Exit Strategies - All You Need to Know about Business Exit Planning
Kison Patel
CEO and Founder of DealRoom
Kison Patel
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
CEO and Founder of DealRoom
The question, âWhat is your exit plan?â tends to draw blank expressions when asked to business owners.
A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.
Business owners need to think about exit planning before searching for potential buyers. The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.
By working with a team of professional advisors, accountants, lawyers, and brokers, you can ensure the right documents are in place for a business exit whenever the time comes.
In this article, we talk about creating a business exit plan and how to make one for your business.
What is a Business Exit Strategy?
A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners donât always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.
Investor exit strategy
An investor exit strategy is similar to that of a business exit strategy. However, investors look for a financial return on their exit from a company, so bequeathing is never one of the options considered. An investor will often have a list of potential acquirers in mind, as well as a timeframe, as soon as their investment is made. In this type of scenario, there is often an exit multiple in mind (i.e. a multiple of EBITDA or a multiple of the original investment made in the business).
Venture capital exit strategy
Another business exit strategy option is a venture capital exit strategy. As our article on venture capital outlines, if a company is venture funded then consider that your investor will have a pre-planned exit. As an early stage company, this is a natural part of taking investments. Usually, with a VC investment, the aim is for an exit after five years, either through an industry sale or an IPO, where they can liquidate their original equity investment.
Motives for Developing Exit Strategies
Technically, it is important for equity owners to have a broad outline of what an exit would look like. For example, the image below represents various motives ranging from financial gain to mitigating environmental risk.
â
Some of the common motives for business exit include the following:
Retirement - Arguably the most common reason of all motives is retirement. Business owners will inevitably retire at some stage, and itâs best that they have an exit strategy in place before doing so.
Investment return - A business exit strategy as part of a wider investment strategy - for example, the VC company planning to go to IPO after five years - makes the exit valuation part a component of the initial investment in the business.
Loss limit -A business exit is ultimately a kind of real option for a business. If the business is hemorrhaging money, the best option may be to exit immediately - âcutting your lossesâ on the business, a sit was.
Force majeure - Like the examples of Covid-19 and Russiaâs invasion of Ukraine, sometimes an investor or owner doesnât really have a choice: The circumstances dictate that they have to exit.
Types of Exit Strategies
Sale to a strategic buyer
Strategic buyers are usually in the same industry as the company whose owner is looking to exit. And in other cases, the buyer can be in an adjacent market looking to compliment their products in an existing market, or expansion of their products into a market.
Sale to a financial buyer
Financial buyers are solely looking for a financial return from their investment in a business and the exit is the primary means of achieving this return. Examples include venture capital and private equity investors.
Initial Public Offering (IPO)
This form of exit, far more common with startups than mature companies, enables company owners to exit by selling their equity to investors in public equity markets.
Management buyout (MBO)
An exit through MBO would occur when the owner sells the company to its current management team, whose familiarity with the business technically should make them the best candidates to achieve value from an acquisition.
Leveraged buyout (LBO)
A leveraged buyout occurs when a buyer takes a loan or debt to purchase another company. The buyer also uses a combination of their assets and the acquired company's assets as collateral. Financial models can be used for multiple scenarios and simulations of when an LBO is an effective choice.
Liquidation
Liquidation can be used by a business owner to exit if they feel like the liquidation would yield cash faster or that the individual assets (i.e. property, plant, and equipment) of the business were more liquid than the business as a going entity.
Exit Strategy for Startups
Startups looking for VC investment can include an exit strategy as part of their initial pitch. It is not mandatory. Sometimes this can work when well, for example, when a startup founder is well versed in the industry and has a credible 5-year forecast.
Startup exit strategies depend on a few different factors:
Market timing
How have IPOs for startups performed in the past 12-18 months? If public markets are showing enthusiasm for companies like the one being pitched, it makes it easier to show how an exit can occur.
Comparable transactions
Similar to IPOs, companies can use comparable transactions (industry or private equity sales) to show investors their route to an exit. The comparable firms should be operating in the same or close to the same competitive space.
