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How to Develop a Business Exit Strategy [+ Templates]

Written by: Idorenyin Uko

No matter how successful your business is, you should plan for the day you move on from the start. At some point, you’re going to either sell or retire and pass it on to a successor.

However, most owners need to be more knowledgeable when it comes to exiting their business. William Buck’s 2019 Exit Smart Survey Report shows that about 53% of entrepreneurs don’t actually have an exit strategy in place.

An exit strategy defines how you will exit your business, providing guidance on how to sell your company or handle financial losses if it fails. In addition, it gives you a clear direction on what steps to take to ensure a successful transition.

This article will take a deep dive into how to develop a business exit strategy for your company. We’ll also share customizable templates you can use along the way.

Table of Contents

What is a business exit strategy, benefits of an exit strategy, 8 templates to support your business exit strategy, types of exit strategies, how to develop a business exit strategy, when to use an exit strategy, business exit strategy faqs.

• An exit strategy for a business is a plan created by an investor or business owner to transfer ownership of the company or shares to another investor or company.
• Having an exit strategy helps you make better decisions, amplifies your ROI, makes your business attractive to investors and ensures smooth transitions.
• The main types of exit strategies are mergers & acquisitions (M&A), selling your stake to a partner or investor, family succession, acquihires, management and employee buyouts, leveraged buyouts, initial public offering (IPO), liquidation and bankruptcy.
• Follow these steps to develop a business exit strategy: determine when you want to leave, define what you want to achieve, identify potential buyers or successors, evaluate and increase the current value of your business and assemble the right team.
• Write an exit plan, create a communication plan, develop a contingency plan and build a data room.
• Visme provides templates for creating a robust business exit strategy , checklist, investor pitch, succession plan, press release, communication plan and more.

A business exit strategy is a strategic plan for a business owner, trader, investor or venture capitalist to sell their company or shares to another company or investor. Having a deliberate exit strategy helps owners generate maximum value from liquidating their assets.

In cases where the business is unsuccessful, an exit plan helps the owner reduce losses or transfer them to another party. A venture capitalist may also utilize an exit strategy to prepare for a cash-out of their investment.

Common exit strategies include initial public offering, mergers and acquisitions, liquidation, management or employee buyout and transfer to a successor.

Exit Strategy Options: Closing vs Selling

When weighing your exit options, you're going to have to choose between selling to a new owner or closing the business.

Selling to a new owner is a win-win. You'll make money while the buyer can start operations without a huge upfront investment. If there's a financing agreement, the buyer can spread the payment over a period of time. However, the downside of selling is that employees may be affected.

The second option is closing shop and selling assets as quickly as possible. While this method is simple and quicker, the proceeds only come from the sale of assets. These may include real estate, inventory and equipment. Also, if you have any creditors, the funds you generate must be paid to them before you can pay yourself.

Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.

Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:

• Making Strategic Business Plans and Decisions: With an exit in mind, you will be more likely to set goals and make strategic decisions toward your expected business outcomes.
• Maximizing Your Return on Investment: When it comes to exiting, timing is key. Having a business plan exit strategy enables you to sell when market conditions are favorable, amplifying your ROI.
• Making Your Business More Attractive to Investors: Potential buyers value businesses with planned exit strategies because they demonstrate a commitment to long-term sustainability.
• Working Towards Business and Professional Goals: Executing an exit strategy that increases your business’s value and potential can prevent negative consequences of exiting, like bankruptcy.
• Revealing the Best Selling Situation: Planning your exit strategy requires an in-depth analysis of finances, market dynamics, competition and positioning. This helps you value your business and understand the best-selling situation.
• Ensuring a Smooth Transition: Exit strategies outline all roles and how they contribute to operations. With every employee and stakeholder informed about their responsibilities and actions, transitions are smooth and predictable. You can minimize disruption and maintain continuity during times of change.
• Implementing an Effective Succession Plan: For business owners, an exit strategy can be a part of company succession planning . This ensures a smooth transition of ownership or management. Be it to family members, existing partners, or external parties.

Executing a business exit strategy involves many moving parts. By using templates, you can effectively articulate your plan and ensure nothing slips through the cracks.

Keep in mind that you can tailor these to suit different industries, business sizes and exit goals.

Company Exit Strategy Presentation

When approaching investors or stakeholders to share your exit intent, you need a pitch deck. And we’re not just talking about “run-of-the-mill” decks. Use this orange-themed, captivating exit strategy template to wow investors and stir their excitement about the deal.

This presentation helps you explain what your business is about, how much you’ve grown, what you’ve achieved and the team behind the dream. It also paints a positive picture of the future. This business exit plan template utilizes charts, widgets and data visualizations to capture the timeline, traction and financing in an engaging way.

Do you have more evidence to support your presentation? You can link to your valuation, financial, legal and operations documents using Visme’s interactive features .

If you're racing against the clock and need to create your presentation quickly, use Visme's AI presentation maker . Input a detailed prompt, choose your preferred design and watch the tool produce your presentation in seconds. You also have the freedom to customize text and design with the extensive array of features and tools in Visme's editor.

Business Exits Checklist

Business exits (or even mergers and acquisitions) are complex. Without a checklist, you could miss out on some key steps. This business exit strategy checklist is a must-have if you want to increase your likelihood of success. It covers various aspects, from financial readiness and legal compliance to communication strategies and post-exit planning.

Think of it as a roadmap with essential steps and considerations to help you achieve a smooth and successful exit. Feel free to use it as is or customize it with the help of Visme’s intuitive editor. When working on this business exit plan template, you can change fonts, text and background colors to fit your branding.

Business Exit Strategy

Use this strategic plan template as a framework to guide you throughout the business exit journey. It captures all the key components of an exit strategy, helping you decide what’s best for your business.

Use it as a guide to navigate various aspects such as financial planning, market analysis and stakeholder communication.

Since multiple stakeholders are involved in the exit planning process, this exit strategy for business can serve as a collaborative tool. With Visme’s collaboration feature , team members can contribute to and review it individually or in real time. (Check out the video below to see how it works.)

The best part is that you can even deploy the Workflow tool for better task management among stakeholders. You can assign different sections, set deadlines, track progress and make corrections—all in one place.

Merger Press Release Templates

Announce your company's recent merger in a polished and professional manner using this blue-themed template. It features dynamic content blocks where you can easily place your text and visual elements.

The blue mixed with a yellow sprinkle makes your news visually appealing and engaging. Leave a lasting impression on your audience with visuals of your product or team members.

The best part of using Visme? You can generate content ideas or drafts for your press release using Visme’s AI Writer . The tool also comes in handy for proofreading your press release.

You can replicate or customize this merger press release for different channels using the Dynamic Fields feature .

Ownership Succession Plan

An ownership succession plan is critical for the success and stability of any business. Craft a well-structured plan for transferring ownership with this ownership succession plan template.

This customizable template addresses every aspect of the transfer process, like ownership structure, transition timeline and financial implications. It also captures an ownership checklist, a succession plan for retirement, a consideration sheet and a successor development plan.

Use this document to facilitate effective communication among stakeholders, including the owner, management, board of directors and employees.

Edit this template to align with your brand identity and maintain a smooth operational flow during the transition. Feel free to beautify the document with icons , stock photos and videos from Visme’s library. You also have the option of generating unique visuals with Visme’s AI image generator .

General Due Diligence Report

Give your business a huge advantage on the negotiation table with this general due diligence report template. Presenting a stunning report makes your business more attractive to potential buyers. It also eliminates surprises during negotiations and expedites the overall deal execution process.

This report presents a clear picture of the company's assets, liabilities, financial performance and growth prospects. It also captures information about your company’s legal and regulatory compliance, operations and team.

After publishing your report, you can monitor traffic and engagement with the Visme analytics tool . It provides insights into your report’s views, unique visits, average time, average completion and more. Monitoring how readers consume the report will help you steer your conversations in the right direction.

Financial Due Diligence Report

​​Instill confidence in potential buyers, investors and other stakeholders with this financial due diligence report. It paints a clear picture of your company’s financial health, controls and systems. This template covers key sections like the company overview, financial analysis, income statement, taxation analysis and recommendations.

The beautiful thing about creating this report in Visme is that you don't have to type in your financial figures manually. You can easily connect to third-party sources and import financial information into your report. As you make changes to your data, your table or chart will also be updated in real-time.

Download this template to share with your recipient in different formats, including PDF, HTML, video and image. Or simply generate a shareable link for online sharing. This means you can cater to different reading preferences–whether print or digital.

Legal Due Diligence Report

Establish compliance with all relevant laws and regulations associated with the transaction with this report template. It offers both the buyer and seller an extensive understanding of the exit process. This report captures key sections, such as:

• Legal and regulatory compliance
• Privacy and data sharing
• Terms of Service and Licensing
• Data retention

With this report, you can identify potential legal risks and liabilities. Not only does it ensure a smoother exit process, but it also helps you make better decisions.

Keep your report on brand with Visme’s brand wizard . Just input your URL; the tool will pull in your brand assets and recommend branded templates. You don't have to manually import them into the Visme editor.

Whether you're mapping out a business strategy or creating a plan for a business exit, we’ve created this ultimate list of strategic planning examples and templates to help you.

There are eight major examples of exit strategies for entrepreneurs, startups and established businesses.

Made with Visme Infographic Maker

 Ultimately, the strategy you select will depend on your own financial, personal and business goals. We’ll also touch on some of the pros and cons of each.

Merger and Acquisition (M&A)

This business exit strategy example involves merging with or selling your company (or a portion) to another company. The acquiring company may be a competitor, a supplier, a customer or a private equity firm. If you’ve built a strong brand, technology, or customer base, a Merger and acquisition exit strategy can provide an attractive exit option for your company.

• Creates economies of scale and increases efficiency by combining resources and capabilities.
• Enhances competitiveness and market position through expanded offerings and increased market share.
• Provides access to new markets, technologies and talent.
• Generates synergies and cost savings through combined operations.

Disadvantages

• Integration challenges and cultural differences can lead to significant difficulties in realizing expected benefits.
• High transaction costs and significant investment are required.
• Risk of overpaying for the acquired company or assets.
• Potential loss of focus on core business activities during integration.

Streamline your M&A exit strategy with the help of this customizable template. It captures every aspect of the transition process, including assessment, preparation, valuation and negotiation.

Exit Strategies for a Partner or Investor

Selling your stake to a partner or investor can be a strategic exit plan, particularly if you are not the sole business owner. In this shareholder exit strategy, you have the opportunity to sell your stake to a familiar entity, often referred to as a 'friendly buyer,' such as a trusted partner or a venture capital investor.

• Allows the business to continue operating smoothly with minimal disruption to daily activities, ensuring a consistent flow of revenue.
• A 'friendly buyer' already has a vested interest in the business and a commitment to its long-term success. This can contribute to the ongoing stability and growth of the company.
• Identifying a suitable buyer or investor for your share of the company can be a challenging task.
• When selling to someone with a close relationship, personal ties may influence negotiations. Hence, the process may not be as objective as with an external party.
• The close relationship with the buyer may make you lower the asking price.

Family Succession Exit Strategy

This exit strategy for a small business involves passing ownership and leadership of a business from one generation to the next within a family.

• Maintains the business's continuity and legacy with a sense of tradition.
• Successors often deeply understand the business because of their long-term affiliation.
• The successor’s familiarity with existing relationships, suppliers and customers can contribute to the business’s stability during the transition.
• Family dynamics can lead to conflicts of interest and an inability to make impartial business decisions.
• Successors may lack the necessary skills or experience to steer the business.
• Non-family employees may perceive favoritism or a lack of equal opportunities, causing dissatisfaction within the workforce.
• Narrow-mindedness within the family may hinder the introduction of new ideas and innovations.

Acquihires Exit Strategy

For this exit strategy in business, a larger company acquires a smaller company primarily for its talent and intellectual property. This allows acquiring companies to easily tap into the experience and expertise of skilled employees and innovative minds.

• Acquiring a team with a proven track record mitigates some of the risks associated with starting a new project or entering a new market.
• Provides a quick way for companies to onboard skilled and talented hires.
• The acquired team brings fresh perspectives, ideas and innovations to the acquiring company.
• Integrating a team already familiar with the industry can accelerate product development or market entry.
• Merging different cultures may lead to conflicts and clashes that affect team morale.
• Getting the acquired team acquainted with existing workflows and processes may present difficulties that impact productivity.
• Acquihires can be expensive and there's no guarantee you'll successfully integrate the new team.

Management and Employee Buyouts (MBO)

An MBO occurs when the company's management team purchases a majority stake from existing shareholders. This exit strategy in entrepreneurship allows managers to take control of the business and make decisions without external interference. MBOs can motivate employees, align interests and facilitate succession planning.

• Increased chance of success since the management team is already familiar with the company's operations, culture and challenges.
• MBOs can provide continuity in leadership, ensuring a smooth transition without significant disruptions to daily operations.
• Enable more agile decision-making processes for a smaller group of decision-makers.
• F​​unding an MBO can be expensive. The management team may face difficulties raising the necessary capital to acquire the company.
• MBOs may lack the financial resources and expertise that external investors or buyers could bring to the company.
• Insiders may have a biased view of the company's value and potential, leading to overvaluation and unrealistic expectations.

Here's a template you can use to manage the transition process for your MBO exit strategy. The presentation template covers key aspects such as employee roles and ownership, the board’s role, the process, transition planning and management.

Leveraged Buyout (LBO)

An LBO is similar to an MBO but involves borrowing funds, equity and cash to finance the purchase. The assets of the purchased and acquiring companies are used as collateral for the loans. Private equity firms often use this method to acquire companies with the potential for high returns through financial leverage.

• If the acquired company performs well, the return on the equity investment can be substantial.
• LBOs allow investors to control a larger enterprise with less initial investment.
• Private equity firms involved in LBOs often bring operational expertise and efficiency.
• Private equity ownership supports strategic decision-making since the ownership structure is often less bureaucratic.
• If the acquired company's performance declines or interest rates rise, the debt burden increases.
• Capital structure of LBOs may limit the company's ability to generate cash for other purposes.
• LBOs are influenced by market conditions and economic downturns can impact profitable investment exits.

Create a robust strategy plan for your leveraged buyout exit strategy using this template.

Initial Public Offering (IPO)

An IPO exit strategy is when a privately held company goes public by issuing stocks to raise capital. This provides an opportunity for early investors and shareholders to cash out their shares and realize a return on their investment. However, going public also means increased scrutiny, regulation and pressure to perform well.

• Provides liquidity for existing shareholders, including founders and early investors.
• Enhances the company's public profile and can attract new investors.
• Preparing and executing an IPO can be an expensive and time-consuming process.
• The company becomes subject to rigorous regulatory requirements and market fluctuations.

Considering how challenging executing an IPO is, this template is your trusted ally. The green fashion-themed design makes it visually appealing. The pictures bring more context to the company’s products or offerings. This strategy plan accounts for every single aspect of a successful exit via IPO, including objectives, the preparation phase, timing, IPO execution and post IPO.

Liquidation

Liquidation exit strategy involves winding down operations, selling off assets and distributing proceeds to shareholders. This option is usually considered when a company is no longer viable or has reached the end of its life cycle.

• Compared to other exit strategies, liquidation is a simpler process.
• Proceeds from liquidation can be used to settle outstanding debts, liabilities and other financial obligations.
• Allows you to sell and realize value from individual assets rather than the entire business.
• Often results in lower returns for shareholders compared to selling the business as a going concern.
• The liquidation process, especially if it involves bankruptcy, can damage the reputation of the business and its stakeholders.
• Assets can be sold below fair market value due to urgency.

Bankruptcy is a legal process where a company unable to pay its debts seeks protection from creditors. Depending on the circumstances, it can result in restructuring, refinancing or liquidation. While not always ideal, bankruptcy can provide relief and allow for a fresh start.

• Provides a legal process for discharging or restructuring debts.
• Triggers an automatic stay and offers legal protection from creditors.
• Facilitates the orderly liquidation of assets. This ensures creditors get fair treatment and maximizes the value of assets for distribution.
• Has a severe impact on the credit ratings of both the company and its owners.
• The court takes control of the company's assets and may appoint a trustee to oversee the process.
• Proceedings involve legal and administrative costs that can further erode the company's assets.
• Often results in job losses and career disruptions for employees.

1. Determine When You Want to Leave

The first thing you should do when doing business exit planning is figure out how long you want to stay involved.

If it’s a voluntary exit, you can approach it in two ways. You can list goals that should be achieved before you exit or pick a date in the future and work towards it.

