An exit strategy is a plan for the transition of the ownership of a company to another company or to investors. The transition can involve several ways of disposing the company either through selling the company to a strategic acquirer or taking the company public through an initial public offering (IPO) or through selling the company to the management team. Amid ever-changing deal dynamics and market conditions, transition preparation and value generation are more important than ever. Choosing the best strategy means knowing the array of the available exit options and evaluating them against business priorities. Basically, most companies that have an exit strategy aim to protect the value of the business built and to recover the maximum value of their investment in the business. However, there are other reasons why a company needs an exit strategy.
1. Financial Prospects
A good exit strategy is a prerequisite to a financing strategy. Different types of investors are only compatible with certain exit strategies. A company therefore needs a well-laid down exit strategy that will attract potential investors who will be assured of the worth of their investment.
2. Tax Implications
An effective exit strategy would help reduce any tax implications that may be passed on to the new owners. Furthermore, through an exit strategy, a company can effectively analyses and assess the tax costs of the various alternatives available and choose the one with the least costs. Tax law changes could also reduce revenues significantly if the company is not prepared to act before the effective dates.
3. Unexpected Offers
As the industry becomes more competitive and larger players look for growth through acquisitions, smaller companies may look for mergers to gain a larger market share and buying power. By having an exit strategy, a company would avoid being caught unprepared when such opportunities arise and will therefore make good of unexpected offers that were not foreseen.
4. Good Planning
By having a well-defined exit strategy, a company will also have a clear defined goal. The exit strategy can be seen as the highest goal to be achieved by the company and by clearly articulating a desired outcome; the company can then effectively lay down plans needed to achieve the goal. The exit strategy can be integrated into the company’s vision and mission statements and it will play a key role in determining the strategic direction of the company. It can help the company leaders mold the business into the ideal shape for the company’s choice of exit option and thus maximizing the value got from it.
5. Proper Valuation Estimates
A good exit strategy plan starts with the company evaluating the potential buyers and what will be important to the buyers in question. The company also evaluates its strengths and weaknesses so as to identify which areas to improve in order to attract the potential buyers. This process goes a long way in calculating the worth of the company and by having a good exit strategy, the company can improve the probability of its success by coming up with measures designed to increase the entire value of the company.
6. Smooth Transitions
Transitions in the ownership of a company can be disruptive without a clearly defined plan. In the case of inheritance, there might be issues of divisiveness between the heirs. In the case of buyouts, valued employees could lose their jobs under the new management or owners. This can lead to a fall in the performance of the company. To avoid such scenarios, a company should have an exit strategy that would spell out the duties and shareholdings of those inheriting it from the previous owners. The exit strategy can also guide the company leaders in hiring the best employees in an effort to groom successors or plan for a transfer to a board of trustees if the heirs cannot manage it.
7. Proper Timing
Most companies that aim to exit through sell or acquisition aim to do so during periods when the profits are high and the company can therefore reap the maximum profits. Having a well-defined exit strategy can help a company exit at the time of its choosing when the business is doing well and the market conditions are advantageous. This ensures maximum profit for the owners of the company.
8. Health and Family Crisis
Sometimes the business owners may be affected by sudden illnesses that had not been foreseen. Family issues such as divorce or sudden deaths in the family may also affect the owners of the company. Such issues can take time away from the focus needed to effectively run a company. An exit strategy that is meant to take care of such eventualities can help a company avoid going under and stay afloat despite the issues affecting the owners.
9. Increased Options
A company having no exit strategy may face limited options in case of unforeseen developments that may call for its disposal. To avoid a scenario where a owners of a company want to sell it off but are limited to the option of selling it to a competitor at a lower value, companies should lay down clear exit strategies that provide for an array of options. This would help maximize on the value of the company when the time to exit comes.
10. Economic Recession
Significant and successive quarters of negative growth in gross domestic products (GDP) and declines n economic activities lasting several months can have negative effects on business. A good exit strategy can help a company’s owners avoid shouldering the effects of such a recession.
Generally, the most successful exit strategies are the ones that were planned years in advance. Often, they leverage one or two key factors such as profits, customer experience, supply chain and organization. A good exit strategy is a must for any company with growth prospects.