How to Put Together a Business Exit Plan
Remember that the purpose of the plan is to make the new business owner transition as straightforward as possible.
Although the steps which follow are general, nobody knows a business better than its owner, so take whatever steps are necessary to make your business as marketable to potential buyers as possible.
These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Personal finances, family situations, and other career options are beyond the scope of this article.
Rather, the intention of the points below is to ensure that a business will be ready to sell in the fastest possible time at a fair price.
Business exit plan
Know the business
Ensure that finances are in order
Pay off creditors
Remove yourself from the business
Create a set of standard operating procedures
Establish (and train) the management team
Draw up a list of potential buyers
1. Know the business
This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes âeverything to every man.â
This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.
2. Ensure that finances are in order
This should be a priority regardless of any future business plans.
But if you intend to sell your business at short notice, it's best to have a clean, well-maintained set of financial statements going back at least three years.
3. Pay off creditors
The less debt that a business holds on its balance sheet, the more attractive it will be to potential buyers.
A common theme among small business owners in the US is thousands of dollars of credit card debt. This can be a red flag to many buyers and should be paid off as soon as possible.
4. Remove yourself from the business
How important are you to the day-to-day operations? If your business would lose more than 10% of its revenue were you to leave, the answer is âtoo important.â
If revenues are tied to the owner, buyers are not going to want to buy the business if the owner is going to leave right after.
Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.
5. Create a set of standard operating procedures
Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs), ideally in written form, that would allow any owner to maintain the business in working order merely by following a set of instructions.
6. Establish (and train) the management team
Are the existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ânoâ.
They may need more training, or you may need a different set of managers. In either case, having a capable team in place will be valuable whether you decide to exit your business or not.
7. Draw up a list of potential buyers
A list of buyers should be made and refreshed on a reasonably regular basis. Ideally, you would know their criteria for buying a business, but this is not always practical.
Keeping a long list of buyers means that you can reach out to them at short notice if it is  required at some point in the future.
This list is likely to include at least some of your managers or suppliers.
Importance of Exit Strategy
Many owners make the mistake of thinking that a business exit plan means the same thing as a âretirement planâ, believing that they can start thinking about putting one together as soon as they hit 55 years of age.
This is an error. Not because your departure is impending, but because it doesnât give you the flexibility.
Instead of looking at a business exit plan as a retirement plan, rethink it as a divestment option.
An alternative way of thinking about this is, what happens to the business owner that doesnât have an exit strategy? Think of the value destruction that occurs to the business if something unexpected happens and the owner has to make an unplanned sale, at a discount, in unattractive market circumstances, or even at a time of personal loss.
Instead of thinking about the business exit as something that will happen in the future, rethink it as something that could happen at any moment.
Conclusion
Exercising critical thinking to write a business exit strategy can be exciting as well as enlightening. Thinking of an exit as an end state is not the best approach since this limits businesses to a strict definition. Rather, consider how the process can be supportive of a business' growth strategy. Take these top three considerations:
Financial considerations: If the exit strategy has a target revenue number in 5 years then how will the business get there? What financial dashboards are needed to properly run the company? How will expenses be managed so a business does not outspend against earnings?
Supply chain considerations: What products will need to be in your catalog to maximize margins? What inventory turns ratio are you aiming for on a monthly basis?
People considerations: Who do I hire to grow the company exponentially? What benefits do I offer to attract the best talent but don't cause complications at the exit? How do I write the force majeure so I protect the company and employees?
A business's primary goal is long-term value generation to its customers, itself, and its stakeholders. Having a thoughtful exit strategy shows the maturity of a business's Leadership towards longevity and value creation. There are many facets of the journey from owner motivation to financial strategies.
At DealRoom we help the owners of businesses of all sizes prepare for this eventuality. Our Professional Services team is ready to help businesses think through these details. It is important that an exit strategy be a journey throughout the growth stages.
