“Begin with the end in mind” is the second of the seven habits of highly effective people Dr. Stephen R. Covey defines in his bestselling book. The habit is based on the principle that all things are created twice: once in your mind and once in the physical world. This article will discuss the significance of having an exit strategy in place when embarking on a business ownership journey. A good business exit strategy can keep you focused, accelerate value creation, and help you reach your goal sooner and more efficiently.
An exit strategy is an important consideration for business owners, but owners often overlooked it until significant changes are necessary. Without an exit strategy that informs business direction, business owners risk limiting their future options and reducing personal wealth. To ensure the maximum value creation for yourselves, have your exit strategy in place before facing the Dismal Ds.
What is a business exit strategy?
A business exit strategy is an owner’s strategic plan to sell his or her ownership in a company to investors or another company. An exit strategy defines a way for a business owner to reduce or liquidate his stake in a business and, if the business is successful, build substantial wealth.
Many owners often think of an exit strategy as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward the owner’s long-term strategic goals. A good business exit strategy enables a smooth transition to a new phase, whether that involves re-imagining business direction or ownership, or pivoting for new challenges.
A fully formed business exit strategy takes all business stakeholders, finances, and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business, provide a foundation for the future, and acknowledge tradeoffs in the process. For small private business owners, a good exit strategy also addresses the owner’s aspirations, including personal and financial goals.
If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes. A key aspect of an exit strategy is exit planning and business valuation, and there are specialists, like Rimonark Advisors, that can help business owners examine a company’s financials to determine a fair value.
About the author
David Qu is a mergers and acquisitions expert and a strategic advisor with broad practical business experience in various industries, markets, and business functions. He gained expertise from decades of hands-on operational training, management consulting, and senior corporate M&A executive roles with well-known global companies. As a trusted partner and expert advisor to his clients, he brings strategic insights, practical expertise, business management know-how, and execution blueprints to help you maximize the value from the sale of your business. Contact us to learn more.
Six Benefits of a business exit strategy
Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals. Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:
1. Vision alignment & greater buy-in
A strong exit strategy includes a clear vision statement that is in correspondence to the value of your business. Once written down and communicated, they enable greater team alignment and buy-in to the business mission. The results will help establish a company identity and culture and accelerate value creation.
2. Better focus and productivity
With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes. This helps business owners better prioritize resources, maintain individual and team focus, and achieve higher productivity regardless of near-term distractions or challenges.
3. More attractive business to buyers
Potential buyers will place value in businesses with planned exit strategies and performing company culture because it demonstrates a commitment to business vision and goals. This is an intangible capital, a by-product, of having a clear exit strategy. The more attractive businesses are the higher multiple buyers willing to pay as business owners exit.
4. Identity & purpose beyond your business
Executing an exit strategy helps owners see through business — and personal — goals after exit. The process of creating a business exit strategy separates the business identity from that of the owner. This is often overlooked by many people, but more relevant for business owners. Successful execution of a business exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like having cold feet at closing, seller’s remorse, or loss of purpose post-transaction.
5. Faster and more timely business exit
Leaving your business can be emotional and overwhelming, and developing a proper exit strategy requires diligence in time and care. It also requires an in-depth analysis of finances and readiness. A strong exit strategy gives measurable value to inform the best-selling conditions for your business. When those conditions are reached, you can be ready to capitalize on them immediately. However, no one can control external factors such as the market cycle, economic conditions, or a pandemic. Only owners who are better prepared can better capitalize wealth on the full potential of their businesses when exit opportunities present themselves.
6. Fruitful and confident transitions
Exit strategies detail all roles within a business and how responsibilities contribute to operations. It is an essential element of “working on” the business instead of “working in” it. With every employee and stakeholder well-informed, transitions will be clear and expected. Also, strong exit strategies better prepare owners’ readiness for the inevitable transition.
What are the business exit strategy options?
Sooner or later, every business owner exits their business eventually, 100% guaranteed. exiting your business in an orderly and controlled manner will help you maximize your business value and wealth. It takes serious time and financial commitment to do it right, and you don’t want to rush it. There are generally eight primary options for a business exit strategy – four external options and four internal options.
