It’s no secret that businesses should have an exit strategy. But what is an exit strategy, and why is it so important?
According to Investopedia, an exit strategy is a plan for selling or disposing of a financial or business asset when certain conditions have been met or exceeded. It is used by investors, traders, venture capitalists, and business owners.
Four Types Of Exit Strategies
There are four main types of exit strategies businesses use to sell or dispose of their assets: initial public offering (IPO), mergers and acquisitions (M&A), private equity investment, and private investment in public equity (PIPE).
By investing in an exit strategy, businesses have the potential to unlock immense value. But careful consideration must be given when analyzing a company’s assets and liabilities.
Going public via an initial public offering (IPO) provides a business with access to capital and exposure to stock markets or securities exchanges. It is a comprehensive process that involves meeting disclosure requirements, regulating all transactions according to trading rules, and offering shares of stock or other forms of security for purchase by the general investing public.
Ultimately, an IPO is useful in industries where value is dependent on consumer perception as it allows companies to gain widespread visibility quickly with minimal risk and effort.
Mergers and acquisitions (M&A) are transactions that involve one company buying all or the majority of the assets of another company for strategic or financial reasons. This is an increasingly popular business strategy. However, these transactions often come with a myriad of legal, tax, and commercial considerations that can be complicated for acquirers to navigate without the help of experienced investment bankers.
Private Equity Investment
Private equity investment is the acquisition of companies by private-equity firms, which specialize in making investments in return for an ownership stake in those enterprises. The shares are generally unavailable to the public. These firms acquire an equity interest in a company by purchasing its shares from existing shareholders and lenders and then exercising their right to purchase more shares at a future date.
All in all, private equity investment provides a great pathway for companies looking for more control over enterprise decisions without sacrificing access to unique resources for high returns.
Private investment in public equity (PIPE) refers to private investment in public equity (as opposed to private equity investing in private businesses) in which large institutional investors buy securities in newly formed companies at significantly discounted prices. PIPE is primarily done to access the company’s future returns at comparatively low risk.
PIPE could be an ideal exit strategy for companies in rapidly changing industries or those that require long-term investment in research and development.
When Planning an Exit Strategy
Crafting an exit strategy is the ultimate opportunity for you as an entrepreneur to reflect on your successes and challenges. An effective plan will enable you to approach retirement or further career ventures with clarity—free from any unfortunate surprises along the way—by properly disposing of assets in advance.
The strategic planning process you use to develop your exit strategy should include the following steps:
First, it’s essential to have a clear vision of where your business will be in the future. What does success look like? Are you aiming for an increase in profitability over time so that it can generate maximum value when sold, or are there other goals, such as passing on management responsibility to another investor who will take things further? By defining these objectives now, you can help ensure that everyone is working toward the same outcome.
Next, you need to determine who will be involved in the process of selling your company. Will you take an active role in the sales process, or will you leave it to the professionals to handle the details? How will you select professionals best suited to your needs?
And finally, you will need to create a plan of action to help you achieve your goals.
Each of these steps is vital in successfully achieving your objectives. Be sure that you dedicate the proper time and resources to each task if you want to ensure that your exit strategy is as effective as possible.
Get the most value out of a sale
Don’t settle for less than what your business deserves. Take the time to explore all possible opportunities, and never forget that you don’t have to accept any offer immediately. Thoroughly research potential buyers before deciding so that you can ensure a fair deal. In my experience, it will almost always be worth the wait.
Planning for all possible angles of a sale should be part of your process. Think about when to sell, what kind of business you’re divesting from, and the potential buyers who may show interest. A well-executed strategy in advance sets you up for long-term success.
Once you are ready to start looking for a buyer for your business, I find that talking to a business broker is an essential step in getting you prepared. They can assess where your sale process stands and help you discover potential buyers while ensuring that everyone involved gets fair terms. Their insights can be invaluable throughout this journey—saving time and stress on your part.
It’s also essential to have professional guidance from an attorney as you navigate through this complex process. They can help clarify sale terms, secure fair dealings between both parties, address potential tax implications of the purchase, and ensure legal rights are maintained throughout.
Lastly, a reliable accountant is a must-have for any business sale. They can set up the necessary accounts, line out your financials, and help prevent future tax issues while safeguarding you from potential buyer disputes after closing.
With these experts on your side, you’ll be more likely to end the transaction on solid footing.
Overall, to get top dollar for your business, you should start preparing well before the actual sale and carefully consider the options available to you.
Article by Michael Shribman, President & Founder at APS Global Partners Inc.| President & Founder at Medias Health Inc.| Influencer of Forbes.