Definition
A Business Exit Strategy is a plan that a business owner devises to sell their ownership in a company, either to another company or to investors. This strategy is typically used when the owner wants to retire, reduce their role in the business or completely end their involvement. It is an important part of the overall business plan as it provides a clear roadmap for future transitions and helps secure the sustainability of the business.
Key Takeaways
- A Business Exit Strategy is a plan devised by a business owner to sell their ownership stake, thereby exiting the business and potentially optimizing a final significant return on investment. It is an essential part of business planning.
- Different types of exit strategies include selling the business to a strategic acquirer, selling to a financial buyer (like private equity), passing it on to family or employees, or liquidating the business. Each strategy has different implications for both the value of the business and the owner’s future involvement in it.
- Planning for an exit strategy should ideally be done well in advance. Early planning gives the business owner time to increase their business’s value, prepare for smooth transition, and ensure they achieve their personal and financial goals at the exit.
Importance
A business exit strategy is important as it provides a planned approach for owners to sell their stake in a company or terminate their involvement, hence ensuring a potential return on investment.
This strategy is crucial from the onset of the business as it safeguards owners or investors interests by setting a path to mitigate potential losses and optimize gains.
It aids in unforeseen circumstances such as market changes, personal issues, or retirement, establishing a clear transition plan while preserving the company’s continuity.
Moreover, a well-devised exit strategy enhances the appeal of the business to prospective investors, illustrating the well-thought risk management measure and end goals, thereby raising its potential valuation.
Explanation
A Business Exit Strategy is an entrepreneur’s strategic plan to sell their ownership in a company to investors or another company. The main purpose of an exit strategy is to anticipate and plan for the conditions of exiting a business, thereby aiding in the mitigation of financial risk.
An apt exit strategy should aim to maximize a company’s market value to facilitate a profitable sale. Additionally, it also offers a clear roadmap for dealing with unforeseen complications, and ensures the smooth transition of business operations and the maintaining of business continuity.
Exit strategies are essential for businesses of all sizes: from startups, where venture capitalists or angel investors expect returns on their investment, to small businesses which may need to plan for retirement or health contingensies of the owner, to large corporations who make strategic plans for disinvestment. The use of an exit strategy is a key component in the strategic planning of a business, ensuring that if or when a business needs to be sold or closed, there’s a clear process in place to minimize losses and ensure maximum profitability.
Examples of Business Exit Strategy
Google’s Acquisition of YouTube: Back in 2006, Google acquired the video-sharing platform YouTube for $
65 billion in stock. The founders of YouTube, Chad Hurley, Steven Chen, and Jawed Karim, used a ‘sale to a strategic partner’ as their exit strategy. They initially launched YouTube with a goal to create a platform for users to share videos easily, but when Google offered a deal that aligns with their future vision, they saw an opportunity for an exit strategy and sold it.
McDonald’s Divestment of Chipotle: In 2006, McDonald’s decided to entirely divest itself from Chipotle Mexican Grill, a fast-food chain it had taken a majority stake in, nine years prior. McDonald’s used the ‘divestiture’ exit strategy, selling off all its shares in Chipotle. Their aim was to focus more on their primary business as they felt the burrito chain didn’t fit their long-term growth plans.
American Express Spinning Off Ameriprise: In 2005, American Express decided to spin off their financial advisory business, Ameriprise Financial. This process, which involved giving current shareholders new shares in the spun-off company, was done with the aim to focus more on the credit card business. This is an example of the ‘spin-off’ exit strategy. By doing so, American Express was able to focus more on their core competencies and boost shareholder value.
FAQ for Business Exit Strategy
What is a Business Exit Strategy?
An exit strategy is a plan formulated by a business owner on how they intend to sell their ownership in the company, either partially or fully. Exit strategies are often used when a business owner wants to retire or when they’re planning on starting a different venture.
Why is an Exit Strategy important for a business?
An exit strategy is essential because it provides a clear plan for the future of the business. Having a detailed exit strategy ensures a smooth transition when the time comes to leave or close the business. It also assures potential investors of their return on investment.
What are the types of Business Exit Strategies?
There are several types of exit strategies including selling the business outright, passing it on to a family member, selling to a manager or employees, going public, or even liquidation.
How to choose the right Exit Strategy for my business?
The right exit strategy depends on various factors such as the nature of your business, the state of the market, your personal goals, and financial considerations. It’s advisable to consult with a financial advisor and consider all options carefully before deciding on an exit strategy.
When should a business start planning an Exit Strategy?
It is never too early to start planning an exit strategy. Ideally, an exit strategy should be part of your original business plan. However, even if it’s not, it’s important to start planning as soon as possible.
Related Entrepreneurship Terms
- Business Liquidation
- Mergers and Acquisitions
- Management Buyout (MBO)
- Initial Public Offering (IPO)
- Succession Planning
Sources for More Information
- Investopedia – They offer a comprehensive overview of various finance-related topics, including business exit strategies.
- Entrepreneur – This site provides resources and articles specific to business strategies and entrepreneurship, including business exit strategies.
- Forbes – They provide articles and insights from various industry professionals and finance experts, which can include discussions about exit strategies.
- Business.com – This site offers guidance and practical advice in all areas of business, including suggestions for developing an effective exit strategy.
