A successful transition requires planning, so having a business exit strategy means an exit can proceed with certainty.

What is an exit strategy in business?

A business exit strategy is a plan executed by an investor or business owner. The goal may be to liquidate assets or a financial position once certain criteria are met, exit a non-performing investment or business, or move on once the company has met its profit objective. Business owners may retire or there may be other reasons, legal or personal, for leaving. 

Having an exit strategy ready to act on can minimize risks and maximize profits on an investment. Exit strategies may vary for startups or established businesses. 

Successful startups may go through an initial public offering (IPO), acquisition or buyout. Established businesses may plan for family succession, selling to a partner or investor, or mergers and acquisitions. Failing companies may undergo liquidation or bankruptcy.  

An exit strategy is a business owner's plan to sell ownership of the company, secure their financial future and preserve the value of the business. It outlines the process of reducing or liquidating ownership and (ideally) making a profit and leaving a legacy. 

Dive deeper: How to plan for a business exit

8 different business exit strategies with pros and cons

There are eight common exit strategies that are suitable for entrepreneurs, startups, and established business owners.  Ultimately the best one will depend on your financial, personal and business goals. 

A business exit strategy should optimize profit, minimize loss, and ensure a legacy. Each exit strategy has pros and cons.

1. M&A deals

A merger or acquisition is a strong exit option for any company owner, in a range of industries. Selling the business allows owners and investors a clear exit date, or the opportunity to remain in the company following the acquisition. An acquisition or merger can focus on real estate assets the company owns, intellectual property it holds, supply chains or other attributes that are desirable such as a strong sustainability strategy. 

Advantages of a merger or acquisition

During a merger or acquisition, owners can remain in the business, leveraging the talent and opportunities of the buyer, or exit the company with a profit. Owners can negotiate the value of the business with an organized due diligence process that showcases the business value. It’s often recommended to have the company externally valued before beginning M&A discussions. 

M&A can be a lucrative option that remunerates owners or shareholders. A rival company may be interested in the deal to increase market share, acquire technology or intellectual property or reduce competition. If there are multiple bidders, competition may push up the sell price. 

Disadvantages of M&A as an exit strategy

M&A processes can be time-consuming and costly and deals often fail. A merger or acquisition may not suit an owner looking for a quick exit, or with minimal time to dedicate to the deal process. Due diligence can be time-consuming and must cover all regulatory considerations, including anti-trust laws. 

Preparation and project management tools in Ansarada Deals™ can streamline processes and ensure deal readiness. Adopting an ‘always on’ readiness for due diligence can help a company exit smoothly, with the optimal valuation. 

2. Selling your stake to a partner or investor

Individuals can exit a business by selling to a partner or investor who has involvement in or an understanding of the company. This allows the business to run as usual, with minimal disruption to customers or suppliers. The ‘friendly buyer’ refers to someone who is known and trusted, often an existing partner or investor.

Advantages of a ‘friendly buyer’

The company can continue to run with minimal disruption to business as usual, keeping revenue streams steady. The buyer may already have a vested interest in the company and demonstrate commitment to its long-term success, ensuring the legacy of the company.

If the prospective buyer is thoroughly familiar with the business, the sale may be accelerated, with a shorter due diligence process. The total cost of selling may therefore be lower. 

Disadvantages of a ‘friendly buyer’

This strategy works best with an existing partnership or multiple business owners, and the buyer/s are interested in increasing their stake in the company. The business may sell for a lower price (a ‘mates rate’), however, this discount will be offset by lower costs of selling.

3. Family succession

The family succession exit (or legacy exit) keeps a profitable business ‘in the family’. Commonly used for small or privately owned companies, planning for a family succession is no less important than any other type of exit. This is an appealing option for those who want to pass down their company legacy to a child or family member with the knowledge and skills to run the business effectively.

Advantages of family succession

A family member may work within the company, or be employed outside the business to gain skills and experience that prepare them for leadership. As the new owner has a close connection to the daily business operations, the exit process can be smooth for employees. The person exiting may advise or consult after exiting to ensure their legacy and to provide support to the successor. 

