Which exit strategy is right for your business?


As a business owner you have a lot on your plate. You must often take on multiple responsibilities and fill many roles across the business as the company starts to grow. However, while your focus may be primarily on scaling up the business and overseeing the day-to-day operations, it’s important that you still keep an eye on the future plans – and the inevitable plan to exit from the company.

So while there are many different and strategic ways to exit a business, how do you know which one is right for your business? Are all exit strategies the same?

Acquisition: An acquisition is when one company obtains ownership of another entity’s stock, equity interests, or assets. This can be done for a multitude of reasons, such as the buyer’s aspiration to expand or eliminate the competition. Unlike in an initial public offering, the purchasing price is not dictated by the current state of the market, which means the company to be acquired has room to negotiate valuation. If the acquiring company decides to keep the current employees on board, it may have drastically different cultures and systems that can make the transition difficult for all parties involved. Alternatively, it also may decide to eventually close the business down entirely. To plan for an acquisition, a founder should position the business as an attractive asset – or potential disruptor – to current businesses within similar and competitive industries.

Selling to another company or Private Equity can be done for positive reasons such as:

  • Being part of a larger organisation to gain scale, credibility and resources
  • Providing a wider range of personal development options for staff
  • Geographic expansion into new territories e.g. national or global
  • Combining with an organisation that has complementary products and services to strengthen the offerings and provide cross selling opportunities

Liquidation: Essentially, to liquidate is to shut down all business operations and sell off it’s assets. This may be an option if something catastrophic were to happen to the market or to the company itself. Alternatively, founders could choose to liquidate over time in the case of a “lifestyle company,” where they use the company’s profits instead of reinvesting them back into the company for growth. While this exit is relatively simple for business founders, it offers the lowest ROI to investors, reduces the growth potential of a company, and can also taint a business owner’s reputation if he or she plans to begin another business venture. Founders will also need to consider investors’ liquidation preferences, or what dictates the capital that must be returned to investors before shareholders can receive returns in the case of a liquidation event.

Selling to a friend or close party: An entrepreneur may decide to sell the company to another individual, such as a family member, company manager, or current employee(s). This can allow the business founder to preserve the core beliefs of their business while passing it onto someone who can operate the day to day. That said, passing the business to a family member requires the creation of a succession plan – a process that may be contested when facing difficult family dynamics. Likewise, arranging a long-term buyout by employees can increase loyalty and motivate staff – but necessitates the current owner stay at the helm over a longer term. This strategy may also be more appealing to any outside investors, as the company continues operations as opposed to simply shutting down as in a liquidation.

Merger: Similar to an acquisition, a merger is when two companies agree to become one single company, merging their assets and becoming an entirely new entity. This can aid both companies in gaining market share, expanding into new markets, and removing some of the competition. After a merger, shares of the new company are often distributed to existing shareholders of both original businesses.

Going public: The most headline-grabbing exit strategy, going public – traditionally in the form of an IPO – means the company becomes publicly traded, is listed on a stock exchange, and is subject to an entirely new set of regulations. Unlike a merger or acquisition, going public entails convincing hundreds of individuals that the company has long-term potential. The process is also extremely time consuming, expensive, and not suited for every enterprise. Depending on how an initial public offering is structured, founders may not be able to withdraw any capital for a period of time – and investors can be subject to a lock-up period. That said, going public is one of the best ways for investors to potentially see a big return on their initial investment.

While planning an exit strategy may go overlooked in some start-ups, it plays a key role in determining a company’s strategic direction. By not proactively planning an exit strategy, business owners and their successors may find that future options are limited.

If you’re interested in finding out more around how EFM Growth can help guide you through the complexities of exiting a business, speak to our team of experienced Growth Partners. Get in touch today through email or call 01582 516300. Want to find out just how exit ready you are? Take our 3 minute Exit Planning Healthcheck to see your readiness score.

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