What is an Exit Strategy?

An exit strategy is defined as an approach or a plan through which an owner or an investor plans to get out of a business or sell his stake in the business. Some examples of exit strategies include selling off the business, transferring ownership to family members, merging with another business, and selling stocks to other investors.

Exit planning assists entrepreneurs in being ready for the future through assessment of the worth, financial standing of the company, possible buyers, and objectives of the entrepreneur.

Exit Strategy Example

The business owner is running his or her business with the sole intention of selling it after five years to another entrepreneur. The first five years will be geared towards maximizing profit so that the value of the business is increased. After five years, he sells the business and makes a profit from it.

What Is an Exit Strategy Used For?

Exit strategies are important for a few key groups:

• Founders: Thinking about how they’ll ultimately cash out the value they’ve created, whether it’s via a sale, IPO, or transition to new management
• Investors: Venture capital and private equity firms typically have a particular exit timeline in mind because their own returns are contingent on selling their stake at some point
• Business owners: Approaching retirement, often planning an orderly ownership transition years in advance 

What are the Common Exit Strategy Types?

Common exit strategies involve:

• Business Sale: The transfer of a business to an individual or company.
• Acquisition: The selling of a business to another company.
• Merger: Merging the business with another business as part of a larger process.
• Buyout: Giving managers or employees the chance to buy out the business.
• Succession: Passing over the business to another person from within the family.
• IPO: An initial public offering that allows the sale of shares held in a private company by the current shareholders.

How to Create an Exit Strategy

• Define the objective: Is it getting the best selling price, maintaining company culture, limiting risks to self, or other things?
• Identify the probable exit route: Whether through acquisition, going public, management buyout, or other – depending on the industry, size of the firm, and growth rate of the firm
• Prepare the business for that future end state: Good financials, solid metrics, and reducing reliance on one individual (the owner included) improves the attractiveness of the firm to potential purchasers or investors down the road
• Have your financials and legal affairs in order: Audited or reviewed financial statements, documentation, and proper legal setup all play a large role in due diligence
• Rethink often: Conditions can change over time, including market conditions, company performance, and your own personal circumstances, and what works as an exit strategy in year one may be different than in year five

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