Disadvantages of family succession

Family succession may not be possible if children or other family members are not passionate and interested in the business. However, the owner/s may select another close individual to take over the business and continue the legacy.  

4. Acqui-hires

Acqui-hires is a unique business exit strategy where a company is bought primarily to acquire talent, rather than for its products, services or assets. This type of acquisition benefits skilled employees, by providing employment opportunities and career growth after the business is sold, and it’s a popular exit strategy in the tech industry. 

Acquihires is a strategy that any business with unique talent or experience might consider, for example, a geotechnical engineering company operating in a unique geographical environment may be sought after for the expertise of its engineers and laboratory team. 

Advantages of acquihires

A business exit through aqui-hiring enables companies with unique expertise to find a practical exit that does not require extensive restructuring.  Employees will enjoy a more certain and successful future.

Disadvantages of acquihire

Aqui-hiring might not provide high financial returns associated with other exit strategies. 

5. Management and employee buyouts (MEBO)

A management and employee buyout is a type of corporate restructure where management and employees join to acquire an existing company. This strategy is an exit plan suitable for business owners, or as a route to take a public company private. 

Those already working within the business gain a sense of ownership increasing loyalty, motivation and commitment to the business. 

Advantages of management and employee buyouts

Management and employee buyouts can be streamlined and occur quickly, with the proper forward planning. The handover process should be less complex as the new owners are familiar with the business. Continuity of management helps to maintain the company culture and operational efficiency. 

Supplier relationships and customer service can continue without interruption and the legacy and purpose of the company continue. There can also be tax benefits to a MEBO, though it is important to ensure the buyout is conducted at fair market value. 

Disadvantages of management and employee buyouts

This exit strategy is only possible if the interests of management and employees align, requiring careful planning and negotiation. There’s always some risk when management changes and planning well in advance can ensure a smooth transition.

6. Initial Public Offering (IPO)

An initial public offering (IPO) is a significant business exit strategy where a private company transitions to become a publicly traded entity by issuing shares to a public stock exchange. An IPO gives the investors, owners, and the CEO the most prestige and often the highest payoff. However, the due diligence and regulatory requirements for an IPO can be extensive and expensive. 

High regulatory costs,  shareholder scrutiny and public pressure may mean owners prefer to keep the company private and pursue M&A as an exit strategy.

Advantages of an IPO

An IPO brings prestige and profit to business owners and investors. This strategy is seen as the holy grail for startups. An IPO can bring a high valuation and provide access to a large pool of capital that can be used for expansion, research and development, debt repayment and strategic acquisitions. The profile of the company rises, which can attract more customers and talent. IPO also gives existing shareholders liquidity

Disadvantages of an initial public offering

An initial public offering requires extensive due diligence and regulatory compliance. Public scrutiny for shareholders, regulatory bodies and the media add an additional layer of complexity. As shareholders gain influence over operations, management may have less control over long-term strategic planning and ongoing operations. 

Preparing for an IPO requires the highest level of organization and preparedness for full transparency. Using a streamlined workflow like Ansarada Deals™ helps to reduce the workload and provides complete oversight and control of the intensive due diligence process.

7. Liquidation

Liquidation provides a quick exit and cash to pay off debts. This exit strategy is typically used by failing businesses, or companies with significant assets but no buyer. Liquidation is one of the most final exit strategies, whereby the business is closed down and all assets sold off. Any cash earned must go toward paying off debts and shareholders (if there are any).

Advantages of liquidation

Liquidation ends the business operations. This can be a simple and rapid way to wind up a business for a fast exit. It allows the company to wind up and debts to be paid off, potentially saving the reputation or credit score of directors. 

Disadvantages of liquidation 

Liquidation is an exit strategy with limited financial returns and which disrupts employee and supplier relationships. The earnings on a liquidation are often limited to the asset value, including property, equipment and possibly a client list. Employees must seek new employment, supplier relationships are terminated and customers will seek solutions elsewhere. 

8. Bankruptcy

Bankruptcy is a last resort for failing businesses. Filing for bankruptcy will result in assets being seized and will impact owners' or directors' credit, but it will also relieve any financial debts.

