According to Investopedia, an exit strategy is defined as “... an entrepreneur's strategic plan to sell his or her ownership in a company to investors or another company.”
An exit strategy gives a business owner the capacity to reduce his/her stake in the business.
If a business is successful, the business can make a substantial profit, but if the business is not highly successful, an exit strategy allows a business owner to limit their losses. In either scenario, an exit strategy is important.
As one might imagine, there are a number of different exit strategies to consider, but the most common are: initial public offerings, strategic acquisitions (sale of the business), management buyouts.
The decision of which exit strategy is best to use often lies in how much control or involvement, if any, the business owner would like to have after they exit.
For instance, a strategic acquisition means the business owner loses all stakes; therefore, they have no responsibility or control.
The new owners may do what they wish with the newly acquired business.
An initial public offering, like the name suggests, is when a private business decides to go public.
This means that any major debt or lack of investor funding can be remedied by allowing the public to have a stake (in stock) of the business.
Often, once a company goes public, the owner may still have a leadership role in the company, but all financial aspects of the company are now public.
IPOs are becoming more popular again, but are not efficient for small businesses.
Alternatively, a management buyout means that those who currently manage the company wish to buy it from the owner, who may be more hands-off in the day-to-day logistics.
This is appealing to the management team because they go from employees to owners, which is a major promotion.
This can be achieved through an employee stock ownership plan, but again the company needs to be of a certain scale for the ESOP to be an economical strategy.
Our advice is to plan ahead and if you are considering an exit strategy in the next two years or so, seek the assistance of a business advisor who has the skill set and professional tools to help you decide which option is best for you and your business needs.