CHAPTER FOURTEEN – Does your business plan contain a fail-proof exit strategy for you? If NO, here is a detailed guide on how to write an exit strategy for a business plan.
Unless you are a joker of a business owner, chances are you came up with a solid business plan at the start of your business. I mean, you conducted your market analysis, and you developed strategies to plan and grow your business. If you really did all of that, then you are right on track.
But one thing you are less likely to have done is planning an exit strategy for your business. And you should do this as soonest as possible if you are yet to. Most people write plans on how to start a business but majority fail to write plans on how to exit their business.
What is an Exit Strategy?
An exit strategy is a method by which entrepreneurs and investors, especially those that have invested large sums of money in startup companies, transfer ownership of their business to a third party, or by which they recoup money invested in the business.
Some forms of exit strategies include, being acquired by another company, the sale of equity, a management-employee buyout et al
Why Prepare an Exit Strategy?
What happens to your business if eventually you die today or get involved in a ghastly accident that incapacitates you? Now I know that nobody prays for bad events or circumstances but one reality of life is that you can never know what’s coming ahead of you. The same holds true in business.
“Prepare for bad times and you will only know good times.” – Robert Kiyosaki
But there are a lot of would-be business owners who love their businesses and would think that having an exit strategy in their business plan is unnecessary. However, there is still a need to have an exit strategy in your business plan. There are two very real and practical reasons why you need to plan an exit:
- Outside investors want to collect their return. Remember that equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold. Even three years is a long time to wait for any pay check.
- Entrepreneurs love the art of the start. Assuming your startup takes off, you will probably find that the fun is gone by the time you reach 50 employees, or a few million in revenue. The job changes from creating a “work of art” to operating a “cookie cutter”.
- If you are seeking for investment from venture capitalist (VC) or angel investors, then an exit strategy is a must have. Even if you’re a small company, it’s a good idea to plan ahead and to actually have an idea of how you will transfer ownership of the business down the line, sell the business, or make a return on your investment.
So just as you had a plan for starting your business, you should also have an exit strategy for transforming your business into cash, should in case you lose interest in the business or run into problems later. Without wasting time, here are the four commonest exit strategies you can choose from and incorporate in your business plan:
6 Types of Exit Strategies You Can Consider and Choose From
1. Initial public offering (IPO)
Taking your business public is a very expensive and time consuming exit strategy, as it usually attracts huge accountant and attorney fees. But it can be very rewarding. Offering your business to the public has one simple implication: you are no longer the boss, your stakeholders are. And you will be giving reports about the business to the board of directors and stakeholders.
If you just cannot afford to let go of your business (by selling it), then you can relinquish a portion of your shares by taking it public. However, this exit strategy is not recommended if your business doesn’t value up to $10 million. In that case, consider other exit strategies.
For smaller companies that have already begun expanding—like restaurants that have franchised—an IPO may be a good way for the owner to recoup money spent, though it is worth noting that he or she may not be allowed to sell stock until the lock-up period has passed. Examples of restaurants on the stock market include Buffalo Wild Wings and BJ’s.
If this is your main exit strategy from the get go or you want to at least have the option of going public later, the easiest way to get listed is to seek investors that have done it before with other companies. They will know the ins and outs and can be able to better prepare you for the process.
The process of getting on an initial public offer can be long and arduous. If you do succeed in winning over the hearts and data-centric minds of Wall Street analysts, you’ve still got to conform to the standards set by the Sarbanes-Oxley Act, you will have underwriting fees you’ll need to pay, a potential “lock-up period” preventing you from selling your shares, and even with all of these, there is still a risk that the stock market could crash.
While an IPO may be a suitable route for a company like Facebook or Microsoft, you should consider whether or not you want to weather the headache of tailoring business decisions to the market and to what analysts believe will do well.
2. Sell your business
Selling a business to another individual or company is the most common exit strategy for any business owner. This option is very easy because it can be conducted between the two parties involved without all the government regulations and oversight that comes with an IPO. As expected, if you decide to sell your business, you will be receiving cash in exchange for it.
But valuing your company is the trickiest part of any sale; as sometimes, knowing the right amount to sell your business for can be very difficult. One way to avoid selling your business for less is to get more than one appraisal of the business (seek out some business appraisal companies to help you with this). This way, you will be confident that you are selling for the right price.
