A successful exit strategy is dependent on numerous elements, from what industry you work in to the nature of your business and of course, the scale. The way you choose to exit your business is a very important and personal decision and one that shouldn’t be taken lightly. The type of exit will depend on your personal goals, financial needs and industry conditions.
Below we have detailed five different types of exit strategies to identify which best fits your organisation.
1 – Sale to Market (third party)
Let’s start with the most common exit strategy – selling to market. The sky is the limit on your perceived value but you still need to find a willing buyer on the open market. Typically you will require services from a team of consultants, including business brokers, lawyers and accountants; this can be costly depending on the complexity of the transaction.
The up sides of selling to market are that you can set a higher price than you would for say, a family member or friend. You could also potentially have multiple buyers which would result in a bidding war and increased sale value. Furthermore, by not passing on the business to family means your loved ones benefit from the money without the pressure of the business operation.
There are downsides of selling to market however. Depending on your business it may not be able to cope with the handover. The acquisition has the possibility to get messy and difficult and if the buyer doesn’t hold your values which could seriously alter the culture of your business. There’s also a chance that you could find it hard to let go.
2 – Internal Sale
When it comes to an internal sale, the owner is usually very emotionally attached to the business and wants to see it go into good hands so will choose someone they know. This person tends to be an employee or business partner, or a family member to ensure the legacy that has built up over the years continues to grow as the owner wanted.
The pros of this type of sale include that the owner has confidence that the business will be ran by someone who has an existing knowledge of the business, improving chances of future growth and longevity. The buyer already has the commitment to making it work as they have an emotional attachment to it. Selling internally also means that the owner could stage their exit over a longer period of time.
However, as the buyer has more power because of the knowledge of the business, the price tends to be sacrificed. In most instances, the buyer has to finance the sale to allow the buyer to pay the purchase amount off. If there are several family members interested in the business, this can cause conflict over who gets what share. In addition, if there are any liabilities in the business such as unpaid taxes that are then handed over to the new buyer, it may damage that relationship post-sale.
3 – Merger / Acquisition
It could be necessary to exercise the option to merge with another company should cash flow or liquidity become an issue. By ensuring your company stays afloat will provide a level of security to investors .
The difficulties that can occur with a merger include: it’s often complicated to set up and execute seamlessly, it can be difficult to sustain long-term, there could be a damage of culture as you’re mixing two separate businesses, and depending on the nature of the company, it just may not be suited to merging.
If the merger goes ahead then it could provide a lot more access to new markets and expand your product options as well as opening the business up to new technologies, people, supply and capacity.
4 – IPO
Summary: An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. Of the two million plus companies registered in Australia, around 2,000 are listed on the ASX.
IPOs are very rare and take a lot of time and money to carry out. In fact, the financial and accounting requirements need to be in place from day one and they will be well above the normal required by SMEs. The other downside of an IPO is you will lose the ability to operate confidentially.
The upside to an IPO is the instant recognition and fame within your industry; if your company is listed it brings a certain amount of prestige and public awareness. Once it’s listed, the business will have high stock worth potential and it improves the financial position.
5 – Liquidation
Going into liquidation is a normal exit plan for companies that will not go on and survive without the owner. Assets are disposed to pay off creditors and any minor profits are divided among shareholders . This is usually a considered option if the business owner is stressed and just wants to exit; an attitude of enough is enough.
Liquidation is not normally a planned exit strategy but unfortunately, it happens regularly. This method of exit strategy is more common in the situation of microbusinesses and when the owner is so closely associated with the brand, image and running of the business, making.
Although going into liquidation is seen as a final resort there are some pros such as the simplicity of it and how quick it can happen as well as you don’t have to worry about the selling price or the time it could take to sell and there’s no stress about transferring control to a third party – be it a relative, close friend or stranger.
Of course, having to go into liquidation can be a terrible feeling – the reputation that you have built up, your clients, contacts, time and effort effectively disappears. This option will also not impress your shareholders and you’re not likely to get your highest sale value.
1 HuffPost article Startup Exit Strategies for Investors http://www.huffingtonpost.com/david-drake/six-startup-exit-strategies_b_8254780.html
2 Small Business United, Pros & Cons of 5 Different Exit Strategies http://www.sbua.org/articlesJune/june_article04.html
