with the help of a lawyer to make the sale and transition smooth.

Plan the Best Exit Plan for Your Business with the Help of Experts

Choose an exit strategy with NCH’s legal and financial experts. For more than 30 years, the business startup specialist has helped thousands of business entities worldwide. With NCH, you can create a strategic direction for your company to minimize tax impact, protect its value, and attract buyers in the future.