If you are concerned about how the business would fare after you have sold it (though this isn’t binding on you), you’d want to sell only to a buyer that knows and understands the business and has the experience to carry on the brand’s legacy. And, depending on the closeness between you and the buyer, you can agree on payment by installments.
3. Acquisitions and mergers
Even though acquisitions and mergers are commonly used interchangeably, there is a slight difference between both terms.
An acquisition occurs when one business acquires another business. For example, Company A buys Company B and still continues running under the name of Company A but now has the strength and value of both companies combined.
A merger, on the other hand, occurs when two businesses come together to continue as a single company. A change of name usually happens after a merger. For example, Company A and Company B merge to form a new company called Company A-B. Most of the time, businesses that engage in a merger or acquisition are in the same industry and see multiple benefits in merging together or acquiring one another.
When you decide to go into a merger or acquisition deal, you can negotiate price and terms. You can request that your employees (if you have any) be kept on for a certain period or that your management team be retained. You can also negotiate final and annual payouts. If you cannot handle these negotiations yourself, hiring an agency would be your best bet.
4. Liquidate your assets
This is the least desirable of all exit strategies, but sometimes the most necessary. This strategy can quickly bring in a lump of cash, and it doesn’t involve any negotiations or losing control of your business. You simply close the business and end it. If you like, you can decide to resuscitate it again some other time.
Most of the time, business owners liquidate their assets because of huge debts. In such cases, the proceeds from the sales of assets are used for settling debts, and the remainder (if there’s any) would be taken by you or divided among your shareholders. Liquidating your business may usually include selling your office building, office furniture and electronics, company cars, and other assets. Usually, you would sell at market price, and you may not make much profit.
5. Management buyout: if you built a business that you want to continue even after you are gone, you can consider turning to your employees.
That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work. This form of exit strategy is a good idea if you are someone who really wants to keep his or her legacy alive. There is still an option of giving the business to your family members, but this has some disadvantages.
For instance, the family members who inherit the business may not understand the business, have no interest to do the needful in order to ensure that the business survives or they could even descend into bitter rivalry over who gets what at the detriment of the business.
6. Family succession: if you family members are quite knowledgeable about your business, then they may be the best people to pass it to. If you would like to pass on your business to your children or any other family member, you should make sure that they have the prerequisite skills, are competent and have the success and future of the business at heart. This will make it a lot easier to retire.
Having reviewed the various exit strategies that are available to business owners, here is how you can write a business plan exit strategy.
How to Write a Business Plan Exit Strategy
a. Detail your most likely exit strategy
Firstly, you have to write in details your most likely or preferred exit strategy. Will you like to go public, sell it to another company, sell it to your employees or just liquidate it. Take some time to review the various options that are at your disposal and document your preferred choice.
b. Prove Your Exit Strategy
This step is very important, and it involves justifying the exit strategy you choose. For instance, if your exit strategy is to go public, then show other companies in similar markets or positions that have successfully gone public in the last three to five years. Research and find out the names of those companies, the dates they went public and the returns their investors received.
In the same vein, if the exit strategy you think is right for your business is to sell it off, you should make a list of potential buyers. Discuss not only who they are and their current financial positions (e.g., estimated total revenues if a private company), but the reasons they’d want to purchase a company like yours. You should also show other companies these firms have acquired in the past and at what price points.
Finally, as much as possible, show other companies that were similar to yours that were recently acquired. As much as possible, determine the sale price of these companies and the returns their investors might have received upon their acquisitions.
In conclusion, even if you don’t plan to sell your business in the future, keep in mind that circumstances may force you to do just that. And you will end up badly burned if you end up doing it the wrong way. So, choose the most appropriate exit strategy for your business and structure it carefully. This way, even if you lose your business later, you will lose gladly.
As you can see, writing a business plan is no easy task. But after having read this eBook, you should now understand that it is well worth the effort. Aside that it better prepares you to deal with some of the shortfalls any entrant into a new market will experience, a business plan gives you a leg up on your competition through better research and insights gained from the process.
If you follow each step as outlined in this eBook, you will be able to come up with a business plan that will market your idea to investors / lenders in the best way.
- Go to Chapter 15: How to Present a Business Plan with PowerPoint
- Go Back to Chapter 13: Your Financial Plan and Projections
- Go Back to Introduction and Table of Content
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