For example, you can decide to sell after hitting a certain milestone in revenue, profitability, growth, or liquidity. You can also determine whether you’ll proceed with the sale even if you don’t hit those targets.

The target date for this transition can change. But without a deadline, you won’t treat the plan with priority or commit resources to achieving it. Once you have a date, you can work toward making your business more valuable and attractive to potential buyers.

2. Define What You Want to Achieve

Ask yourself what you want to achieve from your exit strategy. These could be financial goals, legacy preservation or pursuing new opportunities.

Do you want to retire or will you pursue other opportunities? Do you still want to maintain control over the business? Are you hoping to preserve your legacy?

If you’re exiting a long-term business, succession planning or management buyouts may be your best bet. But if you’re looking to cash out or explore synergies, you can sell, merge or even launch an IPO.

3. Identify Potential Buyers or Successors

The potential buyer for your business will depend on your industry, financial performance, strategic fit, market position and other factors.

Create a profile of the type of investor that may be interested in acquiring your business.

For example, your buyer may be a bigger competitor or venture capital fund that can maximize value from your business model. It could also be a rival company that finds your new product line perfect for cross-sells. You may also be approached by rivals who want your intellectual property, staff or customer base.

The next step is to list businesses that fall into this category. If you're looking to sell your business, consider potential buyers who have expressed interest in your industry or have a track record of acquiring similar companies.

However, if you plan to pass your business down to family members, identify suitable candidates within your family who have the necessary skills and experience to run the business successfully.

4. Evaluate the Current Value of Your Business

The next step is to determine what your business is actually worth. This may involve a business valuation, considering factors like revenue, profits, assets, market position and growth potential.

We recommend hiring external auditing companies or professionals to value your business and conduct due diligence. Not only will you get a due diligence report , but you'll also get a transparent and impartial valuation of your finances.​​

Understanding your business's worth will help you set expectations for buyers and negotiate a fair deal.

In addition to valuing your business, do your due diligence. Organize all of your company and legal documents, including:

• Permits/licenses
• Employee data and payroll information
• Vendor and customer contracts
• Asset lists
• Insurance information
• Liabilities
• IP documentation

5. Increase Business Value and Improve Performance

Now that you know the value of your business, what's next?

Ask yourself: Does it align with the exit strategy goals? Can I achieve my exit strategy goals with this current valuation? What can I do to increase the value of the business or make it more appealing to investors?

Keep finding areas for improvement across your business. This could involve expanding your product or service offerings, entering new markets or implementing new technologies.

Focus more on areas that will make other businesses want to acquire or merge with you. If you haven’t found those value drivers yet, it’s about time you did. Similarly, figure out the biggest drawbacks and fix them.

For example, if you have a strong financial track record, consistent profitability and positive growth trends, you’re likely to attract potential buyers. Your proprietary technology, patents, intellectual property, customer base, supplier relationship and geographic presence may just be the reasons other companies find your business valuable.

Another great practice to increase value is to do a competitor analysis. Analyze the competitors in your market. Where are they doing better than you? How can you beat them in their game? Acting on this intel can increase your chances of finding a suitable buyer and negotiating a favorable deal.

6. Assemble a Solid Team to Manage the Process

Buyers will come to the negotiation table with a solid team. You should assemble a great team as well.

You should also do this if you’re creating an exit strategy for startups.

When it comes to selling your business or liquidating shares, you’ll need professional guidance to navigate the complexities and emerge with confidence. The key is to surround yourself with trustworthy individuals who understand the intricacies of selling.

These professionals should have a proven track record and a wealth of knowledge to handle various situations associated with exits. Some professionals you should consider adding to your team include:

• Accountants
• Business brokers
• Corporate lawyers
• Merger and acquisition advisors
• Financial experts
• Marketing experts
• Information and communication experts

7. Write an Exit Plan

Establish a succession plan that outlines how you’ll ensure business continuity. This should outline how leadership will be transferred, including a clear chain of command, roles and responsibilities and a timeline for the transition.

Once you’ve decided to exit your business, gradually remove yourself. If operations, revenues and survival are 100% tied to the owner, that becomes a red flag for buyers.

Choose new leadership and start transferring some of your responsibilities to them while you finalize your plans. Establish a set of standard operating procedures (SOPs), ideally in written form, that would enable any buyer to keep the business in gear by following a set of instructions.

If you already have a documented operation strategy, transitioning new responsibilities to others will become seamless.

Ultimately, your business exit plan should capture these elements:

• Valuation of the business
• Timeline for your exit
• Financial preparedness
• The most suitable exit strategy
• General due diligence report
• Post exit involvement (consultancy roles, advisory positions, or other forms of ongoing involvement)

We've shared dozens of business exit plan templates. Alternatively, you can create one in minutes using our AI document generator . 

8. Create a Communication Plan

Plan how and when you will communicate the exit to customers, employees and other stakeholders.

Create a communication plan to manage this process. It can minimize disruptions and maintain the confidence of key stakeholders.

Once you have established a solid succession plan, communicate this information to your employees. Be prepared to address any concerns or questions they may have. Notably, approach this communication with empathy and transparency so your employees feel heard and valued throughout the process.

Finally, inform your clients and customers. If your company will continue with a new owner, make the transition smooth by introducing them to your clients. However, if you are shutting down your business, point your customers to alternative options.

Here’s a communication plan you can use for this step.

9. Develop a Contingency Plan

During the exit process, things could go south. For example, unexpected events—like market condition changes, delays or disputes with stakeholders—could impact the exit process.

That’s why you need a contingency plan to address these risks. Evaluate the potential impact and likelihood of each risk you’ve identified. Then, you can develop strategies to mitigate their effect.

Let’s say there’s a sudden change in market conditions. Your contingency plan could be to diversify your revenue streams or implement cost-cutting measures. Ensure the strategies are feasible, practical and aligned with the overall business goals.

10. Create a Data Room

The data room consolidates comprehensive information on financial results, key business drivers, legal affairs, organizational structure, contracts, information systems, insurance coverage, environmental matters and human resources issues such as employment agreements, benefits and pension plans.

As soon as the Confidential Information Memorandum (CIM) is drafted, start compiling information for the data room, as it supports much of the document.

It is important to balance the amount of information and the level of detail provided in the data room. The information should be sufficient to enable buyers to determine the asset's value and complete their due diligence.

However, it is equally important to limit the amount of sensitive or competitive information disclosed to anyone other than the ultimate purchaser. Achieving the right balance often requires discussions between sellers and their advisers.

There are different instances where you may need to use an exit strategy. Let’s look at a few of them.

• Retirement: If a business owner is approaching retirement age, an exit strategy can help them plan for the transfer of ownership or sale of the business.
• Profit Objective : An angel investor can sell their stakes and exit, achieving a specific profit objective.
• Mergers and Acquisitions: If a business owner receives an offer to purchase their business, an exit strategy can help them negotiate the terms of the sale and ensure a smooth transition.
• Financial Losses: An exit strategy is a great way to liquidate losses from a business with financial challenges or heavy debt burdens.

Other situations that can necessitate developing an exit strategy for startups and corporations include

• Change in personal circumstances such as a divorce, illness, or death in the family.
• Shift in business direction or industry changes.
• Lack of growth opportunities.
• Legal or regulatory issues.
• Planning for succession or transition to new leadership.
• Aligning with the investment horizon or expectations of investors or stakeholders.

Q. What Is the Best and Cleanest Way to Exit the Business?

The best exit strategy depends on your personal goals, financial needs and the specific circumstances of your business.

However, a clean exit can provide peace of mind and financial security. This type of exit involves a smooth transfer of ownership where you receive your payout and know your business will be left in capable hands.

With a clean exit, there’s little or no disruption to business operations. The owners maximize the value of their business and realize their financial goals.

Q. What is the Master Exit Strategy?

There isn't a single "master exit strategy" that universally applies to all businesses. Different businesses may benefit from different exit strategies. In addition, a small business exit strategy may not work for a larger company.

When exiting your business, deploy a strategy that helps you maximize your company's value and benefits all stakeholders.

Q. What Are the Two Essential Components of an Exit Strategy?

The two essential components of an exit strategy are:

A clear definition of the business owner's objectives: This includes identifying what the owner wants to achieve through the exit, such as maximum financial return, continued legacy, or minimal disruption to employees and customers.

A thorough assessment of the business's current situation: This includes evaluating the company's financial health, operational performance, market position and competitive landscape.

How Visme Can Equip Your Company & Team

There you go. This article has covered the basics of how to prepare an exit strategy.

Exiting a business you’ve built or invested in can be emotional and overwhelming. But doing it the right way pays off.

Planning a proper exit strategy in entrepreneurship requires diligence in terms of time and care. That’s why you need a tool like Visme that helps you manage the entire process—from planning to documentation to execution.

Visme provides templates for creating a robust business exit strategy , checklist, investor pitch, succession plan, press release and communication plan.

That’s just the tip of the iceberg regarding what you can create in Visme. With a rich library and cutting-edge features, teams can collaborate and create stunning business documents.

Sign up to discover how Visme can help you execute your business exit strategy.

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Exit Strategies

How to Craft an Exit Strategy for Investors

Staying informed about industry trends, learning from both successful and challenging exit stories, and continuously refining the presentation of exit strategies will empower founders to make informed decisions and navigate the path to success.

As founders aim to build successful and scalable companies, it's essential to consider exit strategies – a crucial aspect that plays into the risk-return dynamic VC firms evaluate. 

I. Understanding Exit Strategies

A. Defining the Exit

An exit strategy is a planned approach by which startup founders and investors intend to realize their investment returns. It's a crucial component of the business plan that outlines how investors will eventually liquidate their stake in the company, allowing them to capture the anticipated profits.

B. Common Exit Avenues

Acquisition : The startup is acquired by a larger company, providing investors with a return on their investment.

Initial Public Offering (IPO) : The startup goes public, and shares are traded on a stock exchange, allowing investors to sell their shares.

Merger : The startup merges with another company, creating a larger, more competitive entity.

Management Buyout (MBO) : The existing management team, possibly in collaboration with external investors, buys out the investors' stake.

Liquidation : In certain cases, the startup may choose to wind down its operations, and assets are sold off to repay investors.

II. Timing the Exit

A. Considerations for Timing

Market Maturity : Assess the maturity of the market and industry trends. Some markets may be more conducive to acquisitions or IPOs at specific times.

Company Growth Stage : The exit strategy often aligns with the company's growth stage. Early-stage startups might opt for acquisition, while more mature startups may consider an IPO.

Investor Expectations : Understand the expectations of investors regarding the timeline for an exit. Some investors prefer shorter-term exits, while others are more patient.

III. Aligning Exit Strategies with Business Goals

A. Strategic Alignment

Business Mission : Ensure that the chosen exit strategy aligns with the overall mission and goals of the startup. For instance, an acquisition may align better with certain strategic objectives than an IPO.

Impact on Innovation : Consider how the chosen exit strategy may impact the startup's ability to innovate. Some founders prioritize remaining independent to maintain a focus on innovation, while others see acquisition as an opportunity for greater resources.

IV. Factors Influencing Exit Strategy Selection

A. Financial Considerations

Investor Returns : Different exit strategies yield different returns for investors. Understand the financial implications for both founders and investors.

Valuation : Consider the current and potential future valuation of the startup. High valuation may make an IPO more attractive, while a strategic acquisition may be more feasible at a different valuation.

B. Market Dynamics

Competitive Landscape : Assess the competitive landscape and potential interest from larger players in the market. High demand for innovative solutions can make acquisition more likely.

Regulatory Environment : Understand the regulatory environment, especially if considering an IPO. Regulatory requirements can influence the feasibility and timing of going public.

V. Crafting a Presentation for Venture Capital Investors

A. Transparency and Communication

Open Dialogue : Establish open communication with investors about exit strategy considerations. Transparent discussions foster trust and alignment of expectations.

Regular Updates : Provide regular updates on the progress of the startup and any relevant industry developments that may impact the chosen exit strategy.

B. Tailoring the Presentation

Investor Preferences : Understand the preferences of your specific investors. Some VC firms may have a preference for certain exit strategies based on their investment thesis.

Scalability Narrative : Weave the chosen exit strategy into the broader narrative of the startup's scalability and potential market impact. Show how the exit strategy aligns with long-term growth.

C. Scenario Planning

Contingency Plans : Acknowledge the uncertainties in the startup landscape. Presenting various exit scenarios and associated plans demonstrates preparedness and strategic thinking.

Market Timing : Discuss how market conditions and timing may influence the chosen exit strategy. Highlight the flexibility to adapt to changing circumstances.

VI. Case Studies: Learning from Exit Strategies

A. Successful Exits

Instagram (Acquisition by Facebook) : Instagram's acquisition by Facebook for $1 billion in 2012 is a classic example of a successful exit. The strategic fit with Facebook's vision led to a substantial return for both founders and investors.

Alibaba (IPO) : Alibaba's IPO in 2014 is one of the largest in history. Going public allowed the company to access massive capital markets and facilitated continued growth.

B. Lessons from Challenges

Snap (IPO) : Snap's IPO faced challenges as the company struggled with monetization and faced intense competition from Facebook. The stock price volatility post-IPO highlighted the importance of a solid business model.

Theranos (Liquidation) : Theranos, once a highly valued startup, faced regulatory and legal challenges that led to its downfall. The liquidation of assets became the only viable exit option.

Crafting and presenting exit strategies to venture capital investors is a strategic process that requires careful consideration, transparency, and adaptability. Startup founders should view exit strategies not as an endpoint but as a critical part of the entrepreneurial journey. By aligning the chosen exit strategy with the company's mission, demonstrating financial acumen, and maintaining open communication with investors, founders can navigate the complexities of the funding landscape and position their startups for long-term success.

As the startup landscape evolves, so too will the expectations and preferences of venture capital investors. Staying informed about industry trends, learning from both successful and challenging exit stories, and continuously refining the presentation of exit strategies will empower founders to make informed decisions and navigate the path to success. 

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What Is an Exit Strategy?

Understanding exit strategies, who needs an exit plan, why is it important to have an exit plan, exit strategies for startups, exit strategies for established businesses, exit strategies for investors, why is it important to have an exit plan, what are common exit strategies used by startups, what are common exit strategies used by established companies, what exit strategies can investors use, the bottom line.

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Exit Strategy Definition for an Investment or Business

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

An exit strategy is a contingency plan executed by an investor , venture capitalist , or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria have been met or exceeded.

An exit strategy may be executed to exit a nonperforming investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.

An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO) .

Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning , liability lawsuits, or a divorce; or even because the business owner/investor is retiring and wants to cash out.

Key Takeaways

• An exit strategy is a conscious plan to dispose of an investment in a business venture or financial asset.
• An exit strategy helps to minimize losses and maximize profits on investments.
• Startup exit strategies include initial public offerings (IPOs), acquisitions, or buyouts but may also include liquidation or bankruptcy to exit a failing company.
• Established business exit plans include mergers and acquisitions as well as liquidation and bankruptcy for insolvent companies.
• Exit strategies for investors include the 1% rule, a percentage-based exit, a time-based exit, or selling a stake in a business.

An effective exit strategy should be planned for every positive and negative contingency regardless of the investment type or business venture. This planning should be integral to determining the risk associated with the investment or business venture.

An exit strategy is a business owner’s strategic plan to sell ownership in a company to investors or another company. It outlines a process to reduce or liquidate ownership in a business and, if the business is successful, make a substantial profit.

If the business is not successful, an exit strategy (or exit plan) enables the owner to limit losses. An exit strategy may also be used by an investor, such as a venture capitalist, to prepare for a cash-out of an investment.

For investors, exit strategies and other money management techniques can greatly help remove emotion and reduce risk . Before entering an investment, investors should set a point at which they will sell for a loss and a point at which they will sell for a gain.

Business owners of both small and large companies need to create and maintain plans to control what happens to their business when they want to exit. An entrepreneur of a startup may exit their business through an IPO, a strategic acquisition, or a management buyout, while the CEO of a larger company may turn to mergers and acquisitions as an exit strategy.

Investors, such as venture capitalists or angel investors, need an exit plan to reduce or eliminate exposure to underperforming investments so they can capitalize on other opportunities. A well-thought-out exit strategy also provides guidance on when to book profits on unrealized gains.

Businesses and investors should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments. Here are several specific reasons why it’s important to have an exit plan.

Removes emotions : An exit plan removes emotions from the decision-making process. Having a predetermined level at which to exit an investment or sell a business helps avoid panic selling or making rushed decisions when emotions are high, which could accentuate a loss or not fully realize a profit.

