An exit strategy is a planned approach to selling or otherwise disposing of a business either after a predetermined objective has been achieved or as a means to mitigate loss.
Planning a coherent exit strategy is essential, as it provides a roadmap for business founders to realise the value of their investments.
This article will give a brief overview of common exit strategies, outlining their applications, benefits, drawbacks, and relevant examples.
Before we proceed with the when, the why and the how. We spoke to one of our exited founder Members at Helm. Mark Kirby founded and exited Cart Assist, and is still leading other ventures. We had a few questions for Mark about exiting your business and there are a couple answers that we wanted to share.
What do you wish you knew before you exited your business?
Mark: "How much it can have an impact on the mental health. There’s lots of advice out there about the process of exiting. But it still ‘ prepare you for the large mental impact as you embark on the ‘controlled divorce’ with your business."
"Managing the loyalties with your key team, making (or not making decisions) that would be more natural to how you would be managing the business during exit. The negotiation process. And mentally managing the ‘life after’."
The life after exit is a great facet to mention and something that we see outside of business too.
Is there anything you wish you did differently?
Mark: "Have not been so keen to create ‘the next album’ straight after exit to fill the void of being a captain of your ship."
A concise but complete answer that tells us a lot. The difficult second album, the sophomore slump. It's a known phenomenon. It's easy to feel spare once you are finally relieved of all the duties of being a founder, don't let impatience lead to misfortune.
When is the right time to exit your business?
Exiting your business is an eventuality, so when is the right time? There is no one right answer for this. It will always be personal to you and your business.
Exited founder Mark Kirby, had this to say:
"This is something that should be planned years in advance. This was an exercise I did right at the beginning of the last business I exited to provide clarity on what would the business look like when I was ‘finished’ - with what I would I wanted to create and when it would be ready for a different form of leadership."
"By having a clear vision way ahead of when you have accomplished what the personal destination looks like, it is easier to recognise when you are approaching the time to exit."
You should consider these factors to help you make a well informed decision on the timing of your exit, that is not swayed by your personal attachments and biases. Consider the following:
Market Conditions
Assessing the current state of the market and identifying the optimal time to sell or merge.
Business Lifecycle
Understanding where your business stands in its lifecycle, from startup to maturity, can guide your exit timing.
Personal Reasons
Factors such as retirement or a change in personal circumstances might necessitate an exit.
Financial Stability
Evaluating the financial health of your business and ensuring that it is in a profitable position to exit.
Why would you exit your business?
There’s plenty of mixed opinions about why you would exit your business. Some believe that you should persevere, to pass the business on through the family. But for others, this is not the case.
This was touched upon really well by Jamie Waller, in his Founders’ Brew for Helm. To paraphrase and summarise, having grown up in poverty Jamie said “When you've had nothing, you constantly think it can go away at any time.” and it’s this sense of looming insecurity that pushed him to exit his first business.
When the money landed in his account, he knew that he had made the right decision and went on to start, scale and sell more businesses.
Being a founder is challenging, exciting, and addicting all at once. But knowing when to walk away is crucial. The most common reasons for exiting a business are:
Retirement
Exiting to enjoy the fruits of your labor.
Changing Markets
Adapting to shifts in market demand or competitive landscape.
New Opportunities
Selling the business to pursue new entrepreneurial ventures or investments.
What to consider when preparing to exit your business
Selling a business is a complex process that requires careful planning and execution. Here's a comprehensive list of things you must do before selling your business:
Find your why
Understand and settle on why you're selling the business. This is a big decision, and exiting isn’t to be done on a whim. Know your why and repeat it to yourself throughout.
Get your business valued
Hire a professional to determine the fair market value of your business. Knowing the worth of your business helps you set a realistic price and your forward planning.
Prepare financial statements
Have up-to-date financial statements ready, including income statements, balance sheets, and cash flow statements. Potential buyers will want to see these.
Ensure legal compliance
Consult with a legal professional to ensure all licenses, permits, and regulations are up-to-date and that you're in compliance with all applicable laws. Our network includes highly reliable and effective lawyers, Helm members can benefit from their advice by joining.