Talk to us about how our tools can be an asset for you in your exit plan.
What is a Business Exit Strategy?
A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners donât always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.
The question, âWhat is your exit plan?â tends to draw blank expressions when asked to business owners.
A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.
Business owners need to think about exit planning before searching for potential buyers. The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.
By working with a team of professional advisors, accountants, lawyers, and brokers, you can ensure the right documents are in place for a business exit whenever the time comes.
In this article, we talk about creating a business exit plan and how to make one for your business.
What is a Business Exit Strategy?
A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners donât always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.
Investor exit strategy
An investor exit strategy is similar to that of a business exit strategy. However, investors look for a financial return on their exit from a company, so bequeathing is never one of the options considered. An investor will often have a list of potential acquirers in mind, as well as a timeframe, as soon as their investment is made. In this type of scenario, there is often an exit multiple in mind (i.e. a multiple of EBITDA or a multiple of the original investment made in the business).
Venture capital exit strategy
Another business exit strategy option is a venture capital exit strategy. As our article on venture capital outlines, if a company is venture funded then consider that your investor will have a pre-planned exit. As an early stage company, this is a natural part of taking investments. Usually, with a VC investment, the aim is for an exit after five years, either through an industry sale or an IPO, where they can liquidate their original equity investment.
Motives for Developing Exit Strategies
Technically, it is important for equity owners to have a broad outline of what an exit would look like. For example, the image below represents various motives ranging from financial gain to mitigating environmental risk.
â
Some of the common motives for business exit include the following:
Retirement - Arguably the most common reason of all motives is retirement. Business owners will inevitably retire at some stage, and itâs best that they have an exit strategy in place before doing so.
Investment return - A business exit strategy as part of a wider investment strategy - for example, the VC company planning to go to IPO after five years - makes the exit valuation part a component of the initial investment in the business.
Loss limit -A business exit is ultimately a kind of real option for a business. If the business is hemorrhaging money, the best option may be to exit immediately - âcutting your lossesâ on the business, a sit was.
Force majeure - Like the examples of Covid-19 and Russiaâs invasion of Ukraine, sometimes an investor or owner doesnât really have a choice: The circumstances dictate that they have to exit.
Types of Exit Strategies
Sale to a strategic buyer
Strategic buyers are usually in the same industry as the company whose owner is looking to exit. And in other cases, the buyer can be in an adjacent market looking to compliment their products in an existing market, or expansion of their products into a market.
Sale to a financial buyer
Financial buyers are solely looking for a financial return from their investment in a business and the exit is the primary means of achieving this return. Examples include venture capital and private equity investors.
Initial Public Offering (IPO)
This form of exit, far more common with startups than mature companies, enables company owners to exit by selling their equity to investors in public equity markets.
Management buyout (MBO)
An exit through MBO would occur when the owner sells the company to its current management team, whose familiarity with the business technically should make them the best candidates to achieve value from an acquisition.
Leveraged buyout (LBO)
A leveraged buyout occurs when a buyer takes a loan or debt to purchase another company. The buyer also uses a combination of their assets and the acquired company's assets as collateral. Financial models can be used for multiple scenarios and simulations of when an LBO is an effective choice.
Liquidation
Liquidation can be used by a business owner to exit if they feel like the liquidation would yield cash faster or that the individual assets (i.e. property, plant, and equipment) of the business were more liquid than the business as a going entity.
Exit Strategy for Startups
Startups looking for VC investment can include an exit strategy as part of their initial pitch. It is not mandatory. Sometimes this can work when well, for example, when a startup founder is well versed in the industry and has a credible 5-year forecast.
Startup exit strategies depend on a few different factors:
Market timing
How have IPOs for startups performed in the past 12-18 months? If public markets are showing enthusiasm for companies like the one being pitched, it makes it easier to show how an exit can occur.
Comparable transactions
Similar to IPOs, companies can use comparable transactions (industry or private equity sales) to show investors their route to an exit. The comparable firms should be operating in the same or close to the same competitive space.