Goal setting : Having an exit plan with specific goals helps answer important questions and guides future strategic decision making. For example, a startup’s exit plan might include a future buyout price that it would accept based on revenue turnover. That figure would help make strategic decisions about how big to grow the company to reach predetermined sales targets.

Unexpected events : Unexpected events are a part of life. Therefore, it’s essential to have an exit strategy for what happens when things don’t go to plan. For instance, what happens to a business if the owner faces an unexpected illness? What happens if the company loses a key supplier or customer? These situations need planning in advance to minimize potential losses and capitalize on gains.

Succession planning : An exit plan specifies what happens to the business when key personnel leave. For example, an exit strategy might stipulate through a succession plan that the company passes to another family member or that the business sells a stake to other owners or founders. Carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart.

In the case of a startup business, successful entrepreneurs plan for a comprehensive exit strategy to prepare for business operations not meeting predetermined milestones.

If cash flow draws down to a point where business operations are no longer sustainable, and an external capital infusion is no longer feasible to maintain operations, then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit further losses.

Most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital. Business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party.

Ideally, an entrepreneur will develop an exit strategy in their initial business plan before launching the business. The choice of exit plan will influence business development decisions. Common types of exit strategies include IPOs, strategic acquisitions , and management buyouts (MBOs).

The exit strategy that an entrepreneur chooses depends on many factors, such as how much control or involvement they want to retain in the business, whether they want the company to continue being operated in the same way, or if they are willing to see it change going forward. The entrepreneur will want to be paid a fair price for their ownership share.

A strategic acquisition, for example, will relieve the founder of their ownership responsibilities but will also mean giving up control. IPOs are often considered the ultimate exit strategy since they are associated with prestige and high payoffs. Contrastingly, bankruptcy is seen as the least desirable way to exit a startup.

A key aspect of an exit strategy is business valuation , and there are specialists who can help business owners (and buyers) examine a company’s financial statements to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.

In the case of an established business, successful CEOs develop a comprehensive exit strategy as part of their contingency planning for the company.

Larger businesses often favor a merger or acquisition as an exit strategy, as it can be a lucrative way to remunerate owners and/or shareholders. Rival companies often pay a premium to buy out a company that allows them to increase market share , acquire intellectual property, or eliminate competition. This raises the prospects of other rivals also placing a bid for the company, ultimately rewarding the sellers of the business.

However, a merger-and-acquisition-focused exit strategy should factor in the time and costs to organize large deals as well as regulatory considerations, such as antitrust laws .

Established companies also plan for how to exit a failing business, which usually involves liquidation or bankruptcy. Liquidation consists of closing down the business and selling off all its assets , with any leftover cash going toward paying off debts and distributing among shareholders . 

As mentioned above, most businesses see bankruptcy as a last-resort exit; however, it sometimes becomes the only viable option. Under this scenario, a company’s assets are seized, and it receives relief from its debts. However, declaring bankruptcy could prevent business owners from borrowing credit or starting another company in the future.

Investors can use several different exit strategies to prudently manage their investments. Below, we look at several strategies that help minimize losses and maximize gains.

Selling equity stake : Investors with shares in a startup or small company could exit by selling their equity stake in the business to other investors or a family member. Selling an equity stake may form part of a succession plan agreed upon by founders when starting a business. If selling a startup stake to a family member, it’s important that they understand any conditions tied to the investment.

The 1% rule : Investors apply this rule by exiting an investment if the maximum loss equals 1% of their liquid net worth . For example, if Olivia has a liquid net worth of $2 million, she would cut an investment if it generates a loss of $20,000 ((1 ÷ 100) × 2,000,000). The 1% rule helps investors take a systematic approach to protect their capital.

Percentage exit : Using this strategy, investors exit an investment when it has gained or fallen by a certain percentage from its purchase price. For instance, Ethan, an angel investor, may decide to sell his share in a startup if it achieves a 300% return on investment (ROI) . Conversely, Amelia, a venture capitalist, may decide to sell her share in a startup if it drops 20% in value.

Time-based exit : Investors apply this strategy by exiting their investment after a specific amount of time has passed. For example, Noah may decide to sell his stake in a business after 18 months if it has not generated a positive return. A time-based exit helps free up capital from underperforming investments that could be used for other opportunities. 

Businesses should have a clearly defined exit plan to help manage risk and capitalize on opportunities. Specifically, an exit plan helps remove emotion from decision making, assists with strategic direction, helps to plan for unexpected events, and provides details about an actionable succession plan. 

Exit strategies used by early-stage companies include initial public offerings (IPOs), strategic acquisitions, and management buyouts (MBOs). Entrepreneurs typically select an exit plan before launching a business that fits their longer-term business development decisions and goals. The exit strategy that an entrepreneur chooses depends on factors such as how much involvement they want to retain in the business and its future long-term potential.

More established companies favor mergers and acquisitions as an exit strategy because it often leads to a favorable deal for shareholders, particularly if a rival company wants to increase its market share or acquire intellectual property. Larger companies may exit a loss-making business by liquidating their assets or declaring bankruptcy.

Investors can capitalize on gains and reduce risk by using exit strategies such as the 1% rule, a percentage-based exit, a time-based exit, or selling their equity stake in a business to other investors or family members. Investors typically set an exit strategy before entering into an investment, as it helps to manage emotions and determine if there is a favorable risk-return tradeoff .

Exit strategy refers to how a business owner or investor will liquidate an asset once predetermined conditions have been met. An exit plan helps to minimize potential losses and maximize profits by keeping emotions in check and setting quantifiable goals.

Common exit strategies for startups include IPOs, strategic acquisitions, and MBOs. More established companies often favor a merger or acquisition as an exit strategy but may also choose to go into liquidation or file for bankruptcy if becoming insolvent . Meanwhile, investors can exit investments using strategies such as the 1% rule, a percentage-based exit, a time-based exit, or selling their equity stake in a business.

Selling My Business. “ The Importance of Having an Exit Plan .”

AllBusiness.com, via Internet Archive. “ 10 Reasons Why Your Exit Strategy Is as Important as Your Business Plan .”

Ansarada. “ Different Business Exit Strategies, Their Pros and Cons .”

Experian. “ What Is an Exit Strategy for Investing? ”

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Business Exit Strategy

A plan for the transition of business ownership either to another company or investors

What is a Business Exit Strategy?

A business exit strategy is a plan for the transition of business ownership either to another company or investors. Even if an entrepreneur is enjoying good proceeds from his firm, there may come a time when he wants to leave and venture into something different.

When such time comes, the business can be sold, left in the hands of new management, or acquired by a larger company. Even if it will be decades before the entrepreneur can sell his business, what he does in the present moment can set it up for a smooth exit or make the process more challenging.

What Should Be Considered In An Exit Strategy?

While different businesses will require different tactics in an exit strategy, there are key elements that can be helpful across the board. These elements factor into play the company’s financial circumstances, market conditions , objectives, and timeline.

1. Objectives

One aspect that should never be missed in a business exit strategy is the owner’s individual goals. Upon exiting the business, is the owner interested in getting profits or does he also want to leave a legacy? Establishing the purpose of exiting the company helps to identify the specific objectives and activities to be prioritized.

2. Timeline

Another factor that should be considered is the time frame of the business. When does the owner intend to sell the business? When establishing this time frame, a business owner should allow for flexibility. In such a way, he will have more negotiating power.

However, if the time frame is tight, the business sale might not go through smoothly since everything will be done in a rush. Similarly, the stakeholders might not have enough time to make the business reach its full potential.

3. Intentions for the Business

Does the firm owner want to see his business continue its operations or does he prefer that it gets dissolved? Answering this question will help to establish whether the company will end up being liquidated, merged with another, or sold and set up for transition via succession planning.

4. Market Conditions

Both the current supply and demand for the company’s products or services, and the marketplace demand for businesses are also factors to consider. Are there a lot of potential buyers or only a few?

Why a Business Exit Strategy is Important

1. business owners become weary.

Forming a company from the ground up and transforming it into a successful and profitable one is challenging. It calls for a significant investment of time and money. Most of the time, entrepreneurs need to wear many hats before they can earn enough profits to invest in recruitment and training.

Considering the amount of effort that business owners put into these ventures, they are often unwilling to delegate tasks. These individuals invest all their time in running the business operations. They work round-the-clock looking for new clients, marketing their products, and recording the business finances. Since such company owners rarely take some time off to recharge, they can get to the point of fatigue or burnout.

Burnout can occur at any time and for several reasons. When it does happen, the firm owner will not want to spend another three months getting his business ready for sale. Prospective buyers prefer that the company owners have performance metrics, revenue history, and any other paperwork ready. A business exit strategy ensures that company managers have systems in place for recording essential information on a regular basis.

2. Get a better understanding of revenue streams

An exit plan requires that one keeps consistent and up-to-date data regarding the business’ performance. This means that company owners will always have a good understanding of their revenue streams and cash inflows and outflows. They are able to determine the activities that are bringing in the most revenue and how this revenue is being spent.

Having accurate financial data makes for better decision-making. It also helps firm owners to make realistic predictions. They will be able to manage cash flows more efficiently, plan for seasonal fluctuations, and focus their marketing efforts on the projects that matter.

Coming up with an exit strategy helps firm owners decide whether they should go after short, medium, or long-term income projects. If an individual intends to exit the business within the next few months, he can focus his efforts on activities that bring in cash quickly. These would include items such as monthly subscriptions, automatic renewals, and membership models that remain active up to when customers cancel them. Such income-generating projects require minimal effort, yet they keep money flowing into your business.

However, firm owners who want to remain in business for the next couple of years should focus their efforts on long-term growth activities. Developing life-long client relationships, building a reliable pool of employees, and being innovative will go a long way in helping the company grow.

3. Developing effective leadership

Whether a company owner intends to sell his business or pass it onto his next generation, effective leadership can make or break this deal. To ensure that the transition is a success, the firm owners should outline the chain of command that is to be followed upon exiting. This plan should also lay out the basics of company decision-making.

When a longtime manager or leader leaves, some firms end up in chaos with numerous stakeholders fighting for power. The players that are left waste so much time deciding who will take over that they forget the primary goals of the firm. By outlining a clear succession plan, firm owners help to minimize such risks and ensure that the business continues to thrive long after they leave.

4. Smooth operations

An exit plan highlights all the information that the company’s successor would need to run it. This way, the new investors or managers won’t waste their resources collecting basic information regarding employees’ salaries, finances, and partners. If the business exit strategy contains all the necessary information, its successors can hit the ground running as soon as the company leader leaves.

Key Takeaways

Entrepreneurs think of themselves as innovators. Their primary goal is to take ideas and turn them into successful ventures. This is beneficial; it’s what helps most firms survive and thrive. However, placing too much focus on the start of a business takes away focus from its end, which can be detrimental. A good number of entrepreneurs don’t have solid strategies in place for how they will exit the industry or company.

Exit plans are crucial in ensuring that firms transition smoothly to the new management. Having an exit strategy also makes it easy to keep tabs on the company’s finances. If an individual intends to sell his business later, he will have to present the firm’s revenue history and performance metrics to prospective buyers.

Also, a business exit strategy is important as it outlines the chain of command to be followed once a leader exits the company. This way, the new owners won’t spend too much time determining who will take over the managerial positions.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Corporate Structure
• Leadership Traits
• Management Theories
• Succession Planning
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Exit Strategies - All You Need to Know about Business Exit Planning

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

The question, “What is your exit plan?” tends to draw blank expressions when asked to business owners.

A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.

Business owners need to think about exit planning before searching for potential buyers. The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.

By working with a team of professional advisors, accountants, lawyers, and brokers, you can ensure the right documents are in place for a business exit whenever the time comes.

In this article, we talk about creating a business exit plan and how to make one for your business.

What is a Business Exit Strategy?

A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners don’t always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.

Investor exit strategy

An investor exit strategy is similar to that of a business exit strategy. However, investors look for a financial return on their exit from a company, so bequeathing is never one of the options considered. An investor will often have a list of potential acquirers in mind, as well as a timeframe, as soon as their investment is made. In this type of scenario, there is often an exit multiple in mind (i.e. a multiple of EBITDA or a multiple of the original investment made in the business).

Venture capital exit strategy

Another business exit strategy option is a venture capital exit strategy. As our article on venture capital outlines, if a company is venture funded then consider that your investor will have a pre-planned exit. As an early stage company, this is a natural part of taking investments. Usually, with a VC investment, the aim is for an exit after five years, either through an industry sale or an IPO, where they can liquidate their original equity investment.

Motives for Developing Exit Strategies

Technically, it is important for equity owners to have a broad outline of what an exit would look like. For example, the image below represents various motives ranging from financial gain to mitigating environmental risk.

Some of the common motives for business exit include the following:

Retirement - Arguably the most common reason of all motives is retirement. Business owners will inevitably retire at some stage, and it’s best that they have an exit strategy in place before doing so.

Investment return - A business exit strategy as part of a wider investment strategy - for example, the VC company planning to go to IPO after five years - makes the exit valuation part a component of the initial investment in the business.

Loss limit -A business exit is ultimately a kind of real option for a business. If the business is hemorrhaging money, the best option may be to exit immediately - ‘cutting your losses’ on the business, a sit was.

Force majeure - Like the examples of Covid-19 and Russia’s invasion of Ukraine, sometimes an investor or owner doesn’t really have a choice: The circumstances dictate that they have to exit.

Types of Exit Strategies

Sale to a strategic buyer

Strategic buyers are usually in the same industry as the company whose owner is looking to exit. And in other cases, the buyer can be in an adjacent market looking to compliment their products in an existing market, or expansion of their products into a market.

Sale to a financial buyer

Financial buyers are solely looking for a financial return from their investment in a business and the exit is the primary means of achieving this return. Examples include venture capital and private equity investors.

Initial Public Offering (IPO)

This form of exit, far more common with startups than mature companies, enables company owners to exit by selling their equity to investors in public equity markets.

Management buyout (MBO)

An exit through MBO would occur when the owner sells the company to its current management team, whose familiarity with the business technically should make them the best candidates to achieve value from an acquisition.

Leveraged buyout (LBO)

A leveraged buyout occurs when a buyer takes a loan or debt to purchase another company. The buyer also uses a combination of their assets and the acquired company's assets as collateral. Financial models can be used for multiple scenarios and simulations of when an LBO is an effective choice.

Liquidation

Liquidation can be used by a business owner to exit if they feel like the liquidation would yield cash faster or that the individual assets (i.e. property, plant, and equipment) of the business were more liquid than the business as a going entity.

Exit Strategy for Startups

Startups looking for VC investment can include an exit strategy as part of their initial pitch. It is not mandatory. Sometimes this can work when well, for example, when a startup founder is well versed in the industry and has a credible 5-year forecast.

Startup exit strategies depend on a few different factors:

Market timing

How have IPOs for startups performed in the past 12-18 months? If public markets are showing enthusiasm for companies like the one being pitched, it makes it easier to show how an exit can occur.

Comparable transactions

Similar to IPOs, companies can use comparable transactions (industry or private equity sales) to show investors their route to an exit. The comparable firms should be operating in the same or close to the same competitive space.

How to Put Together a Business Exit Plan

Remember that the purpose of the plan is to make the new business owner transition as straightforward as possible.

Although the steps which follow are general, nobody knows a business better than its owner, so take whatever steps are necessary to make your business as marketable to potential buyers as possible.

These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Personal finances, family situations, and other career options are beyond the scope of this article.

Rather, the intention of the points below is to ensure that a business will be ready to sell in the fastest possible time at a fair price.

Business exit plan

• Know the business
• Ensure that finances are in order
• Pay off creditors
• Remove yourself from the business
• Create a set of standard operating procedures
• Establish (and train) the management team
• Draw up a list of potential buyers

1. Know the business

This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes ‘everything to every man.’

This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.

2. Ensure that finances are in order

This should be a priority regardless of any future business plans.

But if you intend to sell your business at short notice, it's best to have a clean, well-maintained set of financial statements going back at least three years.

3. Pay off creditors

The less debt that a business holds on its balance sheet, the more attractive it will be to potential buyers.

A common theme among small business owners in the US is thousands of dollars of credit card debt. This can be a red flag to many buyers and should be paid off as soon as possible.

4. Remove yourself from the business

How important are you to the day-to-day operations? If your business would lose more than 10% of its revenue were you to leave, the answer is “too important.”

If revenues are tied to the owner, buyers are not going to want to buy the business if the owner is going to leave right after.

Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.

5. Create a set of standard operating procedures

Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs), ideally in written form, that would allow any owner to maintain the business in working order merely by following a set of instructions.

6. Establish (and train) the management team

Are the existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ‘no’.