Prepare for due diligence
Expect potential buyers to conduct thorough due diligence. Have all business contracts, agreements, employee records, and other essential documents organised and ready for review.
Dress for the market
If necessary, make improvements to the business's physical appearance, operations, and financial health to make it more attractive to buyers. This could be a very worthwhile investment of time and resources if it secures a higher return on your exit.
Decide on how you will exit
Plan how you will transition out of the business, including any ongoing involvement, non-compete agreements, and other post-sale considerations. We have detailed different exit strategies further down including examples of companies who have done the same
Consider some extra help
Exiting your business is a huge undertaking. Consider hiring a broker, attorney, and accountant who specialise in business sales. They can guide you through the complex process, negotiate on your behalf, and ensure all legal and financial considerations are handled properly.
Develop a marketing plan
Decide how you will market the sale of your business. This may include creating a detailed prospectus that outlines the key selling points of the business.
Pre-qualify buyers
Ensure that potential buyers are serious and financially capable of purchasing the business.
Consider tax implications
Consult with a tax professional to understand the tax implications of the sale, both for the business and personally.
Prepare for negotiations
Be ready to negotiate terms of the sale, including price, payment structure, transition period, and other key elements.
Inform your team
Plan how and when you will communicate the sale to your employees, considering their concerns and questions.
Address emotional considerations
Selling a business can be an emotional process, especially if you've invested significant time and effort into building it. Be prepared to handle these emotions as you proceed with the sale.
Create a post-sale plan
Plan for your life and finances post-sale, including how you'll invest or use the proceeds from the sale, and what you'll do professionally and personally after the sale. It can be a shock to the system immediately after exit, so know your next move whether that’s travelling the world or starting your next venture.
By carefully planning and considering these aspects, you can help ensure a smoother, more successful sale process. It's a good idea to start this process well in advance of when you intend to sell, as properly preparing a business for sale can take significant time and effort.
If you are a Helm member, you can ask your fellow members about their experiences with exiting their business, or attend our exclusive events and workshops where we discuss life after exit.
How to exit your business: strategies, pros & cons, examples
We’ve looked at when and why you would exit your business. But how can you? We look at some of the most effective and common ways you can exit your business:
Selling to a Strategic Buyer
A strategic business acquisition refers to the purchase of one company by another to achieve specific long-term business objectives, such as entering new markets, accessing unique technologies, or leveraging synergies that align with the acquiring company's overall strategy.
Pros
- Potential for a higher price: Strategic buyers may see more value in your business.
- Strategic alignment: Alignment with a buyer’s existing business strategies.
Cons
- Complexity: May involve intricate negotiations and agreements.
- Confidentiality issues: Risk of revealing sensitive information.
Example
Microsoft's acquisition of LinkedIn in 2016 for $26.2 billion is a notable example of a successful strategic business acquisition.
The purchase allowed Microsoft to integrate LinkedIn's network with its products, access valuable data, strengthen B2B capabilities, and expand into social networking.
The acquisition led to revenue growth, enhanced functionality, and innovation, marking it as a strategic success for both companies.
Selling to a Financial Buyer
Selling your business to a financial buyer refers to the transaction where a company is sold to an investor or investment group, such as a private equity firm, with the primary focus on achieving financial returns, rather than pursuing strategic synergies or long-term business goals.
Pros
- Simplicity: Often less complex than selling to strategic buyers.
- Financial efficiency: Typically a quicker process.
Cons
- Lower price: Might result in a lower selling price.
- Potential loss of control: The new owner's objectives might differ.
Example
The successful financial buyout of Dollar General by private equity firm Kohlberg Kravis Roberts & Co. (KKR) in 2007 for $7.3 billion led to significant operational improvements and a profitable public relisting in 2009. A tidy sum for the founder, and a worthwhile investment for the PE firm.
Initial Public Offering (IPO)
An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time, typically through a stock exchange, to raise capital and provide liquidity for existing shareholders
Pros
- Access to capital: Raising significant capital by offering shares to the public.
