Business exit strategy definition, types, and use cases

Having a thoughtful exit strategy shows that a business owner is prepared for the future and is focused on ensuring the long-term success and sustainability of their company. However, according to a survey conducted by the Business Enterprise Institute, only 20% of owners have created written plans to transfer ownership.

The article will offer insights to startup founders, small business owners, and established company leaders about the importance of developing an exit strategy, outlining key benefits and steps involved. 

What is a business exit strategy?

A business exit strategy outlines the steps a business owner needs to take to sell their ownership in a company to investors or another company and generate the maximum value.

There are several different exit strategies, including types like strategic acquisitions, an initial public offering (IPO), management buyouts (MBOs), liquidation, bankruptcy, selling a stake to a partner or investor, or passing the business on to a family member.

It’s recommended to develop an exit strategy early in the business planning process, ideally during the initial stages of forming the company. This is because this strategy can impact future business plans and influence key decisions regarding growth, investment, and operational strategies.

For instance, if the exit strategy business plan is to pass the business on to family members, the focus may be on creating stable day-to-day operations and a strong brand reputation. In contrast, if a business owner aims to sell their business within, say, five years, they may focus on rapid growth and building tangible assets to increase the company’s valuation.

In fact, one of the most important parts of every thoughtful exit strategy is business valuation, as it determines the company’s fair price. Understanding the current and potential future value of the business helps to make the right decisions regarding when and how to exit. 

It’s also important to note that business exit planning can include two subsets — investor and venture capital exit strategies:

1. Investor exit strategy. This is a plan developed by investors, such as angel or private equity investors, to exit their investment in a particular company. The primary goal is to achieve a favorable return on investment by selling their stake in the company. A business exit strategy, in this case, should always be part of a wider investment strategy.
2. Venture capital exit strategy. Another business exit strategy option can be applied to an early-stage company or high-growth business backed by venture capital funding. In this case, VC investors develop a pre-planned exit to achieve a return on their investment within a specific time frame, often around five years.

Benefits of a business exit strategy

Let’s explore why developing a business exit strategy is always a good idea.

1. Maximizing value

A well-defined exit strategy helps maximize the value of your business by focusing on growth, profitability, and building tangible assets. This, in turn, will lead to a higher sale price or better terms during a transition.

Example: WhatsApp, a messaging app, focused on user growth and engagement before its acquisition by Facebook for $19 billion in 2014. This strategic approach maximized the company’s value and resulted in a lucrative exit for its founders and investors.

2. Mitigating risks

An exit strategy allows business owners to mitigate potential risks associated with industry changes and unattractive market circumstances, protecting the value of their businesses.

Example: Tesla, the electric car manufacturer, diversified its product offerings and revenue streams beyond vehicles by venturing into energy storage and solar energy solutions. This diversification strategy helped mitigate risks associated with fluctuations in the automotive industry.

3. Facilitating succession planning

By outlining a clear exit plan, you can facilitate smooth succession planning and ensure a seamless transition of ownership or management, minimizing disruptions to operations.

Example: Walmart, a retail industry leader, demonstrated effective succession planning. When Sam Walton retired in 1988, his son, Rob Walton, became a chairman, prioritizing expansion and technological advancement. In 2015, Rob Walton smoothly transitioned leadership to his son-in-law, Greg Penner.

4. Enhancing investor confidence. Having a well-defined exit strategy increases investor confidence, as it demonstrates strategic planning and commitment to maximizing returns. This, in turn, facilitates fundraising and growth opportunities.

Example: Airbnb clearly outlined its potential exit strategies, including IPO. This transparency and strategic planning boosted investor confidence, leading to a successful IPO in 2020.

What types of business exit strategies are available?

The selection of an appropriate exit strategy is influenced by a few different factors, such as the entrepreneur’s goals, market conditions, and the business growth strategy. Each strategy comes with its own set of advantages and disadvantages, making it crucial for company owners to carefully evaluate their options before making a decision.

Business exit strategy examples

Let’s also explore the most suitable exit strategy business plan examples for different company types:

• Startup exit strategies
  Startup exit strategies depend on factors such as the company’s growth trajectory, market conditions, investor preferences, and the founder’s long-term goals. The most common methods include an IPO, a strategic acquisition, or a management buyout.
• Small business exit strategy
  The best exit strategy for a small business always aligns with the owner’s financial objectives, long-term vision, and the company’s market position. Small business owners may opt for options like selling the business to a competitor, transitioning ownership to a family member, or pursuing a management buyout.
•  Larger company exit strategy
  The owners of established businesses may go for a combination of options tailored to maximize value. This may include a business sale to a strategic buyer, an IPO, or a management buyout.
• Family-owned business exit strategy
  Succession planning and management buyouts are common strategies for family-owned businesses to ensure a successful transition and preserve legacies.

8 most important steps to develop your exit strategy

A survey of business owners conducted by the Exit Planning Institute shows that just 20% of businesses put up for sale successfully find buyers. Among the businesses that manage to sell, 75% express significant regret within one year of leaving their business.

That’s why it’s so important to proactively develop an exit plan and facilitate the transition to a new business owner. Here are key steps to take:

1. Setting exit timelines. Establish clear timelines for your exit strategy, outlining specific milestones and deadlines. Consider factors such as market conditions, personal goals, and financial targets to determine the optimal timing for your exit.
2. Documenting information. To ensure a smooth and successful exit strategy, it’s important to maintain all important documents related to your business, including financial statements, financial strategies, contracts, employee information, organizational structure, and legal files.
3. Identifying potential buyers. Conduct market research to identify potential buyers for your business. Develop detailed buyer personas to understand their motivations, preferences, and acquisition criteria. Tailor your exit strategy to attract and engage with these prospective buyers effectively.
4. Building valuable assets. Focus on developing and enhancing valuable assets within your business, such as proprietary technology, intellectual property, and customer relationships. Invest in strategies that increase the overall attractiveness and value of your business to potential buyers.
5. Improving business performance. Continuously monitor and improve key performance indicators (KPIs) across various aspects of your business, including revenue growth, profitability, operational efficiency, and market competitiveness. Implement strategies to optimize business operations and maximize financial performance to attract potential buyers.
6. Chasing profitable growth. Explore new opportunities for revenue growth. For example, you can try to diversify product offerings, expand into new markets, or leverage emerging trends. It’s important to focus on generating new revenue streams and demonstrate the long-term growth potential of your business to potential buyers.
7. Delegating responsibilities. Delegate key responsibilities to trusted employees, letting them learn to manage daily operations. Create a strong team able to sustain business continuity and growth, even in the owner’s absence.
8. Saving financial resources. Keep some money saved to cover the costs associated with the exit process, including legal fees, transaction expenses, and the services of professional advisors. 

Key takeaways

Let’s summarize: 

• A business exit plan means a plan developed by a business owner or management team to exit or transition out of the business and generate the maximum value from it. 
• The most common types of exit strategies are strategic acquisitions, initial public offering (IPO), management buyouts (MBOs), liquidation, bankruptcy, selling a stake to a partner or investor, or passing the business on to a family member.
• The key benefits of developing a business exit strategy are maximizing value, mitigating risks, facilitating succession planning, and enhancing investor confidence. 
• Steps to take to create a business exit strategy include setting exit timelines, documenting information, identifying potential buyers, building valuable assets, improving business performance, chasing profitable growth, prioritizing customer loyalty, delegating responsibilities, and saving financial resources.