What is a Business Exit Plan and Why Develop it at Day One?

LJ CapundagBlog, Business, Ecommerce0 Comments

To exit a business would mean to end, to drop, to stop or to get your hands off it. While you may think that your business can go on forever, a business exit is a very possible scenario. It might bring a negative connotation of business failure but it is not always the case.

In the course of your doing business, you might see some signs that tell you it’s time to sell your business. Or, you might meet some unforeseen circumstances that may trigger the end of your operations. Regardless of the way or kind of exit you might do, it means the end of your business.

So, why then should you plan your exit? And, why plan the end of your business at the beginning?

What is a business exit plan?

Knowing what a business exit is will definitely give you an idea of what an exit plan is. It is a vital part of your business plan that details the what, why, when, who and how in exiting your business.

The objective has to be clear and the logical basis for the exit must be explicitly provided. The goal would be for you to maximize your profits when you sell your successful business or to limit your losses should you decide to end or exit your losing business.

A clear objective or goal will also set when the right time would be to execute your plan. Your plan must also identify the responsible people and their respective tasks related to the exit. And, as the owner you must be at the forefront of the transition or liquidation or the conclusion of your business. Hence, it is important that you know your exit strategies.

What are business exit strategies?

While business growth strategies ensure that your business will take off and sustain its operations, exit strategies ensure that your business can do a graceful exit or end of operations. These are the “hows” or the kind of exit you are foreseeing.

There isn’t a fit-for-all business exit strategy. It will still depend on a lot of considerations such as your business objectives, the nature of your business, the plans you have for your employees, the plans you have for yourself as the owner, and many others. Just as you carefully plan your growth strategies, you do so with your exit strategies.

What are the different business exit strategies?

There could be a lot of ways to exit your business but here are some that you can consider and try to see which among these would make it to your business exit plan:

  1. Succession
  2. You can consider this exit strategy as leaving a legacy to your successors. This is common to sole proprietorship where a business is handed down to the heirs, usually the children, and continue the legacy of the business that you built.

    If this is the exit strategy that you are looking at then your exit plan must also include a succession plan. You must already identify your potential successors and get them on board the business even at the beginning. There has to be a hands-on training and management skills development for your children or your identified successor. This is to prepare and groom them to become the owners of your business eventually, when you exit.

  3. Do an initial public offering (IPO)
  4. Another exit strategy that you can consider, especially if you have already grown your business into a high-value enterprise, is to take your company or business public. Usually, this is a direction taken by businesses to raise additional capital to fund their expansion or other investments. But this can be your way out while monetizing your original investment.

    Can you do this just about anytime? Well, not really. You still have to study the industry or market conditions because while your business may be generating high revenues and may have positive bottom line, the industry you are in may not be too appealing to the public. However, if industry and market conditions are aligned then you just might get the optimal profit from your investment.
    This may not be an easy way to go since you have to deal with the Securities and Exchange Commission and other agencies. You also have to do disclosures to your stockholders and other market analysts. Then again, if there is a potential profit out of this undertaking, then maybe it’s worth all the trouble.

  5. Sell to a partner or co-investor

This could be a way out without much changes in the management of the business. This will work well if your partner or co-investor is willing to take in your place in the business and continue the operations as usual.

On the other hand, even if your partner would want to make some major changes, you will be assured that it would be for the best, especially with them having a higher stake now.

  1. Sell to your manager or employees
  2. Somewhere along the way, you may have identified the manager or employee that has the potential to manage and run the business even without you. At the very start, you have to get them involved. This is to build loyalty and a sense of responsibility as well, being present at day one. Empower them by allowing them to make business decisions and take ownership of these decisions.

    The transition here may not be too tasking since, just like selling to your partner or co-investor, the scenario would be business-as-usual. And, having worked together with them in growing your business, your involvement may not be totally lost. In some cases, you can still get involved in the business but already as a consultant without the demand for your full focus and time.

  3. Mergers & Acquisitions
  4. This maybe a technical term but this is also a popular exit strategy. A merger is when two businesses combine into one company to create bigger and better value in terms of financial and operational capacity. In an acquisition, your business will be purchased by another company, their aim is to strengthen their financial and operational capacity. There might be a thin line of difference between mergers and acquisitions but what can be observed from both is the involvement of another company.

    While being popular, it is not a very easy road to take. You have to know the valuation of your business and if it is ripe for a merger or an acquisition. You need to put it in an open market to attract potential investors or buyers. With all of these activities and more, you might need a broker to do all of them. If you have an Amazon FBA business, for example, you can tap any of the Amazon FBA brokers that are offering these specialized service. They can set the value for your business so you manage your expectations for your potential income from the sale of your business.

  1. Liquidation

This is like saying you are closing shop. Under this exit strategy, you close your business and all its operations then sell, dispose or distribute the assets to those who have claim over them. Assets here could mean the equipment, land, building and inventory. You may not be able to maximize profit under this strategy though because you would be selling or liquidating them at the current market value.

In the process of distribution, the secured creditors take priority. Loans secured by the assets of your business must be paid first. Then what follows are other debts and obligations such as unpaid taxes to the government, wages due to your employees, and obligations to your stockholders.

  1. File for bankruptcy
  2. This is an exit strategy that is being resorted to by those who are at the losing end of their business. Under this scenario you might be unable to repay your debts and obligations. Filing for bankruptcy may be the only way to relieve you of the pressure or demands for payment as you will not be anymore legally required to pay your debts.

    It may not be a good sight to see for a business to file for bankruptcy. But this could be a second chance for you to start a new one and start with a clean slate.

When is the right time to do your business exit plan?

You would probably think that you develop a business exit plan at the time when you have already decided to exit the business. True, that makes sense. Of course, why plan the demise of your business when it is supposed to be a going-concern, right?

But an exit plan does more than just prepare you for the exit. Rather, it helps set the direction you want your business to take – it is part of a long-term business plan. Since it is reflective of how your business is being run or managed, it can be a valuable reference for potential investors to see and evaluate for themselves if your business is worth investing into. Even when you are still planning to start your business, you should already include a good exit plan.

Begin with the end in mind

This is an old saying that means to start whatever it is that you are planning to do but with a clear goal or direction. In business, unless your main purpose is to build and grow one then sell it, you begin with the thought that your business will live on from generation to generation. While that may be your ideal vision, you have to bear in mind that the possibility of it ending, is not remote.

A good business plan must be one that covers from womb to tomb. And, as you begin with the end in mind, the best time to do your exit plan is at day one.

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