They may need more training, or you may need a different set of managers. In either case, having a capable team in place will be valuable whether you decide to exit your business or not.

7. Draw up a list of potential buyers

A list of buyers should be made and refreshed on a reasonably regular basis. Ideally, you would know their criteria for buying a business, but this is not always practical.

Keeping a long list of buyers means that you can reach out to them at short notice if it is  required at some point in the future.

This list is likely to include at least some of your managers or suppliers.

Importance of Exit Strategy

Many owners make the mistake of thinking that a business exit plan means the same thing as a ‘retirement plan’, believing that they can start thinking about putting one together as soon as they hit 55 years of age.

This is an error. Not because your departure is impending, but because it doesn’t give you the flexibility.

Instead of looking at a business exit plan as a retirement plan, rethink it as a divestment option.

An alternative way of thinking about this is, what happens to the business owner that doesn’t have an exit strategy? Think of the value destruction that occurs to the business if something unexpected happens and the owner has to make an unplanned sale, at a discount, in unattractive market circumstances, or even at a time of personal loss.

Instead of thinking about the business exit as something that will happen in the future, rethink it as something that could happen at any moment.

Exercising critical thinking to write a business exit strategy can be exciting as well as enlightening. Thinking of an exit as an end state is not the best approach since this limits businesses to a strict definition. Rather, consider how the process can be supportive of a business' growth strategy. Take these top three considerations:

• Financial considerations: If the exit strategy has a target revenue number in 5 years then how will the business get there? What financial dashboards are needed to properly run the company? How will expenses be managed so a business does not outspend against earnings?
• Supply chain considerations: What products will need to be in your catalog to maximize margins? What inventory turns ratio are you aiming for on a monthly basis?
• People considerations: Who do I hire to grow the company exponentially? What benefits do I offer to attract the best talent but don't cause complications at the exit? How do I write the force majeure so I protect the company and employees?

A business's primary goal is long-term value generation to its customers, itself, and its stakeholders. Having a thoughtful exit strategy shows the maturity of a business's Leadership towards longevity and value creation. There are many facets of the journey from owner motivation to financial strategies.

At DealRoom we help the owners of businesses of all sizes prepare for this eventuality. Our Professional Services team is ready to help businesses think through these details. It is important that an exit strategy be a journey throughout the growth stages.

Talk to us about how our tools can be an asset for you in your exit plan.

Get your M&A process in order. Use DealRoom as a single source of truth and align your team.

• Business exit strategies

What is an exit strategy in business?

Types of exit strategies, acquisition, liquidations, how to plan a successful exit, organize your financial statements, due diligence preparation, communicate with investors and stakeholders, communicate with employees and customers, secondary transactions before an exit.

The founder journey doesn’t stop after you’ve launched your startup and raised multiple rounds of venture capital. Whether your sights are set on exiting through an acquisition, merger, initial public offering (IPO), or another path, having an exit strategy in place early on can help guide your startup to success well before you ring the opening bell at NYSE or sign the final paperwork for a big merger. 

An exit strategy is a business plan that outlines how and when a founder, CEO, investor, or other stakeholder will liquidate a company. There are several types of liquidity events you may plan for, including: 

Public offerings

Acquisitions

Below is a basic overview of the most common exit strategies available for private companies. We recommend consulting with your startup lawyer or other advisor to help comb through the different options—and to help you weigh potential buyers.

Going public via an IPO is the ultimate dream for most entrepreneurs and business owners. But a traditional IPO isn’t for everyone—and in fact, most private companies don't exit through an IPO. A company can also list its shares publicly through a direct public offering or a SPAC (special purpose acquisition company) .

Depending on your goals, such as price-per-share, avoiding lock up periods, or keeping a set business valuation, one type of public offering will be more beneficial. 

→ To learn more about the differences between traditional IPOs, direct listings, and SPA, read our IPO Readiness Guide . 

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A merger is when two or more companies combine to become one (they might adopt a new name in the process). In a reverse triangular merger (the most common merger structure), the buyer forms a new subsidiary that merges with the target company, resulting in the target becoming a subsidiary of the buyer.

The biggest prep work needed for an acquisition is determining the deal structure. There are two common structures for acquisitions:

Stock sale: This happens when the target company’s stockholders sell their stock to the buyer, such that the target company becomes a wholly owned subsidiary of the buyer. In some cases, a stock sale could involve the buyer absorbing the target so the target ceases to become a distinct entity.

Asset sale: This happens when the target company sells all or most of its assets to the buyer, then dissolves and pays the proceeds of the sale to the stockholders in the company's wind-down process. 

→ Learn more about asset sales and stock sales

Private equity acquisition

Private equity buyers acquire business across the financing landscape— bootstrapped , venture capital backed, private equity backed, carveouts (public and private), among others.

Leveraged buyouts (LBO)  are the most common private equity investment strategy. In an LBO, the private equity firm acquires a majority stake in the company, using equity and debt . This capital typically buys out existing stakeholders, and goes on the company’s balance sheet to fund growth. The portfolio company is then responsible for paying back that debt and interest through cash resulting from the operational improvements made during the private equity firm’s ownership tenure.

Not all private equity firms use debt. Growth equity or growth buyout firms may fund transactions with minimal to no leverage, allowing the company to continue investing in growth.

Liquidation is a conversion of assets to cash or cash equivalents by selling to a consumer. This is typically an option if your business is insolvent and isn't able to pay its creditors. The liquidation process also can help with negotiating the debt down with those creditors as well as help to avoid filing for bankruptcy. When your business is liquidated, any remaining assets are paid to creditors and shareholders. Although not as common, liquidation can also be a voluntary option. 

Liquidation is also an alternative to (and in most instances, is easier than) attempting to sell your business. The sale of a business requires the buyer to purchase all assets, which can become a more difficult and complex sale.

Liquidation vs. dissolution 

Liquidation is part of the process of ending a business. However, if your business entity is an LLC or corporation , it will continue to exist after a liquidation and will still be subject to obligations such as annual filings and taxation requirements .

Dissolution is the process of terminating a legal business entity. When the business is dissolved, it will no longer have compliance obligations within the state in which it was incorporated or registered. 

Once you’ve determined which exit option is right for you, here are some general steps you can take to prepare. Carta can help support you during this process when it comes to deal modeling, due diligence, IPO preparation, liquidity solutions, and tax planning. 

Ahead of term sheet negotiations, it’s important to understand your company’s anticipated returns based on deal size and other factors so you can in turn understand your breakeven valuation. Settle any debts and address any other outstanding obligations.

You can prepare your company for an M&A deal by familiarizing yourself with what sorts of documents will be requested by the buyer and what happens during their due diligence. The due diligence process may involve sharing disclosures with potential buyers, additional financial audits and reporting, and negotiation conversations between management teams. Some due diligence processes take a couple of weeks, while others take months.

→ See an example of a M&A due diligence request list, provided by one of Carta’s partner law firms, and a leader in the M&A space, Goodwin.

Investor communications are always important, but especially leading up to an exit event. Your investors , board members , and other key stakeholders want to know how they’ll be paid out and what their expected ROI is. If you have employee owners, you may want to inform them at this time, ahead of customers.

Depending on the size and scope of your company, you may also want to share your exit plans with employees and customers ahead of time to ensure a smooth transition. This should only be done after due diligence, board approval, and other key steps are completed. 

Companies can run structured secondary transactions to allow for liquidity in their shares for their stockholders at any time, but there are strategic opportunities to do so—for example,  within 90 days of a primary funding round or when a cohort of early employees fully vest in their initial stock grants. If an exit is still far away, you may choose to use secondary transactions— like tender offers — as a tool to clean up your cap table by consolidating your stockholder base.

In addition, private secondary transactions can offer shareholders an opportunity to liquidate some or all of their shares while the company is still private. Liquidity can allow early investors to secure a return on their investment and can give employees the chance to cash in their equity compensation .

Related Content

Business exit strategy definition, types, and use cases

Table of content.

Having a thoughtful exit strategy shows that a business owner is prepared for the future and is focused on ensuring the long-term success and sustainability of their company. However, according to a survey conducted by the Business Enterprise Institute, only 20% of owners have created written plans to transfer ownership.

The article will offer insights to startup founders, small business owners, and established company leaders about the importance of developing an exit strategy, outlining key benefits and steps involved. 

What is a business exit strategy?

A business exit strategy outlines the steps a business owner needs to take to sell their ownership in a company to investors or another company and generate the maximum value.

There are several different exit strategies, including types like strategic acquisitions, an initial public offering (IPO), management buyouts (MBOs), liquidation, bankruptcy, selling a stake to a partner or investor, or passing the business on to a family member.

It’s recommended to develop an exit strategy early in the business planning process , ideally during the initial stages of forming the company. This is because this strategy can impact future business plans and influence key decisions regarding growth, investment, and operational strategies.

For instance, if the exit strategy business plan is to pass the business on to family members, the focus may be on creating stable day-to-day operations and a strong brand reputation. In contrast, if a business owner aims to sell their business within, say, five years, they may focus on rapid growth and building tangible assets to increase the company’s valuation.

In fact, one of the most important parts of every thoughtful exit strategy is business valuation , as it determines the company’s fair price. Understanding the current and potential future value of the business helps to make the right decisions regarding when and how to exit. 

It’s also important to note that business exit planning can include two subsets — investor and venture capital exit strategies:

• Investor exit strategy . This is a plan developed by investors, such as angel or private equity investors, to exit their investment in a particular company. The primary goal is to achieve a favorable return on investment by selling their stake in the company. A business exit strategy, in this case, should always be part of a wider investment strategy.
• Venture capital exit strategy . Another business exit strategy option can be applied to an early-stage company or high-growth business backed by venture capital funding. In this case, VC investors develop a pre-planned exit to achieve a return on their investment within a specific time frame, often around five years.

Benefits of a business exit strategy

Let’s explore why developing a business exit strategy is always a good idea.

1. Maximizing value

A well-defined exit strategy helps maximize the value of your business by focusing on growth, profitability, and building tangible assets. This, in turn, will lead to a higher sale price or better terms during a transition.

Example: WhatsApp, a messaging app, focused on user growth and engagement before its acquisition by Facebook for $19 billion in 2014. This strategic approach maximized the company’s value and resulted in a lucrative exit for its founders and investors.

2. Mitigating risks

An exit strategy allows business owners to mitigate potential risks associated with industry changes and unattractive market circumstances, protecting the value of their businesses.

Example: Tesla, the electric car manufacturer, diversified its product offerings and revenue streams beyond vehicles by venturing into energy storage and solar energy solutions . This diversification strategy helped mitigate risks associated with fluctuations in the automotive industry.

3. Facilitating succession planning

By outlining a clear exit plan, you can facilitate smooth succession planning and ensure a seamless transition of ownership or management, minimizing disruptions to operations.

Example : Walmart, a retail industry leader, demonstrated effective succession planning . When Sam Walton retired in 1988, his son, Rob Walton, became a chairman, prioritizing expansion and technological advancement. In 2015, Rob Walton smoothly transitioned leadership to his son-in-law, Greg Penner.

4. Enhancing investor confidence. Having a well-defined exit strategy increases investor confidence, as it demonstrates strategic planning and commitment to maximizing returns. This, in turn, facilitates fundraising and growth opportunities.

Example: Airbnb clearly outlined its potential exit strategies, including IPO. This transparency and strategic planning boosted investor confidence, leading to a successful IPO in 2020 .

What types of business exit strategies are available?

The selection of an appropriate exit strategy is influenced by a few different factors, such as the entrepreneur’s goals, market conditions, and the business growth strategy. Each strategy comes with its own set of advantages and disadvantages, making it crucial for company owners to carefully evaluate their options before making a decision.

Business exit strategy examples

Let’s also explore the most suitable exit strategy business plan examples for different company types:

• Startup exit strategies Startup exit strategies depend on factors such as the company’s growth trajectory, market conditions, investor preferences, and the founder’s long-term goals. The most common methods include an IPO, a strategic acquisition, or a management buyout.
• Small business exit strategy The best exit strategy for a small business always aligns with the owner’s financial objectives, long-term vision, and the company’s market position. Small business owners may opt for options like selling the business to a competitor, transitioning ownership to a family member, or pursuing a management buyout.
•  Larger company exit strategy The owners of established businesses may go for a combination of options tailored to maximize value. This may include a business sale to a strategic buyer, an IPO, or a management buyout.
• Family-owned business exit strategy Succession planning and management buyouts are common strategies for family-owned businesses to ensure a successful transition and preserve legacies.

8 most important steps to develop your exit strategy

A survey of business owners conducted by the Exit Planning Institute shows that just 20% of businesses put up for sale successfully find buyers. Among the businesses that manage to sell, 75% express significant regret within one year of leaving their business.

That’s why it’s so important to proactively develop an exit plan and facilitate the transition to a new business owner. Here are key steps to take:

• Setting exit timelines. Establish clear timelines for your exit strategy, outlining specific milestones and deadlines. Consider factors such as market conditions, personal goals, and financial targets to determine the optimal timing for your exit.
• Documenting information. To ensure a smooth and successful exit strategy, it’s important to maintain all important documents related to your business, including financial statements, financial strategies, contracts, employee information, organizational structure, and legal files.
• Identifying potential buyers. Conduct market research to identify potential buyers for your business. Develop detailed buyer personas to understand their motivations, preferences, and acquisition criteria. Tailor your exit strategy to attract and engage with these prospective buyers effectively.
• Building valuable assets . Focus on developing and enhancing valuable assets within your business, such as proprietary technology, intellectual property, and customer relationships. Invest in strategies that increase the overall attractiveness and value of your business to potential buyers.
• Improving business performance. Continuously monitor and improve key performance indicators (KPIs) across various aspects of your business, including revenue growth, profitability, operational efficiency, and market competitiveness. Implement strategies to optimize business operations and maximize financial performance to attract potential buyers.
• Chasing profitable growth. Explore new opportunities for revenue growth. For example, you can try to diversify product offerings, expand into new markets, or leverage emerging trends. It’s important to focus on generating new revenue streams and demonstrate the long-term growth potential of your business to potential buyers.
• Delegating responsibilities. Delegate key responsibilities to trusted employees, letting them learn to manage daily operations. Create a strong team able to sustain business continuity and growth, even in the owner’s absence.
• Saving financial resources. Keep some money saved to cover the costs associated with the exit process, including legal fees, transaction expenses, and the services of professional advisors. 

Key takeaways

Let’s summarize: 

• A business exit plan means a plan developed by a business owner or management team to exit or transition out of the business and generate the maximum value from it. 
• The most common types of exit strategies are strategic acquisitions, initial public offering (IPO), management buyouts (MBOs), liquidation, bankruptcy, selling a stake to a partner or investor, or passing the business on to a family member.
• The key benefits of developing a business exit strategy are maximizing value, mitigating risks, facilitating succession planning, and enhancing investor confidence. 
• Steps to take to create a business exit strategy include setting exit timelines, documenting information, identifying potential buyers, building valuable assets, improving business performance, chasing profitable growth, prioritizing customer loyalty, delegating responsibilities, and saving financial resources.

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Business Exit Strategy

A business exit strategy outlines the planned approach for an owner to transition out of a business

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to  work for Raymond James  Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars'  M&A  processes including evaluating inbound teasers/ CIMs  to identify possible acquisition targets, due diligence, constructing  financial models , corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

What Is a Business Exit Strategy?

Top business exit strategies.

A Business Exit Strategy is a plan for how a business owner can smoothly leave or liquidate their investment in their company, especially as they approach retirement or encounter unexpected personal circumstances. Instead of shutting down a successful business, the goal is to ensure a smooth transition for the owner, employees, and customers.

Any successful business plan should have a strategy in place on how the owner can leave the company at the end of their career. Very rarely do business owners create & run successful companies for the entire operation to be shut down. Instead, most companies are made to outlive their creator and thrive in business. 

Usually, the owner decides to retire from the company. They may have spent much time, energy, and capital on the company and want to retire comfortably. Having an exit strategy can help ensure that their business is in good hands when they are stepping down.

Another reason could be due to a sudden change in personal circumstances. If the owner becomes ill, defunct, or moves away suddenly, both they and their firm will have comfort in knowing that they have prepared for a situation where there was an unexpected turn of events.

Key Takeaways

Business owners need to plan exit strategies ahead for smooth transitions and financial goals.

Choices include selling, merging, going public, family handover, and management buyouts.

Mergers offer market power and scale, but face integration issues and regulatory hurdles.

Going public provides capital and visibility but involves complexity, costs, and regulatory demands.

