written by
Steve Kincanon
published Nov 22, 2023
Every business owner needs an exit strategy. The reason is simple: you can’t be guaranteed anything in life or business. Even if you do everything in your power to grow your business, unexpected circumstances can throw a wrench into your plans. Likewise, you might not want to remain in your role forever. There will come a time to pass the torch to ensure the legacy of the business you started (or the one you took over way back when).
For these reasons, experts advise aspiring or current entrepreneurs or founders to prepare their exit strategies early. Unfortunately, one study shows that 58% of businesses that plan to sell have no exit plan. Also, 90% of business owners have their equity tied up in their businesses and run the risk of losing their net worth without a proper exit plan.
In this article, we’ll explain some ideal exit strategies for business owners, how they suit your business, and essential preparations to make before, during, and after planning your exit strategy.
What Is an Owner Exit Strategy?
A business exit strategy is an entrepreneur or investor’s plan to transfer ownership of their equity or business assets to a third party, which could be another investor, company, heir, or trusted successor.
Typically, when entrepreneurs plan their business exit, they do so to get a return on their investment, choose a viable successor, maintain their company’s philosophy and goals, or simply get out of an underperforming business.
Whatever your reasons for planning an exit strategy are, when doing so, ensure you include how you wish to sell your business or transfer it to your successor, who to sell your business to, and when it’s right to sell your business. Many business experts would advise you to create a two-way exit plan: one for foreseeable events and the other for unforeseeable events.
Foreseeable business exit: Every businessperson aims to fulfill their business goals over time. In this case, you may have plans to sell your business or startup. Whatever the case, a foreseeable business exit allows you to work voluntarily to appeal to potential investors or buyers or choose your successor carefully.
Unforeseeable business exit: You need a contingency plan for events like sickness, death, recession (or going bankrupt due to market downturns), legal action, etc. Planning for situations like these helps prepare you and your business for your absence, or when finances struggle due to uncontrollable events.
That said, exit planning for business owners can come in many forms. All of them, however, fall into the foreseeable business exit (voluntary) and unforeseeable business exit (involuntary). We’ll look at them in the following section.
Different Exit Strategies for Business Owners
Some founders may launch their businesses or startups with a vision of making good returns on investment after a few years. One such example is WhatsApp founders Brian Acton and Jan Koum, who later sold their startup to Facebook for about 16 billion USD.
Other times, these founders or business owners may start a business because they only intend to nurture its success and pass it down to their progeny or go public in the future. In that case, here are some exit strategies that may apply:
Initial Public Offering (IPO)
The IPO (or initial public offering) is usually a top choice for an exit strategy for business owners, especially private startups or companies, because you can sell some (if not al)l of your stocks to early investors or companies at a favorable price. This method is popular with Web3 startups in what is called an initial coin offering (ICO).
However, an IPO comes with risks, technicalities, and paperwork. For instance, you may find it difficult to sell your stocks during a recession. Plus, you must comply with the Sarbanes-Oxley Act, which requires you to pay an underwriting fee in addition to not selling your stocks until after a lock-up period as a security protocol.
Mergers and Acquisitions (M&A)
Strategic acquisitions and mergers are another popular alternative exit strategy for business owners. Most businesses choose this method because, sometimes, they are in control of what happens after they give ownership to a third party. And if successful, they can sell the business for far more than it might be worth.
In most cases, you can keep your business philosophy, including growth goals and financial objectives, after merging with another company. A good example is the JP Morgan and Chase Manhattan Corporation merger in 2004. However, keeping your business philosophy and goals may, in many cases, be unlikely because the business philosophy of the company acquiring your business may differ from yours. Plus, market trends or shifts may require the purchasing company to adjust to clients’ demands.
Management Buyouts (MBO)
In the previous point, we mentioned that with M&A, you could maintain your business’ philosophy and goals, though this may be unlikely. If you are big on keeping your company’s philosophy and goals, then MBO is usually a fair trade.
In this type of exit strategy for business owners, you can sell your company stocks to members of your management or board because they likely understand your company’s philosophy and how to run it better than anyone else. An example of this is the management buyout of The Virgin Group’s Virgin Megastore UK in 2007, which was later rebranded to Zavvi in 2008.
Meanwhile, you can sell or transfer your business ownership to family members or a successor if you’re still uncertain about management being true to their promise.
Family Succession
Transferring ownership to an heir or trusted family member is a great way to maintain and control your business ideology and philosophy. To take this route, you must prepare your heir to take your place and do the job effectively. An example of a company with this exit strategy is Walmart. About half of Walmart's stock is held by seven heirs of founders Sam Walton and his brother James.
Like every strategy discussed so far, this one has its challenges. Your heir or proposed successor may have a different business ideology from you or may not even be interested in running the family business. If things turn out this way, it becomes a problem for you and may result in running the business down or an eventual sell-off through IPO or MBO.