- Increased company profile: Enhances company reputation and visibility.
Cons
- Costs and regulatory hurdles: Expensive and time-consuming process.
- Pressure from shareholders: Increased accountability and scrutiny.
Example
Facebook's Initial Public Offering (IPO) in 2012, raising $16 billion and valuing the company at $104 billion, stands as one of the largest and most noteworthy tech IPOs in history. See the largest IPOs in US history.
Management Buyout (MBO)
A management buyout (MBO) is a transaction where a company's management team purchases the assets and operations of the business they manage, often with the assistance of external financing.
Pros
- Control over the sale process: Managers often understand the business well.
- Potential for smooth transition: Less disruption to operations.
Cons
- Financing challenges: Securing funds for buyout can be difficult.
- Conflict of interest risks: Potential conflicts between management and owners.
Example
An example of a management buyout was the privatisation of Dell in 2013 in partnership with Silver Lake. The total value of this deal was valued at around $24.9 billion
Liquidation
Liquidation is the process of winding up a company or selling its assets to pay off creditors, after which the company ceases to exist.
Pros
- Simplicity: An easy way to close a business.
- Quick resolution: Fast way to dissolve assets.
Cons
- Potential loss of value: Assets may sell below their true worth.
- Negative impact on employees: Job loss and disruption.
Example
The liquidation of Toys "R" Us in 2018, a prominent toy retailer, led to the closure of all its U.S. stores after the company was unable to restructure its heavy debt load, marking the end of a once-iconic brand.
No real positive upside for a founder in this setting. However, in some unique cases, a founder may strategically choose to liquidate a subsidiary or a non-core part of the business, using the proceeds for more profitable endeavors or to reinvest in the core business, leading to positive outcomes.
Acquihires
Acquihires refer to the acquisition of a company primarily for the skills and expertise of its staff, rather than for its products or services, allowing the acquiring company to rapidly integrate talented personnel.
Pros
- Simplicity: Often a quicker process.
- Quick resolution: Immediate integration of talent.
Cons
- Potential loss of value: Might not realise full value of the business.
- Negative impact on employees: Possible cultural clashes.
Example
In 2010, Facebook's acquihire of the social browsing startup FriendFeed brought on board a talented team of engineers, including some former Google employees, who later played key roles in developing Facebook's news feed and other features.
Succession
In the context of exiting a business, succession refers to the deliberate transition of ownership and control to a successor, such as a family member or key employee, to ensure the ongoing sustainability and legacy of the business.
Pros
- Simplicity: Often a smoother transition within a family or team.
- Quick resolution: Less legal complexity.
Cons
- Potential loss of value: Successor might not have the same skills or vision.
- Negative impact on employees: Changes in leadership might affect morale.
Examples
Other than the obvious example you’re thinking of because of that show, an example of successful business succession is the planned transition at Berkshire Hathaway, where Warren Buffett meticulously planned the succession process, identifying key individuals like Greg Abel to carry on the company's investment strategies, ensuring stability and continuity in one of the world's most successful investment companies.
A notable example of a failed business succession was at Hewlett-Packard (HP), where a series of leadership changes and lack of clear succession planning led to strategic missteps and instability. The frequent CEO turnover, including the controversial departure of CEO Mark Hurd in 2010, contributed to a decline in the company's performance and reputation during that period.
There is no real set formula for exiting your business. You can learn from the mistakes of others, and take inspiration from successes too. However, the right time and method of exiting your business is entirely down to you.
When you become a Helm member, you can gain access to exclusive Forums and support groups where you can get advice from founders who have exited their business. You can learn from their mistakes, take inspiration from their success and feel solace in knowing you’re surrounded by like-minded people who are walking a similar path to you.
More from Helm
Helm is a community of high-growth founders that create opportunities for entrepreneurs to connect at exclusive events, form lasting friendships, share knowledge and solve the challenges that come with being a founder. Find out more about the Helm story or read more articles on personal and business growth here.
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