Family transfers and management buyouts ensure continuity, yet face challenges like dynamics and financial risks.

The choice of an exit strategy depends on various factors, including the nature of the company and the market it's in.

If the owner's company is in a high-growth industry, they could cash out easily through a sale or IPO, but if relatives manage it, then the owner may pass it down to one of them. 

Regardless of the method the owner chooses to leave the company, they should prepare to put systems in place in advance so the business can operate without its original owner. This article will cover some business exit strategies and some of their benefits & drawbacks.

#1 - Sale of Business

A business owner may decide to sell their business altogether for a profit. This is a very common and popular way many owners exit their companies. 

This allows them to retire or move on to other business ventures through a quick and easy cash-out.

There are three major ways in which a company sale can occur. 

• It can occur as a private sale, where the company is sold directly to another business owner or investor.
• It can be merged with another company to create a whole new business entity where the company’s business processes are synergized.
• Or the company can be outright bought by another one and act as a subsidiary of the other.

Liquidation is also considered a sale of a business. Still, we will look at that in a separate section of the article, as it normally occurs when a company incurs more debt than it can handle or is no longer profitable.

This is usually considered a long-term capital gain and is taxed accordingly by the IRS. However, all business owners may not prefer this. 

It also results in a loss of revenue stream if the company is private and the owner has no more ties to the company, which may also be unfavorable.

We will go into more detail on the three methods of cashing out of your business for a profit through a company sale and look at the benefits and drawbacks.

#2 - Private Sale

The owner may choose to sell the confidential business to another individual or group if that group is ready to buy.

There are several steps an owner should take to ensure a successful transaction:

1. Valuation

You need to have value for your business, which can be done with the help of a valuation expert who can analyze financials, assets, & liabilities to determine worth & set a sale price.

2. Preparation

Now, the company needs to be prepared for sale. It includes improving the business through equipment upgrades & marketing efforts. You should also have a comprehensive package of financial statements , market materials, and all other relevant information.

3. Find Buyers

The owner may speak with other owners & competitors in the industry. Then, the owner works with a broker to negotiate a price & terms for sale.

4. Due Diligence

The buyer will spend a couple of weeks to months conducting their due diligence on the business to ensure all presented information is accurate. They will assess the size, complexity, and business model before deciding. 

Finally, the sale can be closed after the buyer's due diligence. It involves signing a purchase agreement and transferring ownership to the buyer, which could be a single payment, continuous payment, or an earn-out.

Benefits and Drawbacks of Private Sale 

Some of the benefits and drawbacks are as follows:

The Pros are:

• Confidentiality : If your company relies heavily on company-customer loyalty, this is a way to keep the sale private. It can avoid feelings of uncertainty that may harm the business in public sales.
• Flexibility : If the business has unique or specialized assets, this can give the seller more control over the terms of the sale, so they get the best deal for their situation.
• Personalized Negotiations : The seller can negotiate directly with the buyer, creating personalized negotiations and greater control over the sale process.
• Lower Transaction Costs : Fewer parties are involved, so there are lower transaction costs.

The Cons  are:

• Limited Buyer Pool : These sales can have a limited pool of buyers, making it more difficult to find a buyer.
• Lack of Market Competition : There is less competition and, thus, no competitive bidding process, so the buyer faces less stress to pay a fair price for the seller’s business.
• Increased Risk : Private Sales can be riskier than public ones, as the buyer may not perform the same level of due diligence or have the financial resources as a larger company, which means the company may struggle to survive after the sale.
• Limited Exposure : Private sales may have less exposure for the business, which can be challenging for sellers trying to market the business and achieve the desired sale price. Ultimately, the decision to sell a business through a private sale will depend on the business circumstances and owner preferences. Therefore, it is essential to consider the potential pros & cons of each option & work with a trusted team of advisors to ensure a proper & successful transaction.

#3 - Merger

Another style of business sale is through a merger , where two or more companies combine their operations into one corporate entity. 

There are three ways a merger can occur:

1. Horizontal Merger

This merger occurs when two companies in the same industry & offer similar products/services merge, which increases the final entity company’s market share , reduces competition, and improves profitability via economies of scale .

2. Vertical Merger

Here, companies operating at different supply chain levels merge. For example, this could be a manufacturer merging with a retailer. It leads to greater control over the supply chain, const synergies, and more efficiency.

3. Conglomerate Merger

It occurs when two companies in completely different industries merge. And diversifies the revenue of the newly merged entity’s revenue stream and reduces the risk.

Mergers can occur in many different ways. Still, it normally occurs in a stock-for- stock exchange , where the owners of the selling company receive shares of stock in the merged company in exchange for their ownership stake in the selling company.

It also allows the owners to participate in the future success of the newly merged company. 

Pros and Cons of Merger

This method has many pros & cons and can be described as follows.

The  pros  are:

Combining operations can help the merged company increase market share & reduce competition.

• Market Power :  Combining operations can help the merged company increase market share & reduce competition.
• Economies of Scale:  Pooling resources can help the merged company achieve cost synergies & greater efficiency.
• Diversification:  Merging with another company in another industry or market can diversify revenue & reduce risk.
• Access to new markets:  Merging with a company with a strong presence in a new market or geographic region can help the merged company access new customers and growth opportunities.

On the other hand, the  cons  are:

• Integration Challenges: Mergers can be complicated to execute. In addition, there could be challenges in integration, cultures & systems.
• Costly: Mergers can be expensive, with legal fees, due diligence costs, and integration efforts.
• Cultural Differences: Mergers can be companies with varying cultures, values, and ways of doing business together, leading to potential conflicts and challenges.
• Regulatory concerns:  Mergers may face government blocks that could stop them from merging.
• Shareholder disagreement :  Shareholders could disagree over deal terms and/or the direction of the combined company.

Mergers can be risky and complicated and involve many integrational challenges. Therefore, it is important that a company holistically examines the potential risks and benefits of a merger before proceeding with one.

#4 - Acquisition

An acquisition occurs when a larger company purchases a smaller company. This option is mutually beneficial, as the buyer can access new products, services, or markets while the seller cashes out. There are two types of acquisitions:

1. Strategic Acquisitions

They are made by companies looking to expand into new markets or gain access to products or services. These are motivated by synergies between the companies by offering complementary products or services or accessing new distribution channels. These are done to integrate the companies to realize long-term benefits rather than the target company's assets.

2. Financial Acquisitions

It is made by companies looking at a company for its assets or financial advantage. These can be motivated by acquiring valuable intellectual property or patents or gaining access to a larger customer base.  These are done to maximize short-term financial gains, such as selling off the acquired company’s assets or leveraging the customer base.

Regardless of the type of acquisition, the process involves several steps:

Buyer conducts due diligence to evaluate the target company’s financials, operations & legal liabilities. They will also assess the benefits & risks of the acquisitions.

After Due diligence, the buyer will negotiate the terms of the acquisition, including purchase price, payment structure, and any contingencies or warranties.

Finally, the companies work together to integrate their operations and realize the benefits of the acquisition. It may involve restructuring or merging the acquired company with the buyer's existing operations.

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Advantages and Disadvantages of Acquisitions 

Here are some of the pros & cons of an acquisition:

The  Pros  are:

• Exit strategy:  Selling the business through acquisition can provide the owner with an efficient and straightforward exit strategy.
• High valuation:  Acquisitions often result in a higher business valuation than would be possible through other exit strategies.
• Synergies: The acquisition may result in synergies between the two businesses, improving profitability.

The Cons  are:

• Loss of control:  The seller will lose control over the business and may need to give up critical decision-making authority.
• Culture clash:  The seller may not mesh well with the acquiring company's culture, leading to conflicts and difficulties in integrating the two businesses.
• Legal liabilities:  The buyer may inherit legal liabilities or other risks associated with the target company.

For the business to be attractive to the buyer, all the company financials must be in order, regardless of how the sale occurs. This option may also include working with a broker or investment banker to market the business, find the buyers, negotiate the terms & price, and plan any contingencies.

The owner would also work with tax experts to minimize tax liabilities & protect their interests.

#5 - Going Public

​​Business owners may consider exiting their company through an IPO or initial public offering . Through the NYSE and NASDAQ , their now- public company can have their shares bought and sold by investors.

It's easy for a quickly growing company to raise lots of capital in a single transaction by attracting many investors. A couple of prerequisite actions happen before a company goes public. A quick rundown of these steps is as follows:

They work with an investment bank to create a prospectus, which provides information about the company’s business, financial performance , and management team. This gets filed with the SEC and made available to potential investors.

The company & investment bank begin a roadshow , where they present their company to potential investors. Then, the company’s management team meets with the investors to discuss the company’s business & answer questions.

The company sets a price for its shares based on demand. Then, they are sold to the public through an underwriter, usually the investment bank that helped make the prospectus. When the company goes public, the owner can sell off their shares to leave the business or decide to keep some and become a shareholder.

Benefits & Drawbacks of Going Public 

While this may seem like an excellent way to alleviate yourself from the effort of running the company and take the role of a shareholder, this method does have some benefits & drawbacks. 

• Access to Capital:  An IPO can provide a significant influx of capital to the company, which can be used to fund growth initiatives, repay debt, or make strategic acquisitions.
• Increased visibility and credibility:  Going public can bring more attention to the company, attracting customers, partners, and employees.
• Liquidity for shareholders:  Going public will give the shareholders a chance to realize a return on their investment in the company.
• Ability to use stock as currency :  Publicly traded stock can be used as currency for future acquisitions or mergers, which can help the company grow more quickly.
• Potential for higher valuations:  Public companies are valued higher than private ones, which can increase shareholder returns.

The  cons  are:

• Cost and complexity:  An IPO can be a complex and expensive process, requiring significant time and resources from the company's management team and advisors.
• Increased regulatory scrutiny:  Public companies are subject to strict reporting and disclosure requirements.
• Loss of control:  The founders & management team of the company will have less control over operations and strategic direction.
• Pressure to meet expectations:  Public companies must meet quarterly earnings expectations and provide regular updates to investors, which can be challenging and time-consuming.

Public firm shares are easily affected by ups and downs in the stock market. It can change stock prices to factors the company can't control, like economic changes, industry trends, and investor sentiment.

An initial public offering can quickly raise capital and exposure for growing companies. Still, it would be best to consider all the pros and cons of IPO as your business exit strategy.

#6 - Family-Owned

Another option includes passing the business down to family members. Many business owners try to do this, passing it as a gift or through a sale.

Several important tax implications must be considered if an owner decides to pass the business as a gift. The owner will need to file a gift tax return, so they need a valuation for the business. They also want to minimize this by using the annual gift tax or lifetime exclusion.

The owner could also sell the business at a fair market value through a:

• Stock purchase
• Traditional buy-sell agreement
• Family member

When passing the business on, it is important to consider that the family member taking it over has the skills & experience necessary to run the business successfully.  You may consider providing training or mentorship to the member or hiring a third-party consultant to help with the transaction.

Also, consider the impact this will have on family members not involved in the business, as there may be concerns regarding fairness & equal treatment that may disrupt family relationships. 

Pros and Cons of Family-Owned

Some pros and cons to consider when using this strategy are explained below.

The Pros  are: 

• Continuity:  One of the biggest advantages of passing the business on to family members is its continuity, which can help maintain the company's culture, values, and traditions.
• Smooth transition:  Passing the business on to family members can also provide a smoother transition than selling to an outside party. Relatives may already be familiar with the business operations & customers, which can minimize disruptions from management change.
• Financial benefits:  Depending on the circumstances, passing the business on to family members may also provide financial benefits. For example, if the business owner passes the business at a reduced price or as a gift, it can reduce the tax implications of the transfer.
• Personal satisfaction:  It can be rewarding to see the business continue to grow and thrive under the leadership of a family member, making passing the business to a family member can be personally satisfying and fulfilling.
• Family dynamics:  One of the biggest challenges of passing the business on to family members is the potential impact on family dynamics. This can include issues related to fairness, jealousy, and resentment among family members who are not involved in the business.
• Lack of experience:  The owner needs to ensure the relative who takes over the business has the right qualifications & skills to run the business and minimize the chance of them putting the company's future at risk.
• Limited market:  Another potential downside of passing the business on to family members is the limited market for the company. Relatives may not have the financial resources to take over the business and may limit the owner's options.
• Business performance:  The transition to a family member may impact the performance of the business. If the family member is less effective a leader than the previous owner, it can lead to decreased profits and reduced success for the company. It is a great way to keep a business under family leadership and ensure the company lives on for future generations. Still, handling it fairly, transparently, and successfully requires lots of planning.

#7 - Liquidation

What if the business at the time of the owner's exit is not profitable or capable of earning revenue?

It may result in company liquidation. The management sells all assets for cash to pay off creditors and outstanding debts, which includes inventory, equipment, & property. The proceeds of the sale of assets are distributed to creditors and shareholders according to a predetermined order of priority.

First, the assets and liabilities of the company need to be assessed. After they receive an appraisal value, a plan is made to sell them off via auctions, private sales, & negotiations with potential buyers.

After all the proceeds have been collected, the remaining debt is paid off in a predetermined order. This includes secured creditors, like banks and other lenders, then unsecured creditors, like suppliers and vendors. Finally, anything left is distributed to shareholders.

Advantages and Disadvantages of Liquidation

A liquidation is a good option for businesses that are not profitable or have too much debt to equity. However, stakeholders may prefer something other than this option as they get little to no return on their investments while employees lose their jobs. Other pros and cons include:

• Simplicity:  Liquidating is pretty straightforward, as you sell your assets to pay your liabilities. This is an easy and fast way to exit the business if you have few assets and creditors.
• Control:  By liquidating the business, the owner retains control over the process and can determine the order in which debts are paid off.
• Relief:  Liquidation can provide relief for business owners struggling with financial difficulties, simply wanting to retire, or wanting closure so they can pursue other ventures.

The Cons are:

• Limited Return:  In many cases, liquidation results in little or no return for shareholders, which can be frustrating for owners who invested significant time & capital into the business.
• Employee Displacement:  Liquidation often results in the business closing, which means employees lose their jobs. 
• Legal Costs:  Liquidation can be a complex legal process that requires the expertise of attorneys and other professionals and can be costly for an already struggling business or if a business has lots of assets.
• Reputation Damage:  The liquidation process can also damage the business's reputation, particularly if seen as a failure or a sign of financial instability. This can shake the confidence of investors in the owner's future ventures. Liquidation is a viable exit strategy for some businesses, but weighing the potential outcomes with financial and legal advisors before pursuing this option is important.

#8: Management Buyout

A management buyer ( MBO ) is an exit strategy where the current management team purchases the business from the owner.

MBO can help a business owner sell their company to someone they trust (or a group of people). It also gives them the satisfaction of knowing the company is in capable hands. In an MBO, the management team borrows funds from a bank or other lender to finance the purchase of the business from the owner. 

There are many pros and cons to this method:

The Pros  are

• Business Familiarity:  The managing team is familiar with the business operations, which can reduce the risk of disruptions.
• The incentive to Grow the Business:  The management team may have a stronger incentive to grow the business after taking ownership since they will now be owners. And can motivate them to be focused on driving the business forward.
• Confidentiality:  An MBO can be a good option for owners who want to maintain confidentiality during the sale process since the management team is already familiar with the business and can keep the sale private.

The  Cons  are

• Risk of Financial Strain:  The management team may lack the financial resources or expertise to run the business successfully. This could cause a drop in valuation for the business if it cannot leverage the financing method of choice.
• Limited Market:  The pool of potential buyers is smaller in an MBO, limiting the price the owner can receive for the business.
• Potential for Conflict:  The management team may struggle to agree on the purchase terms or work together effectively after taking ownership of the business, which can lead to conflict.
• Complexity and Time-Consuming:  An MBO can be complex and time-consuming. The management team must secure financing, negotiate terms with the owner, and manage the transition process. An MBO is a solid option for business owners to sell their business to trustworthy people who know how to run it. However, it is essential to consider the risks and benefits of an MBO carefully and to work with experienced advisors to navigate the sale process.

A business exit strategy outlines how the business owner will exit at the end of their career.

There are several common business exit strategies, including

• Selling to a strategic or financial buyer
• Transferring ownership to family members or employees
• Going public
• Liquidating the business

Every strategy comes with its own set of benefits and drawbacks, which can impact the exit timeline & financial goals of the owner and the health & value of the company.

Ideally, the business owner should plan their exit 3-5 years in advance to ensure they maximize the business and have a smooth transition. To make their exit strategy they should consider advice from:

• Business brokers
• Financial planners
• Accountants
• Tax specialists
• Attorneys 

They will guide various aspects of exiting the company, help fairly value the business, negotiate terms, and manage the  implications of tax  when the exit occurs.

