Exit Strategy

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Exit Strategy

An exit strategy in the business world can refer to how a person or entity will leave a firm or part of a firm behind; this can mean selling, liquidating, or in some cases, the complete demolition of an entire corporation (or a branch thereof). An exit strategy is a plan devised by a person or team within the firm—or by a consultant group—that will end the life of a product, service, or sector of a business venture. In some cases, an exit strategy refers to a plan that will enable an entrepreneur to part with a business in a variety of ways for the sake of profit and nothing else.

Ultimately, the goal of an exit strategy is to keep a firm from losing money on a product or branch that is no longer lucrative. When it no longer makes financial sense to keep an item or branch of business going, a clear-cut exit strategy must be established. Creating a good exit strategy is the responsible choice when an item is costing more than it is profiting. Experienced strategic managers will know when this time has come by looking at the numbers and making choices based on fiscal results; stake-holder input can also factor into the decision. In many cases, however, the point of an exit strategy is to sell a business for a profit and simply walk away. This type of exit strategy usually involves liquidation, acquisition, or sale to an employee or other interested, invested party.

ENDING A BRAND OR PRODUCT TYPE

Ending the life of a product or brand within a company can also mean the end of jobs or an entire division of a company. Therefore, as much consideration and planning should be done for the end as was done to begin the operation in question. In this case, providing different jobs or job training to employees who will be displaced by the cancellation of the product or division are important parts of an exit strategy. Other considerations may concern what to do with unnecessary equipment and space, and how to put together a campaign for public notice that a brand or product type will be discontinued.

ENDING OWNERSHIP

Perhaps the most popular reason for calling for an exit strategy is selling a business for profit. Most entrepreneurs sell for a profit or sell at a time when maintaining the business no longer makes financial sense. When the time comes to sell, having a well-thought-out exit strategy is important; unloading a business hastily or without a plan can cost thousands or millions of dollars or can create legal issues. The strategy used should always be approved or even drafted by legal counsel that specializes in business law. Regardless of how the entrepreneur leaves, thinking about the future and what the sale will mean should be on the top of a short list.

A business owner can leave his or her business behind in just a few ways: by sale to an employee or interested party, by liquidation, or by acquisition. Other strategies—like staying on with an extravagant salary or massive stock benefits—are not really exit strategies, as they don't cause an immediate, well-planned or even guaranteed exit. In fact, it's altogether possible to bankrupt the company this way, causing major financial upset for the owner and employees. An exit strategy should include a plan for the best future for everyone, simply bleeding the corporate coffers is not considered a strategy.

Selling Versus Acquisition. Of the exit strategies for the sale of a business, the best option for the life of the business is to sell to an employee, family, or customer. In this way the business will be preserved, for the buyer typically has a vested interest in what is best for its future. Additionally, selling to someone who already knows the business well, and who the buyer knows, will create an atmosphere of trust during the sale and will expedite the process.

Selling the business in an acquisition can mean a good deal more profit for the entrepreneur, which is a good choice if the life of the business is not a concern. Selling to an acquirer is often more lucrative because the acquirer is often a larger company and not an individual. Additionally, when negotiating price with an acquiring company, it may be easier to negotiate upward because as the process moves forward, others interested in acquisition may come along, stirring up an interest and therefore increasing the value of the company for sale. Conversely, selling to an acquiring company can lock the entrepreneur out of a specific industry (noncompete agreement) and the best interest of the company and its history are likely not major concerns for the acquirer. Selling the company becomes a question of what is more important to stake-holders: the legacy or the profit.

Emergency Exit. Sometimes a business must be sold due to a death, divorce, or other event that makes keeping it no longer possible or sensible. In this case, liquidation may be the best bet. While liquidation almost never adds up to the kind of benefit that selling outright does, it offers a fast exit with some profit for the entrepreneur. One way to avoid having to liquidate in the event of a divorce or death is to incorporate. In this way, a business is seen as its own “self,” an entity other than the person(s) who own it. A good exit strategy will include plans for what to do and who gets what in the event of a tragedy or emergency. Part of any exit strategy should include a formula for determining the company's worth, a plan for the surviving partner(s), and who will receive what in the event of a divorce.

An exit strategy should be a part of every business plan at the onset. “Begin with the end in mind,” says Steven Covey in The Seven Habits of Successful Living. Without this kind of forethought, little can be done when the end approaches. An exit strategy should always consider stake-holders, family, and employees first, as protecting them during a transition is always essential to the end goal.