D2 Planning an Exit Strategy
An exit strategy is the plan for an Entrepreneur to cease ownership of their business. The reasons an Entrepreneur may want to exit a business include changes in lifestyle such as retirement or parenthood, IPO readiness, market uncertainty, loss of passion for its purpose, exhaustion or business failure.
It is important for a business to prepare a realistic evaluation of the business to ensure a transparent understanding of its worth to ensure a smooth transition to owners or to support in liquidation. This can be done using a balance sheet which is a financial statement outlining the assets, liabilities and equity of the business.
Goodwill refers to the increase in value of a business beyond its identifiable assets such as buildings, machinery and equipment. This includes the brand reputation, loyal customer base and the skills of the workforce.
Possible Exit Routes
Trade Sale
A trade sale is when an Entrepreneur sells their business to another firm. This is often a competitor in the same industry who is looking to expand. The buyer benefits from their assets, market share, and skilled staff at the same time as eliminating a rival.
Family Succession
Family succession is when the entrepreneur hands over the business ownership to a family member such as their child. The entrepreneur must ensure that their successor has the knowledge and skills to take over the business. They may do this through training and experience of working together prior to the handover.
Management Buyout (Internal)
In a management buyout, the managers of the business raise finance to purchase it, allowing the entrepreneur to leave. The managers use their own money and loans to pay for the buyout. This keeps the company under capable leadership after the owner's departure.
Management Buyout (External)
In an external management buyout, managers from outside the company buy the business. This brings new ideas and abilities to develop the company, while still allowing the owner to exit. The purchasing managers will need to raise their own finance such as using their own funds or taking out a loan.
Stock Market Flotation (IPO)
An initial public offering (IPO) is when a business sells its shares on the stock market for the first time. The business can raise capital for growth through the sale of shares. It is common for new directors to be brought in at this stage giving founders the opportunity to reduce their involvement in the business.
Liquidation
Liquidation means shutting down a business and selling its assets. The money earned from selling assets can be used to pay off any debts. It's a way for entrepreneurs to exit when their companies aren't working anymore.
Cease Trading
An entrepreneur can choose to close their business, which involves stopping operations and selling or disposing of assets. This decision might be for retirement, not making profits, not having someone to take over, or other personal reasons.