Ultimately, a well-planned exit strategy can help business owners achieve their financial goals, have a smooth ownership transition, minimize risk & uncertainty, and secure a future long past the original owner's life.

It is a plan that explains the details of how the owner will exit the business.

It allows the owner to maximize & capitalize on the value of their business, ensure a smooth transfer of ownership, minimize risk & uncertainty with leaving a business, and ensure the business outlasts them.

Common strategies include Private Sale, Merger , Liquidation, Acquisition, Passing it on to a family member & going public.

Factors for consideration include your goals, business health & value, exit timeline & tax implications.

It's never too early to plan your exit strategy. Ideally, you should plan 3-5 years before exiting to ensure a smooth transition.

Business brokers, financial planners, accountants, and attorneys are all professionals that can help you when planning your exit strategy.

Yes, your strategy should account for timing, value, & structure. This may have consequences, so you should consult a professional to consider all the impacts before changing the strategy.

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How to Plan Your Exit Strategy

Candice Landau

8 min. read

Updated April 17, 2024

Many people start businesses with the goal of seeking acquisition. But others decide later that it’s time to move on—they’d like to pull their time and money out of a particular venture. It’s never too early (or too late) to start planning your exit strategy.

• What is the purpose of an exit strategy?

An exit strategy is how entrepreneurs (founders) and investors that have invested large sums of money in  startup companies  transfer ownership of their business to a third party. It’s how investors get a return on the money they invested in the business.

Common exit strategies include being acquired by another company, the sale of equity, or a management or employee buyout.

• Who needs an exit strategy?

For anyone seeking  venture capital funding  or  angel investment , having a clear exit strategy is essential.

Even if you’re a small business, it’s a good idea to plan ahead and think about how you will transfer ownership of the business down the line, whether you choose to sell the business, or try to scale it and seek to be acquired. It’s never too early to plan.

• Should I include my exit strategy in my business plan?

Including your exit strategy in  your business plan  and in  your pitch  is especially important for startups that are asking for funding from angel investors or venture capitalists for funds to grow and scale.

Most of the time, small businesses don’t need to worry as much about it because they probably won’t seek investment (not all good businesses are good investments for angels and VCs). The small business founder’s goal might be to own the business themselves for the foreseeable future.

• What type of exit strategy is right for my business?

This list should give you an idea of common types of exit strategies. The type of strategy you adopt will depend on what type of company you are and your financial and strategic goals.

Here are some of the most common:

Acquisition, initial public offering (ipo), management buyout, family succession, liquidation.

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The acquisition is often known as a “merger and acquisition.” This is because, when a company decides to sell itself to another company, the buyer will often incorporate or merge the services of that company into their own product or service offerings.

This happened when Google bought YouTube, seamlessly integrating the video platform into their own search product. Now, when you google a topic, you will often notice that videos appear on your search result page.

On a smaller scale, it might happen when a coffee chain decides to buy a bakery business so that they can add a line of pastries and tarts to their menu. An acquisition or merger can be an appropriate approach for businesses of all sizes, including startups.

The best thing about an acquisition is that if you get “strategic alignment” right, you stand to sell the company for more than it may actually be worth. And, if there are multiple companies interested in your product, you may be able to raise the price further or begin a bidding war!

Reasons an outside company might seek to acquire or merge with another company range from allowing them to break into a new market, to giving them a competitive edge, or a strong built-in customer base. Or they might be interested in eliminating you as a competitor from the current market.

If you know that being acquired is your exit strategy right from the start, this gives you room to make yourself appear attractive to the companies who may be interested in purchasing you. That said, remember that those particular companies may decide not to purchase you or may never have been interested in doing so. If you do go down the road of creating a very niche product only one specific company will be interested in, you also stand to lose big time if they don’t take the bait.

This exit strategy is right for a small number of startups and larger corporations, but is not suited to most small businesses, primarily because it means convincing both investors and Wall Street analysts that stock in your business will be worth something to the general public.

For smaller companies that have already begun expanding—like  restaurants that have franchised —an IPO may be a good way for the owner to recoup money spent, though it is worth noting that he or she may not be allowed to sell stock until the  lock-up period  has passed.

A couple of well-known examples of restaurants on the stock exchange include  Buffalo Wild Wings  and  BJ’s .

If you think this is the right strategy for you, or you want to at least have the option of going public later, the easiest way to get listed is to seek investors that have done it before with other companies. They will know the ins and outs and be able to better prepare you for the process.

Speaking of the process—it’s long and hard. If you do succeed in winning over the hearts and data-centric minds of Wall Street analysts, you’ve still got to conform to the standards set by the  Sarbanes-Oxley Act , you will have underwriting fees you’ll need to pay, a potential “lock-up period” preventing you from selling your shares, and of course, the risk of seeing the stock market crash.

While an IPO may be a suitable route for a company like Twitter or Macy’s, consider whether or not you want to weather the headache of tailoring business decisions to the market and to what analysts believe will do well.

If you’ve built a business whose legacy you want to see continued long after you’re gone, you may want to consider turning to your employees.

That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work.

There’s also the added bonus that you’ll have to do a lot less due diligence. Having management or employees buy your business is a good idea if legacy matters most to you. Of course, you could always consider passing the business on to family, but there’s always the risk there that they won’t understand the business, won’t have the determination to make it succeed, and if you’re splitting the business between family members, the possibility of family rivalry.

On that note, if your family has been brought up with an intimate knowledge and understanding of your business, they may well be the best people to pass things on to.

In fact, this is exactly what happened at Palo Alto Software. Founded by Tim Berry in 1988, his daughter Sabrina Parsons was made CEO and her husband Noah the COO shortly before the recession hit.

The decision was strategic and allowed Tim to pursue other interests, including putting a focus on  writing . Since then, Sabrina and Noah have adapted the flagship desktop-based business planning product,  Business Plan Pro , into a SaaS tool called  LivePlan .

Passing Palo Alto Software on to family was more fortuitous than carefully planned. Tim had always  encouraged his children  to follow their own path. In fact, none of them got degrees in business. It just so happened that Sabrina and Noah had entered the internet world early in their careers and gained the experience necessary to join and build out Palo Alto Software’s product offerings.

If you are considering passing your business on to your children or other family members, there are a number of things worth thinking about and planning for, including ensuring that whoever is set to take over the business has the relevant skill set, is competent, and is committed to the future and success of the business. This will make it a lot easier to retire.

For small businesses, liquidation is a common exit strategy. It’s one of the fastest ways to close a business, and may sometimes be the only option in cases where the operation of the business is dependent solely upon one individual, where family members are not interested in or capable of taking over, and where  bankruptcy  is close at hand.

It’s worth noting though that any profits made from selling assets need to be used to pay creditors first.

To make any money using liquidation as an exit strategy, you’re going to have to have valuable assets you can sell—like land, equipment, and so on.

If it’s not too much hassle and if your decision to liquidate is not related to finances, think instead about selling the business to the public. Are there any ways you can make it appealing?

If this isn’t an option and it’s better to close the doors before you lose money, liquidating your assets may be your best bet.

• Planning for the future?

If you’re putting together your business plan or preparing to pitch to investors for the first time, think through your exit strategy. Make sure your  financials are up to date  and that you’re reviewing them regularly so your  business’s valuation  is accurate.

If your successful exit is tied up in hitting certain financial milestones, don’t hesitate to ask your  strategic business advisor  for some guidance. There are other things you can do to prepare your business for acquisition and other exits— check out this article  for more information.

Candice Landau is a marketing consultant with a background in web design and copywriting. She specializes in content strategy, copywriting, website design, and digital marketing for a wide-range of clients including digital marketing agencies and nonprofits.

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Startup Exit Strategies: From IPOs to M&As and Beyond

An exit strategy is a planned approach to selling or otherwise divesting ownership in a startup. It’s a critical component of a business plan, providing a roadmap for founders and investors to realize returns on their investment. 

Whether through a merger, an IPO, or other means, exit strategies are essential for defining a startup’s long-term goals and value. 

This article will explore the various exit strategies, their importance, and how to plan and execute them effectively.

Key Takeaways

• Strategic Importance of Exit Planning:  Exit strategies are not just an endpoint but a vital part of a startup’s business plan. They guide decision-making, enhance business value, and prepare for planned and unforeseen transitions.
• Diverse Options and Considerations:  From IPOs and M&As to management buyouts and liquidation, various exit strategies suit different goals and stages. Careful consideration of timing, market conditions, legal compliance, and stakeholder interests is essential for success.
• Lessons from Real-World Examples:  Case studies of successful and unsuccessful exits provide practical insights into the complexities of startup exits. Strategic alignment, proper timing, thorough preparation, and awareness of potential challenges are key lessons learned.

We all want to land big exits with our investments, but there’s more to startup investing. Be sure you check out my article, Understanding Startup Investing .

Why Plan an Exit Strategy?

Planning an exit strategy is more than a mere endpoint; it’s a strategic component that shapes a startup’s direction and growth. 

Here’s why it’s essential:

• Aligning with Long-Term Goals:  An exit strategy helps align the business operations with the long-term objectives of founders and investors. Whether the goal is a lucrative sale or passing the business to the next generation, a clear exit plan guides decision-making.
• Enhancing Business Value:  By focusing on the desired exit, startups can work towards building value in areas that will be attractive to potential buyers or investors. This includes strengthening the management team, improving financial performance, and protecting intellectual property.
• Preparing for Unforeseen Circumstances:  An exit strategy isn’t just for planned transitions. It also prepares the startup for unexpected situations, such as a sudden market shift or leadership changes. A well-thought-out exit plan ensures the business can adapt and respond effectively.

An exit strategy is not an afterthought but a vital part of a startup’s business plan. It influences key decisions, adds value, and ensures readiness for both planned and unplanned transitions. It’s a tool that enables founders and investors to navigate the startup journey with clarity and purpose.

Types of Exit Strategies

Exit strategies vary based on the goals, industry, and stage of the startup. Understanding the different options is crucial for selecting the path that aligns best with the startup’s objectives.

Here are some common types:

Merger & Acquisition (M&A)

This involves selling the startup to another company. It’s often an attractive option for startups with unique technology or market positioning, providing a way to realize returns quickly.

Initial Public Offering (IPO)

An IPO allows the startup to go public by listing shares on a stock exchange. This strategy can provide significant capital but involves complex regulatory requirements and increased scrutiny.

Management Buyout (MBO)

In an MBO, the startup’s management team purchases the company. This option can be favorable when the existing team wants to continue the business independently.

Family Succession

Passing the business to family members is an option for those who wish to keep the startup within the family, ensuring continuity and preserving the founder’s legacy.

Liquidation

This involves closing the business and selling its assets. While not an ideal outcome, it’s a strategy that may be used when other exit options are not viable.

Factors to Consider When Choosing an Exit Strategy

Selecting the right exit strategy is a complex decision that requires careful consideration of various factors. 

Here’s what startups and investors should keep in mind:

• Startup’s Stage and Growth Potential:  The maturity and growth prospects of the startup can influence the choice of exit. A high-growth startup may opt for an IPO, while a stable, mature business might consider an M&A.
• Market Conditions and Industry Trends:  Understanding the current market landscape and future industry trends is vital. Timing an exit when the market is favorable can maximize returns.
• Investor Expectations and Goals:  Different investors may have different goals and timelines. Aligning the exit strategy with investor expectations is essential for a successful exit.
• Legal and Regulatory Considerations:  Each exit strategy has legal and regulatory requirements. Compliance with laws and regulations must be a central consideration in exit planning.
• Impact on Employees and Company Culture:  The chosen exit strategy can significantly affect the startup’s team and culture. Considering the impact on employees and maintaining the company’s values can be crucial.
• Financial Considerations:  Assessing the financial implications, including potential returns, tax consequences, and costs associated with the exit, is a key part of the decision-making process.
• Potential Buyers or Market Interest:  Identifying potential buyers or market interest in the startup can guide the choice of exit strategy. Building relationships with potential acquirers or understanding public market interest can inform the exit plan.

Timing the Exit

Choosing the right time to execute an exit strategy is as crucial as selecting the strategy itself. Timing can significantly impact the value and success of the exit. 

Here’s what to consider:

• Identifying the Right Time to Exit:  The optimal time for an exit depends on various factors, including the startup’s growth stage, market conditions, industry trends, and investor expectations. Timing the exit to coincide with peak value can maximize returns.
• Market Indicators and Internal Factors:  Monitoring market indicators such as industry growth, competitor activity, and economic conditions can provide insights into the best time to exit. Internal factors like achieving key milestones, financial performance, and team readiness should also be considered.
• Avoiding Common Timing Mistakes:  Rushing to exit too early or delaying until the market interest wanes can lead to missed opportunities. Understanding common timing mistakes and learning from others’ experiences can guide better decision-making.
• Flexibility and Adaptation:  While planning is essential, flexibility to adapt to changing circumstances is equally important. Being prepared to adjust the timing based on new information or unexpected developments ensures that the exit strategy remains aligned with the startup’s best interests.

Preparing for an Exit

Proper preparation is key to a successful exit, whether it’s an IPO, M&A, or another strategy. Here’s what startups need to focus on to ensure they are ready for a smooth transition:

• Building a Strong Management Team:  A capable and experienced management team can enhance the startup’s value and appeal to potential buyers or investors. Strengthening leadership and ensuring a cohesive team is vital.
• Enhancing Financial Performance:  Clear financial records, robust revenue streams, and profitability can attract the startup. Implementing financial controls and optimizing performance should be priorities.
• Protecting Intellectual Property:  Safeguarding intellectual property, such as patents, trademarks, and copyrights, adds value and can be a key selling point in an exit.
• Engaging Experts:  Legal, financial, and industry experts can provide valuable guidance in preparing for an exit. Their insights can help navigate complex regulations, structure the deal, and maximize value.
• Creating an Exit Plan:  A detailed exit plan outlines the preferred exit strategy, timing, valuation expectations, and potential challenges. It serves as a roadmap for the entire process.
• Communicating with Stakeholders:  Transparent communication with stakeholders, including employees, investors, and customers, ensures alignment and minimizes surprises during the exit process.
• Assessing Potential Challenges:  Identifying and addressing potential challenges in advance can prevent last-minute hurdles. Proactive preparation is key whether it’s legal compliance, due diligence, or negotiations.

Case Studies: Successful and Unsuccessful Exits

Real-world examples provide valuable insights into the complexities of startup exits. Here are two case studies that highlight different aspects of exit strategies:

Case Study 1: A Successful Tech Startup IPO

• Startup:  A technology startup specializing in AI solutions.
• Exit Strategy:  Initial Public Offering (IPO).
• Key Success Factors:  Strong financial performance, innovative products, favorable market timing, and a well-executed IPO process.
• Outcome:  Successful public listing with significant returns for investors and founders.

Case Study 2: An Unsuccessful HealthTech M&A

• Startup:  A healthtech startup developing wearable medical devices.
• Exit Strategy:  Merger & Acquisition (M&A).
• Challenges:  Overvaluation, lack of due diligence, cultural misalignment with the acquiring company.
• Outcome:  The merger faced integration challenges, leading to a decline in value and dissatisfaction among stakeholders.

Lessons Learned:

• Strategic Alignment:  Ensuring that the exit strategy aligns with the startup’s value, goals, and market positioning is crucial for success.
• Timing and Preparation:  Proper timing and thorough preparation can make the difference between a successful exit and a missed opportunity.
• Avoiding Common Pitfalls:  It is key to understand potential pitfalls, such as overvaluation or cultural misalignment, and take proactive steps to avoid them.

From selecting the right strategy and timing the exit to meticulous preparation and learning from real-world examples, the exit process requires strategic thinking, careful planning, and adaptability. 

Whether aiming for a high-profile IPO, a strategic merger, or another exit path, the success lies in aligning the strategy with the startup’s unique characteristics and the broader market landscape.

Hungry for more? Here are a few other articles you should check out:

• Why Invest in Startups
• Understanding Startup Valuation

Startup Valuation Explained: Methods, Factors, and Common Mistakes

Investing in Startups: Risks vs. Rewards

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© 2024 The Crwd

Disclaimer: The information on this website is for general informational purposes only. It should not be construed as investment advice or an offer to buy or sell any security. I am not a registered investment adviser and do not provide personalized investment advice. Please consult a registered investment adviser and conduct your own research before making any investment decisions. Investing in startups and early-stage businesses involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Any financial projections, market outlooks or estimates on this website constitute my own judgments as of the date of publication and are subject to change without notice. The Crwd LLC has not received compensation from any startup, issuer or entity to be featured on this page.

