Common Business Exit Strategies
A business exit strategy denotes a plan that the business owner makes for the future development of the business when they decide they want to leave it. A business exit strategy does not necessarily mean that the business is in trouble or has failed. In actuality, many business owners start a business with the clear intention to exit it after a given period. Some common examples of a business exit strategy are family succession, a management buyout (MBO), selling to a business partner or investor, merger and acquisition (M&A), and an initial public offering (IPO).
Also known as legacy exit, a family succession means transferring the business ownership to a family member. Many entrepreneurs prefer the business to stay in the family long term and thus, plan to transition it to a child or other relative. Besides preserving their name in the business for multiple generations, this strategy enables business owners to select and prepare their successors to take on a leadership capacity over many years. In addition, they do not need to entirely separate from the company but may assume an advisory or consulting role.
On the downside, entrepreneurs may not be able to find a family member that has the desire and the capacity to lead the business. Mixing personal and professional may put the whole family under unnecessary emotional and financial stress. And employees or business partners may not approve of the chosen successor.
MBO resembles family succession in that a person who knows the business and how it works takes on its reigns. But, it enables people who work within the organization to buy it out. This strategy allows for a smoother and more straightforward handover process than selling to a third party. It ensures the business stays in the hands of someone experienced in the organization who business leaders know and trust. Furthermore, as this is still a sale, entrepreneurs will be able to realize some profit from the deal.
MBO’s main disadvantage is that there may not be a company manager or employee interested in buying it. Also, significant leadership changes may be challenging to implement and negatively impact the business.
Selling their stake to a business partner or other investor in cases when the entrepreneur is not the sole business owner can minimize potential harm to the business. Depending on the buyer, the transition can occur while the company continues to operate, as usual, maintaining revenues steady. Furthermore, as they most likely have a vested interest in the business, they will work for its long-term success.
However, finding a buyer or investor interested in purchasing their share can prove difficult for the business leader. Also, if this is a person close to them, they may ask for a lower price and, thus, have a less lucrative deal. Furthermore, the process may aggravate the relationship with their partners or investors.
Considered by many among the strongest exit strategies, with M&A, another company either merges with or acquires the business. The primary advantage is that the business owner can control the price negotiations and set their preferred terms. Furthermore, if they have several bids or sell to a competitor, they may send the price even higher. Also, this strategy allows business owners to completely break with their business if this is what they desire. In terms of disadvantages, M&A deals can be highly tedious and costly. Moreover, they often do not go through.
Finally, with an IPO, a business owner takes the business to the public and sells its shares as stock to shareholders. This strategy’s biggest advantage is the potential to realize a substantial profit. However, it may not be suitable for small- and mid-size businesses as it mandates certain business conditions to succeed.
For example, a company may be thriving and appeal to private investors, but it may not be so for the wider industry and the public. Also, the business must demonstrate progress and report performance. Furthermore, IPOs are time- and cost- and effort-consuming and subject to rigorous scrutiny from stockholders, regulators, and the public.
