What is an Exit Strategy?

exit strategyExit strategy is a contingency plan that is executed by an investor, trader, venture capitalist or business owner to liquidate a position in a financial asset or dispose of tangible business assets once certain predetermined criteria for either has been met or exceeded.

An exit strategy may be executed for the purpose of exiting a non-performing investment or closing a business that is not generating profits. In this case, the purpose of the exit strategy is to limit losses. An exit strategy may also be executed when an investment or business venture has met its profit objective. Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning, liability lawsuits or a divorce; or for the simple reason that a business owner/investor is retiring and wants to cash out.

Regardless of the type of investment, trade or business venture that is entered into, an effective exit strategy should be planned for every positive and negative contingency. This planning should be an integral part of determining the risk associated with the investment, trade or business venture.

In the case of a startup business, good business people always plan for a comprehensive exit strategy in case business operations don’t meet predetermined milestones. If cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit any further losses. Most venture capitalists usually insist that a carefully planned exit strategy is included in a business plan before committing any capital. Business people may also choose to exit if a very lucrative offer is tendered by another party for the business.

Exit strategies are also used to ensure businesses are prepared for the termination of significant contracts or other business relationships. There are many reasons why contracts come to an end, including non-performance by one or both parties, a significant change in the requirements of either party, or that the contract has run its course. In almost all cases, having a well-developed exit strategy is critical. The strategy is usually developed as the means by which to withdraw from a working relationship with a supplier. It can incorporate the process of returning assets, transferring back key employees and the conditions under which a relationship can terminate, for example, the failure to meet service level agreements, changes in circumstances, and ethical breaches.

Business Exit Strategy

An entrepreneur’s strategic plan to sell his or her investment in a company he or she founded. An exit strategy gives a business owner a way to reduce or eliminate his or her stake in the business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy enables the entrepreneur to limit losses.

Ideally, an entrepreneur will develop an exit strategy in the business plan, before actually going into business, because the choice of exit plan can influence business development choices. Common types of exit strategies include initial public offerings, strategic acquisitions and management buyouts. Which exit strategy an entrepreneur chooses depends on factors such as how much control or involvement (if any) he or she wants to retain in the business, and whether the entrepreneur wants the company to continue to run in the same way or is willing to see it change going forward as long as he or she receives a fair price for his or her share of ownership. A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean giving up control.

Different exit strategies also offer business owners different levels of liquidity. Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well; for example, an IPO may not be the best exit strategy during a recession.

The best type of exit strategy also depends on business type and size. A partner in a medical office’s best exit strategy might be to sell to one of the other existing partners, while a sole proprietor’s ideal exit strategy might simply be to make as much money as possible, then close down the business. If the company has multiple founders, or if there are substantial shareholders in addition to the founders, these other parties’ interests must be factored into the choice of exit strategy as well.

Reasons for Having an Exit Strategy

– unexpected offers may arise: as the e-commerce industry becomes more competitive and larger players look for growth through acquisition: smaller companies may look for mergers to gain a larger market share and buying power
– health or family crisis: sudden illnesses or family issues take time away from your focus on your business
– economic shift: a recession may negatively impact your business
– technology trends shift: if you are not making the transition to mobile devices you may be left in the dust
– you want options: should you decide to sell, you will want to have options beyond selling to a competitor at a low value.
– age; at some point you may want to retire and you will want to capture the value of your company
– product trends change: many small e-commerce businesses are highly dependent on a single product or product line: a shift in trends may lower your revenues

Summary

The most successful exit strategies are the ones that were planned years in advance. Frequently, they leverage one or two key factors such as profits, customer experience, supply chain, or organization. Think about an exit strategy for your business and plan ahead. You can then decide when to act.

 


 

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