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Why Every Business Owner Needs an Exit Strategy

An exit strategy is a key component of entrepreneurship, as it can provide a sense of safety and peace of mind.

Table of Contents

You wrote a business plan to launch your company. To say goodbye to it, you need an exit plan to get the maximum possible return and to limit any future exposure to what happens to the company after your departure. But years of experience teach you that nothing in business is predictable — and that’s why you need two exit plans.

Why every business owner needs an exit strategy

Today, most business brokers and advisors recommend incorporating a thorough exit strategy into your business planning from the very start. While it may seem counterintuitive to plan on starting or buying a business and simultaneously plan how you’re going to sell or remove yourself from it, this is the smartest move you can make in today’s fast-paced economy.

Here are some of the benefits of developing an exit strategy.

Gives you an end goal 

If you don’t know where you’re going, you’ll never know when you get there. An exit strategy helps define what success is for you and provides you with a timetable complete with milestones toward your exit.

Informs strategic decision-making  

Without a plan, it’s easy to get caught up working “for” the business, and resolving day-to-day issues. With a firm end game in mind, you have the vision to work “on” the business instead, planning and executing the strategies you need to achieve the ultimate end goal you’ve set for yourself.

Enhances the value of the business

If you don’t have an exit plan, your business will have some inherent value when you look to change ownership, but this is often the baseline value. With an exit strategy where you have a clear end goal in mind, your business is worth more to potential buyers or investors. You’ve grown it, locked its profitability, trained a strong management team, established a customer base, cemented meaningful supplier relationships and, most importantly, structured the business to operate independently of your personal involvement. That is valuable.

Provides a flexible template 

At some point, you will likely need to make adjustments to your exit strategy. Sometimes, that will be for business reasons. Other times, something unexpected and unwanted like a sudden death, divorce, major health problem or required relocation may force you to change course. It’s easier to revise and tweak a plan that already exists with clear objectives and milestones than to come up with one suddenly to cope with a sudden change.

Having a preexisting strategy makes managing unforeseen events simpler. That’s because you already have a way of making decisions for growth — one that’s got you to where you are. You can strengthen this by involving outside professional advisors like a business broker, attorney and accountant to help you course correct when necessary and to monitor progress against your goals. 

Why you need 2 exit strategies

Creating one exit strategy may seem daunting enough, but to cover your bases, you should craft two different plans: one for a voluntary exit and one for an involuntary exit.

With a voluntary exit strategy, you’ll know the following:

• When you want to leave:  Maybe it’s in five years, 10 years or when revenue hits $10 million.
• Who you want to take over the business:  It could be a brand-new owner, your current management or a family member.
• How much money you want to leave with:  Perhaps you’d like a lump-sum payment, a share of profits every month for the rest of your life or a mixture of both.
• What to do if you’re approached by a potential buyer:  How will you react if you’re contacted out of the blue? More business owners today are receiving unsolicited buyout offers than in years past.

But things don’t always go the way you expect them to, so you need a plan for that as well. With an involuntary exit strategy, you’ll know what to do in the following situations:

• You fall ill and you’re not able to work in the way you used to (or at all):  You need to know who’ll take the reins and make decisions and you need to train them now so the business is ready.
• Your business begins to fail financially:  You need to know which employees and assets you can jettison so you can stay solvent and in business.
• You burn out and just can’t take it anymore:  If it’s all getting to be too much, you need to look after yourself. Do you hang in there, appoint a successor for day-to-day overall management or look to sell up? A well-defined involuntary exit strategy can lead the way.

The best way to plan for leaving your business for good is to prepare as if you have to leave it involuntarily.  That might sound strange, but the situations that lead to voluntary and involuntary exits have a lot in common. For example, in either scenario, you need to do the following:

• Train people to run the company in your absence:  If you want to sell up, the person who wants to buy it probably won’t want to run the company day to day. If they know your business is not owner-reliant, this is a massive selling point. Meanwhile, if you fall ill or burn out, it’s a big comfort knowing your staff can keep the business operational so it can continue flourishing.
• Know which assets and staff to cut to survive:  This is not only a way for you to reduce costs when business is suffering. It’s also a road map for a new owner looking to streamline operations and make more money from their investment.
• Sell off nonvital assets quickly for cash:  A new owner will want to know they can sell certain assets to offset some of the amount they paid you to take over the business. If you’re managing a crisis and need cash, you need to know which assets you can sell (or refinance) to bring money into your account.

With two exit plans in place, you have more bases covered, and you can carry out strategies that benefit both you and the new ownership.

What an exit strategy involves

Developing a well-rounded exit strategy entails the following.

Knowing when you want to leave

For your voluntary exit strategy, set yourself a date in the future by which you want to achieve your ultimate goals. These milestones could be based on metrics like company revenue and profitability. Decide on whether you’ll still proceed with a sale if you’re not successful in hitting those targets.

When you have a fixed date of departure in mind, your approach to running the business changes. You now think long-term as well as short-term because you’ll constantly be looking for ways to not only improve profitability but also build more value in your business to make it as attractive as possible to potential buyers.

Discovering who your most likely buyers are

Try to come up with “buyer personas” — documents that detail the type of person or company that would want to buy your business and why. (These are similar to customer personas , which are developed to identify your ideal customer.) To get your wheels turning, look below at potential buyers for four very different types of businesses.

Think about what specific aspects of your business will be valuable to buyers. Consider how you’ll develop and showcase those assets to increase the appeal and value of your company at the point of exit.

Developing assets that are valuable to other businesses

Sometimes, your company’s real value may be hidden behind your North American Industry Classification System (NAICS) Code. Don’t limit your company’s selloff potential by only considering buyers in your specific field.

Consider this example: You’re an e-commerce retailer and you’ve developed custom software that places your products in prominent search positions on third-party sales platforms. That, of course, would have great value for a purchaser from your sector. But it may have much greater value to a technology company and you could make a lot more money selling or licensing that software than doing a traditional sale to a competitor. Another benefit is that you could sell or license this software to raise cash if your company falls on hard times and needs money quickly. 

Improving performance in your business

Keep finding areas of improvement across your business. If you have developed custom software, as mentioned above, continue to develop it with your own needs in mind first but also consider what other companies would need to make them want to rent from you.

Look at new ways to get more people to your website or your premises every month with each visit costing you less. For instance, consider changing suppliers if you’re offered a similar quality product or service that does the job for a lower price. Ask yourself what you need to do to get that package to your customer in three days instead of four.

Another great way to build value is to do a competitor analysis. Investigate the competition in your market. Where are they doing better than you and how can you match or beat them?

Chasing profitable growth

Be experimental and creative in your advertising and keep tweaking every campaign to find wins like a drop in cost per sale or conversion. If you can prove to a potential buyer that by spending $1 on this campaign, you get $10 in revenue back and that’s been the case for years, that has tremendous value.

Promote deals to customers through  email marketing campaigns  and  short message service messaging and aim to make as much money as you can on each sale. Think of your future buyer when pricing up and chasing new business.

Doing everything you can to keep customers loyal

Don’t use the client email addresses and phone numbers you’ve collected just to move inventory; use them to  grow customer loyalty . 

Let customers know about a new product before it goes live on your website and give them the first opportunity to buy it. Send emails asking repeat clients to recommend you in online reviews. When someone does, give them a shoutout on social media and offer them a present as a thank you.  [Learn the  importance of social media for small businesses .]

Use  customer tracking tools  to work out the annual and lifetime value of each customer. Buyers look for those types of numbers. They also like companies with lots of clients who have given permission to receive emails and texts.

Customer loyalty is also key in any involuntary exit plan. If a crisis arises, you can attract regular clients and raise money quickly with a one-time sale. For example, if you sell subscription services, offer a special annual deal to existing customers to generate an influx of cash.

Handing over responsibilities to employees

The hardest types of businesses to sell are mom-and-pop shops and one-man bands. To a buyer, it’s like buying a job, not a company. It’s also really hard to sell businesses where there are 10 to 20 employees but success is still the responsibility of the owner. That’s because it’s like buying the job of a senior manager.

Delegate an increasing number of responsibilities to your employees over time. Train them and trust them to take on key tasks. If they make a mistake, be there to help them fix it and build up their confidence. If you don’t delegate, you’re training helplessness instead of anything valuable.

If a buyer asks, “Have you spent time away from the business?” you want to be able to confidently and truthfully say something like, “I spent three months in Hawaii and got one update email from the team a week. Everything ran like clockwork.”

For an involuntary exit plan, knowing you can step away for a while and still draw money thanks to your responsible staff gives comfort if you’re suffering from ill health or burnout.

Paying down company debt

You should try to pay down as much company debt as possible. That’s because when one company takes over another, things like business equipment loans and factoring service agreements cannot be novated.

In other words, they have to be settled in full on “completion day” (the day you sell your business). Normally, whatever you owe creditors is subtracted from the agreed-upon price you sell your company for, so you want to have less debt to subtract. Paying down debt also reduces your monthly servicing bills, meaning more profit in the meantime.

Starting to save money

Selling your business costs a lot of money. There are lawyers’ fees, accountant fees, professional service fees, a commission to your broker and more. For a business with $1 million in annual revenue, expect to pay up to $150,000 for a successful sale. If a deal is agreed to but falls through, you’ll still have to pay your team of outside advisors and experts.

If your business is struggling financially, having a decent amount of money saved up gives you more time to delegate day-to-day tasks to staff and raise cash by selling assets. If you also shrink your payroll and look for other savings, this will buy you even more time, financially speaking.

Exit strategies for startups vs. established businesses

There are dozens of ways for owners and investors to exit their businesses; however, the path chosen often depends on the age and size of the company.

Exit strategies for startups

• Initial public offerings (IPOs): IPOs are the favored way for many startup business owners to divest themselves, especially tech businesses that have already gone through a few rounds of funding. When you opt for an IPO, your business becomes a publicly traded and you and your investors should all make substantial returns. Bear in mind there are many regulation and governance hurdles to jump in preparation for an IPO.
• Strategic acquisitions: Most times, startup business owners end up selling their companies to larger competitors in the same or a related industry. You sell the shares in the business to your acquirer and this results in a complete transfer of ownership. Quite often, startups are bought for some aspect of their business that is unique and valuable, not necessarily due to their levels of profitability or market share. 
• Management buyouts (MBOs) : In an MBO, a team consisting primarily of your current management raises the money to buy you out. Returns for owners on MBOs can be good but are generally not as high as a strategic acquisition. Still, MBOs are an excellent way of ensuring the company remains in capable hands.

Exit strategies for established businesses

• Merger or acquisition: For established businesses with good profitability and an impressive market share, you can merge with or be acquired by another company. Businesses are often valued at multiples of annual profit and the higher your turnover and profitability, the greater the multiple you’re likely to receive. If you want to stay involved with your business after a merger, you can make it a condition of the sale that you stay on the board of the business you’re selling and/or have a seat on the board of the merged company.
• Liquidation: If you wish to exit the business on a faster timeline than it takes to find a buyer, liquidation is an option. You sell all your assets and settle all your existing debts, allowing you to extract the remaining residual value from your business as income. While quick, it’s much less lucrative than a sale or merger in most cases.
• Bankruptcy: If your business is facing insurmountable debts, you have two choices. First, there’s Chapter 11 bankruptcy, which keeps your doors open while you restructure your debt. Second, there’s Chapter 7 bankruptcy, which allows you to settle company debts by selling off your assets. This is a tough decision to make, but bankruptcy can relieve many financial burdens your company is suffering, giving it a chance to do business again in the future. There are a few specialist venture capitalist and private equity firms that specialize in purchasing bankrupt or near-bankrupt companies too.
• Spin-offs: If your business has several operating divisions, whether distinguished by geography, activity or both, you could spin them off into separate entities and sell them to realize their value. This way, you receive a payout and reduce the size of the operations you’re responsible for.

Word of caution

Beware of earn-outs. With an earn-out, you receive part of the agreed price for your company now and the remainder in tranches over a period of time based on the business’s continued performance.

It is perfectly normal not to receive your asking price in one go. However, if you agree that what you’re paid will be linked to the performance of the business once you’re no longer in control of it, you’ll be putting yourself in grave danger of not getting all the money you’re expecting.

Tips for executing an exit strategy

Now that you know what creating an exit strategy involves and how exits can differ for startups versus established businesses, follow these tips when executing your plans.

1. Bring in outside expertise.

You need to build your own professional team for the sales process because your buyer will almost certainly have one. You want to level the field as much as possible, but you also want people on your side who know the intricacies of selling companies.

Consider hiring part-time chief financial officers or fractional chief marketing officers well before you put your company on the market. Bring experienced, proven talent with wider connections in the business world to your C-suite to help you improve the organization first. They’ll be invaluable in helping you carry out your exit strategy when a deal is on the table.

These same professionals will have proven themselves adept at crisis management in their careers too. They’ll be able to help you get out of awkward financial situations and train your workers to handle management responsibilities.

2. Keep your accounts up to date and your accountants close.

Inform your accountants that you want to be in a permanent state of readiness in case you receive a purchase offer out of the blue or decide to put your company on the market. Once you’ve identified the financial areas of greatest interest to your buyer type, make sure your accountant updates the company’s finance reports on a weekly or monthly basis and keeps historical records of them. The  best accounting software  will come in handy.  [Related article:  How to Hire the Right Accountant for Your Business ]

3. Hire a corporate lawyer.

Retain a lawyer, preferably one with mergers and acquisitions (M&A) experience. Your buyer’s corporate lawyers will vigorously defend their interests and try to use the information you provide about your business during the due diligence process to bring down the selling price. You need someone on your team to advocate on your behalf.

4. Hire a business broker and M&A advisor.

Opinions differ on the effectiveness of business brokers and M&A advisors for companies with an annual revenue of less than $1 million. If you’re confident enough, it might be worth forgoing an advisor and handling the process yourself.

But what does a broker do? They market your business in many ways, often on websites like businessesforsale.com. They also handle initial inquiries, verify potential buyers have the required funds to purchase your company and sit in on the negotiations over price. Many try to engineer a bidding situation where two or more interested buyers make offers at the same time to try to drive up the price.

Brokers often also intervene during the due diligence stage. During due diligence, the buyer’s professional team of lawyers and accountants will ask for lots of detailed information about your company, often over a period of between three and six months. Their job is to help the buyer understand exactly what it is they’re buying. Tempers often become fraught during due diligence for a variety of reasons. When this happens, the brokers often act as go-betweens to smooth relations and keep the deal on track.

5. Create your own data room.

In years past, a buyer’s lawyer would enter a private room at your lawyer’s office called a “data room.” Here, they’d inspect financial and employment records, as well as documentation regarding intellectual property ownership and previous and ongoing legal disputes. Most data rooms are now virtual and the professional teams acting for the buyer and the seller usually email documentation to each other.

Create your own online data room as soon as you can and ask your accountants, lawyers and managers to submit updated reports every month. Delays in providing information can upset buyers — something you want to keep to a minimum.

Running your business like nothing else is happening

Once you’ve settled on an exit strategy for your business, don’t spend any more than 30 minutes per day on it, even if you have a deal on the table and it’s going through due diligence. Concentrate on running your business as well as possible to retain and build on the value you’ve already created. Buyers will expect this and they’ll be able to monitor if you’re protecting their interests from the updated information in the data room. Proceeding with business as usual while simultaneously preparing for the future is the best way to be ready for a voluntary or involuntary exit.

Bruce Hakutizwi contributed to this article.

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Start » strategy, ready to move on how to create an exit plan for your business.

Exit plans are necessary to secure a business owner’s financial future, but many don’t think to establish one until they’re ready to leave.

An exit strategy is an important consideration for business owners, but it’s often overlooked until significant changes are necessary. Without planning an exit strategy that informs business direction, entrepreneurs risk limiting their future options. To ensure the best for your business, plan your exit strategy before it’s time to leave.

What is an exit strategy?

An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.

A fully formed exit strategy takes all business stakeholders, finances and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business and provide a foundation for future goals and new direction.

If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.

[Read more: What Is a Business Valuation and How Do You Calculate It? ]

Benefits of an exit strategy

Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.

Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:

• Making business decisions with direction . With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes.
• Remaining committed to the value of your business . Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best selling situation for your business.
• Making your business more attractive to buyers . Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and goals.
• Guaranteeing a smooth transition . Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions will be clear and expected.
• Seeing through business — and personal — goals after exit . Executing an exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like bankruptcy.

Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.

Weighing your options: closing vs. selling

There are two strategies to consider for your exit plan.

Sell to a new owner

Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.