How to Put Together a Business Exit Plan
Remember that the purpose of the plan is to make the new business owner transition as straightforward as possible.
Although the steps which follow are general, nobody knows a business better than its owner, so take whatever steps are necessary to make your business as marketable to potential buyers as possible.
These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Personal finances, family situations, and other career options are beyond the scope of this article.
Rather, the intention of the points below is to ensure that a business will be ready to sell in the fastest possible time at a fair price.
Business exit plan
Know the business
Ensure that finances are in order
Pay off creditors
Remove yourself from the business
Create a set of standard operating procedures
Establish (and train) the management team
Draw up a list of potential buyers
1. Know the business
This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes âeverything to every man.â
This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.
2. Ensure that finances are in order
This should be a priority regardless of any future business plans.
But if you intend to sell your business at short notice, it's best to have a clean, well-maintained set of financial statements going back at least three years.
3. Pay off creditors
The less debt that a business holds on its balance sheet, the more attractive it will be to potential buyers.
A common theme among small business owners in the US is thousands of dollars of credit card debt. This can be a red flag to many buyers and should be paid off as soon as possible.
4. Remove yourself from the business
How important are you to the day-to-day operations? If your business would lose more than 10% of its revenue were you to leave, the answer is âtoo important.â
If revenues are tied to the owner, buyers are not going to want to buy the business if the owner is going to leave right after.
Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.
5. Create a set of standard operating procedures
Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs), ideally in written form, that would allow any owner to maintain the business in working order merely by following a set of instructions.
6. Establish (and train) the management team
Are the existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ânoâ.
They may need more training, or you may need a different set of managers. In either case, having a capable team in place will be valuable whether you decide to exit your business or not.
7. Draw up a list of potential buyers
A list of buyers should be made and refreshed on a reasonably regular basis. Ideally, you would know their criteria for buying a business, but this is not always practical.
Keeping a long list of buyers means that you can reach out to them at short notice if it is  required at some point in the future.
This list is likely to include at least some of your managers or suppliers.
Importance of Exit Strategy
Many owners make the mistake of thinking that a business exit plan means the same thing as a âretirement planâ, believing that they can start thinking about putting one together as soon as they hit 55 years of age.
This is an error. Not because your departure is impending, but because it doesnât give you the flexibility.
Instead of looking at a business exit plan as a retirement plan, rethink it as a divestment option.
An alternative way of thinking about this is, what happens to the business owner that doesnât have an exit strategy? Think of the value destruction that occurs to the business if something unexpected happens and the owner has to make an unplanned sale, at a discount, in unattractive market circumstances, or even at a time of personal loss.
Instead of thinking about the business exit as something that will happen in the future, rethink it as something that could happen at any moment.
Conclusion
Exercising critical thinking to write a business exit strategy can be exciting as well as enlightening. Thinking of an exit as an end state is not the best approach since this limits businesses to a strict definition. Rather, consider how the process can be supportive of a business' growth strategy. Take these top three considerations:
Financial considerations: If the exit strategy has a target revenue number in 5 years then how will the business get there? What financial dashboards are needed to properly run the company? How will expenses be managed so a business does not outspend against earnings?
Supply chain considerations: What products will need to be in your catalog to maximize margins? What inventory turns ratio are you aiming for on a monthly basis?
People considerations: Who do I hire to grow the company exponentially? What benefits do I offer to attract the best talent but don't cause complications at the exit? How do I write the force majeure so I protect the company and employees?
A business's primary goal is long-term value generation to its customers, itself, and its stakeholders. Having a thoughtful exit strategy shows the maturity of a business's Leadership towards longevity and value creation. There are many facets of the journey from owner motivation to financial strategies.
At DealRoom we help the owners of businesses of all sizes prepare for this eventuality. Our Professional Services team is ready to help businesses think through these details. It is important that an exit strategy be a journey throughout the growth stages.
Talk to us about how our tools can be an asset for you in your exit plan.
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