Four External business exit strategy options
E1. An Initial Public Offering (IPO)
An IPO refers to the process of offering shares of a private corporation to the public in a new stock issuance. IPOs are often seen as the holy grail of exit strategies since they often bring along the greatest prestige and highest payoff. It is a valid exit option, but one that is not realistically available for most lower to middle-market businesses. Hence, companies successfully exit with an IPO are often considered unicorns.
- Raise sizeable capital
- Reduce company debt
- Maintain company brand & identity
- Attract & retain employees
- Fund M&A transactions
- Time consuming process
- Significant time commitment
- High underwriting fees (4-7%)
- Public information scrutiny
- Risk of failure to complete
E2. Sale to Third Party
Selling to a third Party is when you sell your business to an individual buyer, financial buyer, strategic buyer, or private equity group through a negotiated sale, controlled auction, or unsolicited offer. With 90% of business owners’ net worth typically tied up in their businesses, this is often the most viable exit option for many. However, the process and diligence needed are high as well. Advanced preparation with clear goals is a key success factor here.
- Highest sales price, except IPO
- Cash upfront & cost effective
- Good deal term stability
- Walk away cleaner & faster
- Break management & family deadlocks
- Long-process (9-12 months)
- Distractions & loss of focus
- Privacy concerns
- Emotional for owner
- Can be difficult to close
recapitalization is the process for business owners to sell a minority or majority of ownership position externally by finding new ways to “fund the company’s balance sheet”. This process essentially brings in a lender or equity investor to act as a partner in the business. As a result, the owner converts company ownership into liquid assets, cash in most cases, at an agreed business valuation. A negative byproduct of this option is owners typically lose control of the business at some level.
- Partial exit
- Lower owner risk – diversify assets
- Provides capital for growth
- Second bite at the apple
- Works well with other exit options
- Continuing accountability to partners (not a clean break)
- Loss of control
- Leadership and company culture shift
- Expensive relative to benefit
E4. Orderly Liquidation
Orderly liquidation occurs when a business is shut down through a simple, quick process, where all assets of the company are sold off, typically below market value. This approach makes sense if asset values exceed the ability of the business to produce the income required to support an investment.
- Valid option when asset value exceeds value of going concern
- Sum of the parts is greater than the whole
- Efficient way to exit
- May be less costly than other exit options
- Uncertain proceeds – no guarantees
- No value for goodwill or intangibles
- Emotional Stigma
- Hard to predict costs
- Harmful to employees and community
Four Internal business exit strategy options
I1. Intergenerational Transfer
An Intergenerational transfer is when owners choose to transfer business stock to direct heirs, usually children. About half of all business owners want to exercise this option; in reality, only about 30% do so.
- Business legacy preservation
- Planned exit with more control
- Lower cost
- Less business disruption
- High buyer/seller motivation
- Complexity of family dynamics
- Lower sale prices
- Illiquid buyers or lack of funds
- Key employee flight risk
- Path of least resistance (but not always best paths for growth)
I2. Management Buyout (MBO)
Management buyout occurs when owners sell all or part of the business to the company’s management team. Frequently, management uses the assets of the business to finance a significant portion of the purchase price.
- Best for business continuity
- Highly motivated buyers
- Preserves key human/knowledge capital
- Planned exit with more control
- Can collaborate with PEs to access capital for growth
- Management “Sandbagging”
- Business distraction
- Threat of flight in the process
- Lower price and unattractive deal terms for seller
- Heavy seller financing presents risks
I3. Sale to Existing Partners
a sale to existing partners is when owners sell their share to the remaining owners in a company with multiple owners. This option is not available to single-owner businesses.
- Less Disruptive to business
- Planned exit
- Well informed buyers
- Lower cost
- Controlled process
- Lower sale price
- Potential discord among partners
- May have competency gaps
- Buy-sell may restrict selling options
- Realization of proceeds is slower
I4. Employee Stock Ownership Plans (ESOP)
Employee Stock Ownership Plans allow a company to acquire shares from the owner using borrowed funds and contribute the shares to a trust on behalf of the employees.
