Business Exit Strategy: Everything You Need To Know
As entrepreneurs, we spend a substantial amount of time thinking about positive growth and developing tactics to receive the best return on investment for our time, hard work, and capital. Yet, in the process of hustling through the daily grind, many founders often fail to properly plan for the end goal—when the time is right, how do you plan to transition out? A business exit strategy outlines the big picture for your growth goals. A robust exit strategy will help you stay on track and determines the ultimate direction of your business.
What are Exit Strategies?
An exit strategy is a roadmap to what happens when you choose to leave your business. It is a comprehensive plan for selling your business or your ownership shares to an investor, investment firm, or to another company. An exit strategy answers questions like: what methods will you use to transition ownership of your business? And, how much ownership are you willing to relinquish?
Exit strategies also outline decisions on what should happen to your business after you leave. The exit strategy you implement will ultimately affect all aspects of your business—your employees, partners, and perhaps even your company values and culture.
The Importance of Having An Exit Strategy
What do you want to do with your business after it reaches a certain size? An exit strategy is as important for startups and entrepreneurs as growth strategies. Knowing your ultimate exit plan—your end goal—can shape your decisions and help you stay on track while you are growing and building your company. Are you hoping to attract investors as you grow? Is your dream to sell your ownership stake and exit into an early retirement?
If your business is successful, selling your ownership stake can garner a potentially sizable profit. Yet, exit strategies are also vital when your business is less successful than you had hoped; a thoughtful and clearly defined plan can help you mitigate risk and recover losses. What will happen if your business fails to get off the ground?
Types of Exit Strategies
There are many different ways to exit a business and the details of an exit strategy will be bespoke to every company. In general, there are five common paths for exiting:
- Initial public offerings
- Selling to someone you know
The type of strategy you choose will depend on the overall structure and intention of your business—what is your ownership stake in your enterprise? Do you want the business to continue operating in the same way after your departure, or are you willing to pass over the reins? The answers to these questions aid in fostering a smooth and intentional transition.
Do you want to combine with another company to make a new business? Merging with another business can be a profitable exit strategy. Yet, true mergers are somewhat uncommon. In a merger, two separate businesses combine to become a new legal entity that shares resources; employees, technology, and equal leadership. More commonly than not, however, acquisition is a component of a merger—one of the merging stakeholders stands to benefit more than the others and the share of resources may not be entirely equal. Mergers may also affect your employees, as turnover is common.
Do you want to sell your business to another entrepreneur or a business? Do you want to stay on board after your company is sold? Acquisition is a common and profitable exit strategy. During acquisition, an investor, firm, or another company purchases the ownership stakes of your business. The overall ownership power of the purchasing entity is determined by the terms of the agreement—it’s up to you to decide how much of your business you are willing to sell.
Acquisitions often allow founders to stay onboard and continue to share in the success of their businesses. Selling to a multi-brand platform like Moonshot Brands provides you the unique opportunity to gain a large amount of cash upfront, gain upside in the future growth of your brand and provides your business with the expertise and resources it needs to truly thrive.
IPO (Initial Public Offering)
Do you want to open your business to public ownership? An Initial Public Offering (IPO) refers to the first time make your business available to public shareholders. However, transitioning to an IPO is often a long and arduous process. Publicly trading your company can be lucrative, rewarding, and critical for scale. However, the process also comes with high initial startup costs, requires mandatory reporting, and will reduce your overall say in the company’s direction.
Selling To A Partner, Employee, or Customer
Do you want a long payout over time? You may want to consider selling your business to someone familiar, like an existing partner, family member, employee, or customer. Selling to someone you know often involves a seller financing agreement that allows the buyer to make payments over time, rather than purchasing the business in one large payment. This process offers the seller security by supplying regular income over a fixed period.
Do you want to sell your assets and property and reclaim capital? Or, do you want to reap the benefits of your business without investing in continued growth? Liquidation is the dissolution of your business, either suddenly or slowly over time. Liquidation is a common exit strategy for businesses that have come into financial hardship, who are hoping to recover from unexpected losses.
Liquidation is also common among business owners who wish to extract resources from their businesses for themselves over time, rather than continue to grow or scale the enterprise. A solo-entrepreneur, for example, may want to simply profit from their business over time, rather than scale their business into a larger enterprise.
How To Plan An Exit Business Strategy
Planning an exit strategy is not a fast process, it requires careful deliberation and clear communication across your organization. Wondering how to get started? Here are a few general best practices on how to start to plan an exit business strategy:
- Prepare your finances. The financial health of your business is the first thing an investor or potential buyer will want to know about your business. Crunching the numbers will allow you to make informed decisions on which exit strategies may be best for your company.
- Evaluate your options. Review common exit strategies and come up with a general idea of what might be the best fit for your business.
- Talk with an advisor. A business advisor and/or an attorney can double-check your work and help you find holes in your current plans and understandings.
- Talk with your investors. Decide on how your investors will be repaid for their contributions to your business. How will your exit affect other stakeholders?
- Designate new leadership. Appoint someone to take over your leadership role in your absence.
- Plan communications with your employees. Carefully create both written and verbal communications about the change to your employees. Be transparent about your exit and clearly address how the change in leadership may affect their daily work and their job security.
- Plan communications with your customers. Decide on how you will break the news to your customers and clearly articulate what the transition will mean for them.
Planning your exit? Moonshot Brands helps founders navigate the acquisition process by working with you every step of the way. We buy e-commerce brands and grow them long-term. Besides fast, lucrative exits, Moonshot also allows founders to share in the long-term growth of the brands they built via equity, earn-outs, or other upsides. Contact us today to learn how much your business is worth.