Liquidation
While an IPO is a holy grail exit strategy for business owners, liquidation is usually the final bus stop for a failing business. A business heavily in debt will seek to sell off its holdings or equity to pay off its debt. However, if the business’ equity is not liquid, it can declare Chapter 7 bankruptcy so its creditors can relieve it of its debt.
Many things can cause a business to get to this stage where it considers liquidation an exit strategy. Some include fraud and embezzlement, poor bookkeeping, legal disputes, competition, etc. Planning your exit strategy early and getting expert advice will help you exit the business while the day is still young.
Preparing Your Business Exit Strategy
Because of the uncertainties surrounding the business world, you must prepare your business exit strategy from the start. Doing so helps you to make logical decisions. Here are a few tips for preparing your business exit strategy.
Prepare Your Legal and Financial Documents
If you own the business, you must prove it has an “exit by owner” plan using the right corporate and legal documents. So you must get all your business particulars ready. These particulars also indicate that you’ve passed all the legal and financial requirements to run the business.
Your legal documents include corporate and mortgage documents as well as records of legal internal and external disputes. On the other hand, your financial documentation should comprise your account records, including your periodic expenditure, revenue, and profit records. You should also include your employee records, such as salaries, bonuses, promotions, etc.
You want to make sure your financial and legal records are clean. No one wants to buy a company or business in debt or one that has serious legal issues or documentation errors. All these could reduce your business’s market value.
Get Expert Legal Advice
If you know your bookkeeping and legal records are not clean, or you’re not confident about them, hire external experts such as business consultants, certified public accountants (CPA), M&A advisors, or CFOs or CMOs with good track records to help out. You may also want to seek counsel from venture capitalists who have experience in how to sell or invest in startups or businesses.
Above all, ensure you have a legal team for your business. At the end of the day, you cannot have a smooth transition without your legal team or their advice. For example, note how lawyers came through during Elon Musk’s 44 billion USD Twitter takeover deal, which almost turned sour after some disputes with Twitter’s management over the platform’s spam and bot information. Since Twitter had a legal team on the ground, Elon Musk couldn’t go ahead with his plan to back out, and everything was resolved.
Get Ready to Pay Exit Taxes and Fees
When developing exit strategies for business owners, professionals always strive to inform entrepreneurs that selling a business is not the same as selling a product. As a matter of fact, it costs money to actually sell your business. There are the fees you pay to your attorney, accountants, expert advisors, brokers, banks (underwriting fees), and even miscellaneous fees that come with selling your business. Moreover, even if the deal doesn’t go through, you still have to pay these personnel for their services.
Taxes are another thing to consider. Selling your business is treated as income, which is taxable. Importantly, taxes differ from one place to another, so you must acquaint yourself with the tax system of your country—first as a business, then as the seller of the business.
Some professional services will want to be paid on commission; others may want to earn from the buyout clause. You must seek advice from as many investors as possible or ask your colleagues before hiring professional services.
Timing Matters
Above anything else, the timing of your exit matters, which is why you need a two-way exit strategy, as explained earlier in this article. In a situation where you have a sudden financial downturn due to the loss of a supplier of a particular raw material or the exit of a crucial investor, then you should consider one of the above-mentioned exit strategies for business owners.
The timing of your business sale could play a role in its market value. For instance, selling your business or doing an IPO after a recession or financial downturn has badly hit you will return little value for you. Either wait for the recession to pass and seek alternative methods to sustain your business or settle for whatever fair market value you find, which may not be favorable.
However, planning ahead of time using a two-way strategy can help prepare for future occurrences like these and possibly clarify when it’s right to exit the business.
Making Your Final Decision
Before making your final decision, ensure it’s what you want. Selling your business isn’t done in a day—not for you or your potential investor or third-party interest. So take your time to think things through and be sure you've consulted everyone you need to.
Most times, when the buyers are pressuring you to sell, it may be an indication that you're about to make an unfair deal. At other times, it may simply mean that the buyers have more than enough funds to invest that they don't want any delay. However, with your trusted legal team on speed dial, you should know the right step to take.
Execution and Transition Planning
When Elon Musk took over Twitter (now “X”), he laid off some workers he believed didn’t comply with his business principles. That’s one of the downsides of transferring ownership of your business to a third party—you get little or no control over your business or company afterward.
However, you may resolve this at the negotiation table with your legal team. While this is highly unlikely, you can always set a good philosophy for your company so that the third party buying it sees reasons to abide by this philosophy. Also, this will work best if your company or startup is in good shape.
Get Help Developing Your Exit Strategy
Exit planning for business owners shouldn’t overwhelm you. All you need to do is answer the important questions about your business—clearly defining your business goals, roadmap, and structure. After deciding where you want your business to be in the long term, you can then plan how and when you intend to exit it. Surprisingly, you could even receive a purchase offer without listing it for sale.
Getting ill-informed business valuation and advice can lead you down the wrong road. Fortunately, at Foreword Companies, we specialize in exit strategy planning for business owners. You don’t have to worry about making the right choice; we’ll guide you through it all—including managing crises, securing deals, business valuation, etc. Schedule a call with us now to get started.