- Business stays in the “extended family”
- Tax benefits to buyer – pretax purchase
- Potential tax defer benefits for shares sold
- ESOP is an employee benefit
- Employee to think and act like owners
- Generally suitable for gradual exit
- Complicated and expensive
- Requires security registration exemption
- Company compelled to buy back shares from departing employees
Considerations for your business exit strategy
Have a clear purpose
When choosing which option is best for you to exit your business, owners must make decisions that require tradeoffs. None of these options are perfect. ESOP and intergenerational transfer may better preserve a company’s legacy and culture, but they often lead to lower selling prices or personal wealth for the owner. Having a clear purpose statement can better guide owners in the decision process. This is also the key difference between an exit strategy and an exit plan.
An Exit Strategy vs. Exit Plan
An exit strategy requires researching the exit options, evaluating the tradeoffs, and making informed decisions. Strategy is about making difficult choices aligned with the owner’s purpose. Business exit strategies are inputs to exit planning. Exit planning is a process that helps owners outline actionable steps to achieve their purpose. The resulting exit plan is a roadmap, or execution plan, that guides owners’ short-term activities and investments. Both exit strategies and exit plans should be visited periodically, with plans visited more frequently.
Fortune favors the prepared mind
As Louis Pasteur said, “Fortune favors the prepared mind.” Opportunities come and go, but most owners cannot differentiate the good ones without preparation. We often see owners sell their businesses after receiving a solicitation offer and leaving value on the closing table. On the contrary, owners with a clear exit strategy are better equipped to assess the offer’s attractiveness against their purpose. Hence, preparation increases the probability of luck.
Timing is a double-edged sword
Developing your exit strategy and plan requires a sizeable investment in time and resources. Many business owners think they have plenty of time or delay the decision to define their exit strategy. Results could lead owners to miss exit opportunities that negatively impact their wealth. Opportunity examples are:
- exit at peak of an industry/market cycle
- exit in a good economic environment favorable for sellers
- exit when a buyer presents an attractive solicitation offer, and immediately recognize it
On the contrary, owners who are better prepared can capitalize on the timing of these opportunities immediately.
Where do you start with an exit strategy?
Once you are convinced of the value of having an exit strategy, you may ask how to get started. The answer can be found in three simple steps. The first and foremost is to work with a professional advisor who is an expert, like Rimonark Advisors. Every year, large enterprises spend tens of millions of cash to hire management consultants and investment bankers for similar purposes. These professional advisors like, BCG, Mckinsey, and Goldman Sachs help executives create strategies and execution plans to increase shareholder value. Why should you short-change yourselves and your wealth by not working with an expert?
Business owners have several options when engaging professional advisors to start the process. They can start with their accountants, lawyers, financial advisors, business consultants, etc. However, it’s important to engage Certified Exit Planning Advisors (CEPA), like Rimonark Advisors, who are trained in the process. Creating exit strategies and exit plans requires specialized skills and expertise. Furthermore, CEPAs know to work collaboratively with your extensive advisory team to best serve your interests.
The Bottom Line
Having an exit strategy and exit plan in place means you have the end in mind, which is the second of the seven habits of highly effective people. Regardless of where you are in your business ownership journey, a strong business exit strategy and plan help you stay focused on your vision and goals. More importantly, it helps you prepare for the inevitable event and better capitalize on a fruitful transition when opportunities present themselves.
The benefits of having an exit strategy are many, including vision alignment, greater buy-in, higher productivity, more attractive business to buyers, achieving confident transitions, reaffirming purpose beyond your business, and faster and timelier exit.
Among the eight exit strategies options, four are internal and for our external options. To determine the best options for you, it is best to consult your certified exit planning advisors, like rimonark advisors, to get started. Connect with us to learn more about exit strategy and how it can help prepare you for a successful exit while extracting the maximum value from your business to build generational wealth.
About Rimonark Advisors
Rimonark Advisors is a client-centric mergers and acquisition advisory firm based in Cincinnati, Ohio. We help clients maximize wealth through business growth advisory, business sale preparation (exit planning), and business sale transaction services. We are here to help our clients get ready for a successful business sale, get the most value, and achieve fruitful confident transitions for themselves, their families and their stakeholders. Ultimately, we help clients harvest years of hard work by unleashing business cash flows and converting them into generational wealth. Contact us to learn more.
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