Advantages of bankruptcy

Debts and responsibilities of the business are extinguished and the business is wound up.

Disadvantages of bankruptcy

Bankruptcy may negatively impact directors' reputations and owners' ability to access credit in future business endeavors.

Why do you need an exit strategy business plan?

A well-planned exit strategy helps owners and investors follow a defined plan to minimize potential risk and maximize profits. From setting goals, ensuring sustainability practices to maximize valuation to preparing for material events, an exit strategy informs decision-making. 

During times of economic uncertainty, an exit strategy, and exit strategy provides clear goals and timelines. This proactive approach helps to maintain stability and ensure the business is positioned to adapt to fluctuating market conditions. 

An entrepreneur should develop a business plan with an exit strategy early. Targets, goals and timelines can be crafted around this exit plan. 

Established companies should also undertake business exit strategy planning. The exit strategy should be reviewed periodically for suitability against changing business circumstances. 

Succession planning

Many businesses aren’t prepared for generational change, providing an opportunity for mergers and acquisitions as an exit. Planning for family succession or having a clearly defined M&A strategy can alleviate risk, optimize the sale value and ensure a smooth exit process.  

Confidence in decision-making

Exiting a business where there is no pre-defined plan in place can be stressful. The best way to ensure a lasting legacy, optimal profit and a smooth transition is to plan the exit, from due diligence to the goals of the exit, ahead of time. 

Certainty during change

Unplanned events may prompt a business exit. Whether this is a health, financial or legal matter, an exit strategy provides a plan for the transition. A defined exit strategy provides certainty for owners, employees, staff, suppliers, and customers. 

Setting goals

Startups or established businesses may time an exit on reaching defined targets. This helps the company to plan how to organize operations to meet these targets within the set timeframe. The target may be a particular revenue, reaching a research and development milestone, or customer volume. 

How to plan a business exit strategy

The right business exit strategy will vary for startups and established businesses depending on the health of the business, the industry, market and the suitable buyers. 

Planning ahead is key — mergers and acquisitions or an IPO take time and require extensive due diligence. Businesses should have a best-case and worst-case exit strategy available.  

Things to consider when selecting an exit strategy include: 

• How much control owner/s want to retain over the business
• The health of the business and its long-term potential
• How many owners or investors are exiting
• Exit timeline
• Financial goals of the owner/s
• Prestige gained from the deal
• State of the market 

Choosing an exit strategy is just one part of creating a business plan. When choosing an exit strategy, be aware that the process may typically take three to five years to complete, depending on the readiness and level of complexity. 
 

Being prepared is the key to a successful business exit for startups or established businesses

Preparation is everything when it comes to optimizing the value of a business on exit. No matter which business exit strategy you choose, due diligence will be required. 

To capture an exit opportunity at exactly the right moment, Ansarada’s company exit software provides a secure platform for preparing, maintaining, and sharing all of the information required to seal the deal. Reduce uncertainty and accelerate deal preparation with Ansarada. 
 

Questions about business exits

When is the right time to implement an exit strategy?

Time a business exit to maximize value by setting KPIs and targets, monitoring industry trends and market shifts and evaluating personal circumstances and business performance indicators. Having a clear strategy in place and an ‘always on’ readiness for due diligence enables owners to capitalize on an exit opportunity. 

How can an exit strategy impact stakeholders and employees?

An exit strategy can affect the financial outcomes of stakeholders, job security of employees and organizational stability. Relationships with suppliers and customers may change or end, return on investment for investors may be realized or unrealized and employees face changes to the company culture and possibly their career trajectory. A well-planned exit balances these factors to ensure the interests of all parties are considered for a smooth transition. 

What are the key steps for planning a successful exit strategy?

• Define objectives and desired outcomes
• Conduct comprehensive due diligence and valuations
• Determine the exit options available
• Develop a detailed exit plan and timeline, considering the legal, operational and financial aspects of the transition. 

Reviewing and updating the exit strategy as the business evolves or the market changes ensures readiness when it’s time to exit.

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