In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because:

• The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
• The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
• The transition for your employees and customers will be a smooth one since the buyer likely already has a stake in the business.

However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to compromise on value and sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.

Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.

The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.

[Read more: 5 Things to Know When Selling Your Small Business ]

Liquidate and close the business

It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.

Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry and then closing up shop.

The benefit of this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.

The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.

Whichever way you decide to liquidate, before closing your business for good, these important steps must be taken:

• File your business dissolution documents.
• Cancel all business expenses that you no longer need, like registrations, licenses and your business name.
• Make sure your employee payment during closing is in compliance with federal and state labor laws.
• File final taxes for your business and keep tax records for the legally advised amount of time, typically three to seven years.

Steps to developing your exit plan

To plan an exit strategy that provides maximum value for your business, consider the six following steps:

• Prepare your finances . The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally. Having a sound understanding of expenses, assets and business performance will help you seek out and negotiate for an offer that’s aligned with your business’s real value.
• Consider your options . Once you have a complete picture of your finances, consider several different exit strategies to determine your best option. What you choose depends on how you envision your life after your exit — and how your business fits into it (or doesn’t). If you have trouble making a decision, it may be helpful to speak with your business lawyer or a financial professional.
• Speak with your investors . Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid. A detailed understanding of your finances will be useful for this, since investors will look for evidence to support your plans.
• Choose new leadership . Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans. If you already have documented operations in practice in your business strategy, transitioning new responsibilities to others will be less challenging.
• Tell your employees . When your succession plans are in place, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent.
• Inform your customers . Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.

The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Exit strategy planning: 8 actions for business owners

12 January 2024

Planning your exit strategy before actually starting your business might seem a little counter-intuitive. But in fact, it’s important to think through your end-game so you can plan your journey accordingly. 

Leaving a business can be stressful. But a good exit strategy, planned well in advance, ensures a smooth transition if and when you hand over the reins to a new owner. In this guide, we’ll explore the pros and cons of different types of business exit strategies and when to use them. Then, we’ll show you how to plan your exit strategy.

What is an exit strategy?

An exit strategy is the plan that a business owner, founder, investor, or venture capitalist has for exiting a business. It may involve selling their share or the whole company for a financial return — or passing it onto a chosen successor.

Some owners have an exit strategy in place when they start their business. For example, they might plan to sell their business to a competitor in 5 years’ time for a 20% profit. However, a Voice of Australia Business Survey revealed that only 19% of Australian small-to-medium enterprises have an exit strategy or succession plan.

When are exit strategies useful?

You can use an exit strategy to:

Shut down a business that’s not profitable

Cash-out an investment after meeting profit objectives

Close a business if market conditions change significantly 

Sell a company

Sell some shares in a company 

Relinquish control or reduce ownership in a company

List your company on the stock market. 

Types of exit strategies

Here are 7 types of business exit strategies to consider based on your long-term goals. We’ve outlined the pros and cons of each option so that you can make the best choice for your company and employees.

Merger and acquisition (M&A) deals 

An M&A deal is the most popular exit strategy, especially for startups and entrepreneurs. Depending on the conditions of the agreement, you might remain involved in the business or exit altogether. 

You’ll most likely be selling your business to a larger company that may want to increase its reach or acquire your product expertise or capabilities to beat the competition. 

You can control the price, terms and details of the M&A 

If you are selling to a competitor or have several bids, you may be able to increase your asking price

You get a clean break from the business 

A merger could keep a struggling business running.

M&A deals can be lengthy, expensive and sometimes unsuccessful

The company culture and systems of the merging firms may be incompatible

The merger may result in employee layoffs

It may be hard to let go of your business.

Employees acquire an ownership interest

An Employee Stock Ownership Plan (ESOP) allows employees to acquire an ownership interest in a company by purchasing stocks or shares.

Empowers employees to make the business successful

Motivates employees and increases their commitment to the company

Causes less disruption to business operations.

ESOP company structures are challenging and costly to set up

Business decisions can take longer because all ESOP members need to approve.

Management buyouts

Like an ESOP, a management buyout (MBO) allows your senior management team to buy your business from you.

You can hand the business over to an experienced team

The transition will likely be more seamless than selling to a third party

The management team may lack experience in business ownership 

The management team may struggle to raise the funding required for a MBO.

Initial public offering (IPO)

An initial public offering (IPO) exit strategy involves selling shares of stock to the public and converting the company from private to public ownership. It’s best suited to companies that are sufficiently established and resourced to manage their responsibilities to shareholders. 

An IPO is one of the most profitable business exit strategies

IPOs can increase publicity, reputation and brand awareness.

An IPO is one of the most challenging and expensive exit strategies

Significant initial and ongoing documentation and reporting requirements 

Shareholders play a significant role in running the company. 

Liquidation

Liquidation is a common exit strategy for failing businesses, but you could also use it to exit a successful business. Liquidation involves selling your assets, repaying your creditors, paying any shareholders, and closing your business.

It’s a straightforward process that you can complete quickly

You can get your cash immediately.

You only make money from assets you can sell, such as land, inventory and equipment. 

There will most likely be job losses as a result.

Family succession

The family succession (or legacy) exit strategy lets you keep the business in the family by passing it onto the next generation. But your successor must have the necessary skills and commitment to keep the business running.

You have plenty of time to train your successor

Family members usually have a good understanding of how to run the business

You can remain as an advisor or consultant.

There may not be a suitable family member to take over

Choosing a successor can cause tension in families

Employees, investors or business partners may not be supportive of your choice.

Filing for bankruptcy is the exit strategy no business plans for. Yet, in extreme cases, it’s the only viable option. Although you may have assets seized, you’ll be relieved of debts and the burden of running an unprofitable business.

It relieves you of the responsibilities and debts of your business

You can move on from your failed business and start to rebuild your credit.

It’s possible that filing for bankruptcy will not relieve you of all of your debts

If you file for bankruptcy, you may have difficulty borrowing money in the future

Most likely, it will mean ending relationships with employees, suppliers and customers.

How to plan your exit strategy

An exit strategy sets out the timeline, financial and market conditions for you to leave the business and someone else take over. Follow these eight steps as you plan your exit strategy.

1. Define your intentions for the business

Start your exit strategy by defining your intentions for the business. For instance, you may want to merge with another company, leave it to a family member, or liquidate it.

2. Identify your target buyer

When choosing your target buyer or successor , you need to consider several factors, including:

Financial benefits and costs

Ease of transition

Continuity of service 

Future staffing requirements

Personality and cultural fit.

For example, if you’re selling to management or employees, you might need to stagger payments. Or, if you plan to keep the business in the family, you’ll want to ensure everything is transparent and fair, so there’s no conflict between family members. 

3. Establish an exit timeline

A vital part of planning your business exit strategy is establishing an exit timeline. Some buyers, such as employees or management, might not have enough cash to buy the business outright, so you may have to factor in a staggered transition period. Other buyers may request you stay on board to facilitate a smooth transition and satisfy existing clients.

4. Keep accurate accounting records

Most potential buyers will want to see at least two years of accounting and financial records. They’ll want to see steady growth and profitability rather than sudden spikes and dips in revenue. An accounting package like MYOB Business provides you an up-to-date and accurate view of your cash flow.

5. Make yourself redundant

One step you may not have considered before is how to make yourself redundant. You have to ensure that your employees know how to operate the business without you. So, plan how you will gradually step back, delegate important decisions to your management team, and become less available to your customers.

6. Document your processes 

You must document your business processes in a standard operating procedure manual. You need a single “how to” manual that covers every business process and workflow, such that a stranger could walk in, read the manual, and run your business without any disruption. Also, you’ll need to ensure you include employee job descriptions and their tasks and responsibilities. 

7. Get a professional business valuation

A business is only worth what someone is willing to pay for it. If a business valuation is lower than expected, you may have to spend more time growing the business. If it’s higher than a buyer expected, you might have to bide your time until they can raise enough funds. So it’s vital to get a professional business valuation to know what it’s worth and set realistic expectations for potential buyers.

8. Observe market conditions

Finally, it’s essential to observe the market conditions to determine the timing of your exit strategy. For example, if there’s more than one potential buyer, you’re better positioned to drive the selling price higher.

Take the stress out of your exit

It’s worthwhile having an exit strategy in mind before starting your business. Developing a plan from day one gives you time to review and refine it accordingly as the business evolves or new information comes to light. A well-planned exit strategy ensures a business continues to thrive by:

Defining your intentions for the business

Identifying your target buyer or successor

Establishing an exit timeline

Observing market conditions

Documenting your business processes

Reducing your day-to-day involvement

Storing accurate financial data

Including a professional business valuation.

You can use MYOB’s accounting software to keep accurate, up-to-date accounting records — if you ever decide to sell your business, you’ll be well prepared. 

Disclaimer:  Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.

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6 Startup Exit Strategies That Investors Will Accept

The last thing a new entrepreneur wants to think about for a new startup is how it will end. Yet one of the first things a potential equity investor asks about is your exit strategy. The answer you give can make or break your ability to get an investment, so you need to have the right answer ready before anyone asks. Here are three important reasons for the question:

• Good investment paybacks normally require an exit event.  Equity investments are not loans, so there is no loan payback period or interest payments. Equity is stock, but private company stock has no market value until the company goes public or is sold or merged with another company. These events may take three to five years at a minimum.
• Startups with no exit planned will minimize investor returns.  If the entrepreneur plans to grow the company into a family business, or keep it private, they will either never be interested in buying out investors, or will certainly not be motivated to provide the 10x return that investors are looking for. Investors hesitate to invest in these conditions.
• Most entrepreneurs like the startup role, but not the big-company role.  Investors know that the fun of a startup turns into managing production processes, sales processes, and personnel in a few years. You probably will do that job poorly, unless you plan your exit early, to move on to your next startup role, to do that better the next time.

Of course, if you are able to bootstrap your startup, and don’t anticipate the need for outside investors, you can technically ignore the first two points. Even still, in the context of all three points, I recommend that you evaluate the most common exit alternatives and considerations, and integrate the right one into your startup strategy and plan:

• M&A – merger or acquisition by another company.  This should be perceived as a win-win event, where your startup is bought or merged into a larger peer or competitor, allowing both you and investors to cash out. The resulting entity will gain complementary skills, economies of scale, new customer sets, and hopefully a larger growth opportunity.
• IPO – public company initial public stock offering.  According to the National Venture Capital Association  statistics , only 16% of venture-backed startups recently used this alternative, due to high liability concerns, demanding shareholders, and high costs. Most experts don’t recommend this approach as your default strategy anymore.
• Find a private equity firm or a friendly individual.  This alternative differs from an M&A, since the result is still your original single company. Yet it is an opportunity for you and your investors to cash out. The buyer has the challenge of scaling the business and managing all the operational growth requirements. You can kick-off your next startup.
• Position the company as a cash cow to fund spinoffs.  If you can convince investors that your startup will generate a solid revenue stream, and the market won’t go away any time soon, they may see an opportunity for an even larger return. You can maintain ownership, and even find someone you trust to run it for you, as you focus on spinoffs.
• Liquidate the assets, cash out investors, and keep the rest.  This is not a recommended strategy since business shutdowns are usually seen as distressed situations, meaning the value of hard assets will be highly discounted. Less tangible assets like the brand name, business relationships, and even your reputation may be lost or damaged.
• No exit.  If your startup strategy is to be a lifestyle company or a family business that will grow organically and never go public, then no-exit is a valid exit strategy. This alternative is often paired with a personal no-exit strategy. If you expect investors to help your startup scale, it probably won’t happen, as discussed in the first points of this article.

While exit discussions may somehow seem negative, an exit strategy should always be seen as positive. It’s a plan to develop the best opportunity for you, your startup, and your investors, and capitalize on it, rather than a plan to get out of a bad situation. Think of it as a succession plan, to keep growing what you have started. It may be the end of your startup phase, but it should be the beginning of a more mature and stable business.

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What to know as a first-time entrepreneur seeking investors.

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Cheryl Contee is the Author of Mechanical Bull: How You Can Achieve Startup Success and CEO at The Impact Seat Foundation - ImpactSeat.org .

Embarking on my entrepreneurial voyage was akin to setting sails on uncharted waters. It was full of lessons about perseverance, agility and the sheer grit needed to transform an idea into a thriving reality. Now with more experience under my belt, I’ve gained a new perspective on the other side as an investor.

As a result, I co-founded a foundation with another impact investor to provide resources and funding to entrepreneurs like me. Here are the lessons I've learned that can help bridge the seemingly vast expanse between nascent entrepreneurs and seasoned investors.

Understand investment terminology.

As a first-time entrepreneur, the world of venture capital can seem labyrinthine. When terms such as "convertible notes," "equity" and "liquidity event" start to come up in the fundraising process, it can seem like you’re learning a new language. This is something I've experienced firsthand, as I used to furtively look up industry jargon in the car after meetings.

Research and familiarize yourself with everyday venture capital terms to help inform your decision-making and keep you from getting caught in a situation that is not advantageous to you. Remember to always read the fine print as well to ensure you know what you’re signing up for.

Align your business with the right investors.

One common mistake entrepreneurs make is casting too wide a net when reaching out to potential investors. Time is your most precious resource; use it wisely by targeting investors whose investment thesis aligns with your business model and sector.

Look online for angel investors or venture capitalists who might be interested in the type of product you have and the level of funding you seek. Review the VCs’ websites and portfolios of companies in which they’ve already invested before approaching them to learn about the types of investments they tend to make. For example, some VCs focus on early-stage companies and seed rounds while others look for Series A and late-stage companies.

If your focus is software-as-a-service and you pitch a group that tends to invest in hardware-based solutions, those investors are not likely to invest in you, no matter the merits of your pitch deck. They might not even give you a meeting; but if they do, be realistic about what you can gain from that meeting.

Master the art of the cold email.

Reaching out to an investor cold can be daunting, but mastering this skill can open numerous doors. Here are my recommendations: First, use the old Silicon Valley chestnut of wisdom, "If you want money, ask for advice. If you want advice, ask for money." In my experience, it's best to start the relationship by building rapport and benefitting from the experience and expertise of the person you're contacting before you reach for the cheddar. Second, research who you're sending the email to. In particular, check to see if you have any LinkedIn friends in common.

When you do make contact, make sure your message stands out. TechCrunch reported that investors spent 24% less time looking at pitch decks in 2022 compared to the year prior, which means you need to make the limited time you have with investors count. I've written previously on building a winning pitch deck ; doing so is key to getting your foot in the door. Remember to keep it short, smart and punchy.

Build relationships before you need them.

Networking is about building relationships that can provide support, advice and connections throughout your entrepreneurial journey. When I first moved to Silicon Valley, I made a point of attending local meetups and founders' events. This allowed me to build relationships with fellow entrepreneurs who became close friends and advisors. When I was going through a rough patch and questioning my path, their support and perspective kept me going.

Know your exit strategy.

I cannot stress enough the significance of knowing your exit strategy from the outset. Crafting a clear exit strategy is a guiding principle that informs every strategic decision along your business journey. When I sought investors for my ventures, I looked for those who also shared my vision for the company's future, including its potential exit, be it through acquisition, initial public offering or another route.

This foresight into the exit strategy is crucial when engaging with investors. It's about partnering with investors who understand and support your endgame. They become allies in steering the company toward that envisioned exit. I've learned to value investors who not only bring capital but also align with my exit objectives, whether they're looking for a quick turnaround or a long-term growth trajectory. By being selective and aligning with investors who support your intended exit, you lay the groundwork for a successful and strategic culmination of your entrepreneurial efforts.

Know the value of your own equity.

In the early days, it might be tempting to give away significant equity to secure necessary funds. However, understand the long-term implications of equity dilution. Not everyone needs to go the traditional VC route to achieve the kind of success they want. ​​Alternative funding options exist that can help you secure capital while preserving your ownership stake.

For instance, some organizations opt for revenue-based financing , which is a form of non-dilutive financing that is repaid based on how much revenue is coming in. Equity crowdfunding is another example; this is a democratic way to raise funds and may be effective if you have a strong network and a compelling product. Government grants, such as the Small Business Innovation Research Program , offer non-dilutive funding for qualified small businesses as well.

Choose the funding option that best aligns with your company's goals and values, and prepare to engage with investors who share your vision for growth and success.

Transitioning from entrepreneur to investor has opened my eyes to both the visible and subtle nuances of startup success. The lessons learned through direct experience are invaluable, but learning from those who have traveled this road before you can significantly smooth your path. As you venture forth, remember that every entrepreneur's journey is unique, but the principles of preparedness, alignment and resilience remain constant.

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