Business Exit Strategies

7 Best Business Exit Strategies to Consider When Selling

Rasi
By Rasi 25 Min Read

Selling your business is an important decision and not one to take lightly. However, some strategies might be better for you than others. You should always research the best business exit strategy for you and your company before making a final decision.  

These strategies may depend on your company’s stage, the industry it operates in, or your personal goals for the future. Here are 7 exit strategies to consider when selling your business.

What Is Business Exit Strategy?

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An exit strategy for a company is an entrepreneur’s strategic plan to sell their company ownership. An exit strategy allows entrepreneurs and investors alike to reduce or liquidate their stake in a business and make it easier to make money. 

If unsuccessful, an exit strategy limits what will be lost. Exit strategies can also be seen from investors’ perspectives; they may have one when planning to cash out investments.

These are two different things: Business exit strategies should not be confused with trading exit strategies used in securities markets.

  • A business exit strategy is a company owner’s plan to sell or share it with other investors.
  • Initial public offerings, strategic acquisitions, and management buyouts are among the more common exit strategies an owner might pursue.
  • If the business is profitable, an exit strategy lets the business owner reduce their stake or completely get out of a potentially lucrative investment.
  • Implementing an exit strategy or “exit plan” can save a struggling business from experiencing too much financial loss.

So, The exit strategy you choose will depend on your own situation and what type of business you have. There are a variety of options, so it is important to know the different types available before coming up with an action plan.

Understanding The Business Exit Strategy

To start, entrepreneurs should have an exit plan outlined in their business plan before going into business. Choosing the type of exit strategy can also influence development decisions. 

For example, suppose you want to retain control or some involvement in the company after your departure. In that case, a management buyout might be better for you than an initial public offering (IPO). The best option is determined by several factors, including how difficult each one is and which will deliver the best ROI.

A strategic acquisition means giving up ownership responsibility and retaining specific control measures such as decision-making power. At the same time, IPOs are often seen as “the holy grail” because they often come with great prestige and high payoffs. On the other hand, bankruptcy is seen as a less desirable way to end a business.

One of the critical aspects of an exit strategy is business valuation. Some specialists can help business owners (and buyers) examine a company’s financials to determine a fair value. 

The transition managers assist sellers with their strategies for exiting their businesses by offering assistance on finding third-party financing, preparing corporate and personal exits, and more.

7 Business Exit Strategies You Should Consider When Selling 

When it comes to selling your business, you need an exit strategy.  To help make this decision easier for you, here are seven different ones that may be worth considering depending on the situation surrounding your sale:

Step-1: Liquidity

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Liquidation is the process of closing down and disposing of a company’s assets. Liquidations are often used when they cannot be sold through any business, usually because they are intrinsically dependent on one employee or owner or have poor strategy/performance.

Business owners should consider restructuring a company rather than liquidation as an exit strategy. 

Liquidating a business will often generate low returns and not recognize the value of current clients, while restructuring can optimize the sale process.

Exit Strategy: Gradual Liquidation

What is gradual liquidation in business exit strategy, and how does it differ from regular liquidation? The first type of exit strategy is a long-term process, where the owner wants to wind down their business. Gradual liquidation occurs over an extended period like monthly or quarterly payments. It’s most common for owners who wish to sell all their assets and pay off debt at a fixed price to end up with something after the sale has been completed. This kind of slow transition out will also make employees feel secure about job stability.

The most popular strategy for business owners is to systematically take profits out of their company when it comes to exit strategies. This will be done by either paying large salaries and bonuses or through dividend payments. 

The operation of the business will slow down until it is no longer sustainable. Small-business owners often want to reduce their workload slowly towards retirement choose this gradual liquidation method.

To avoid major mistakes, they may make while on a steep learning curve after selling their business, like not finding new buyers or overpaying taxes.

Liquidity Management In Business Exit Strategy Has Three Common Aspects

There are three different ways to manage liquidity in your organization, depending on the needs and goals of your organization:

  • All of the balances of your organization are placed into one account through physical concentration.
  • Multiple accounts are held in the same bank in notional pooling, but these accounts are combined when calculating interest.
  • The bank performs a periodic sweeping process on overlay structures at the end of the day, typically encompassing multiple accounts.

Gradual Liquidation is a method of reducing inventory by selling it off at regular intervals. This type of liquidation can be done in two ways: through decreasing the number produced or increasing the amount sold, which will eventually decrease supply and increase demand. 

Strategy 1: A Focus On Physical Activity

It is often hard to gain visibility and manage assets when split up into different accounts. However, there is a simple way to better control the flow of liquid assets by physically consolidating them into one central account or location. 

When you consolidate liquid assets, it gives you a clear line of sight over them- making it easier for management purposes. The benefits include more easily managing risk since only one account needs to be addressed and simplifying the process if your company operates with more than one currency.

A single automated cash position system like Trovata.io, can consolidate and normalize all your bank accounts, regardless of currency. 

Talking to one of our experts about how an automated cash management platform would help you understand how much money there is in your account at any given time. We hope that you will make more informed decisions for the future.

Strategy 2: The Concept Of Notional Pooling

Notional pooling is a strategy that balances their respective accounts, unlike physical concentration. Banks combine the balances and convert them to one currency with notional pooling. 

This presents a potential solution for organizations with too many different accounts and currencies to implement a physical concentration strategy- by leveraging notional pooling. 

Larger organizations can mitigate FX conversion costs without consolidating accounts and corporate relationships. 

An important consideration when deciding on this alternative approach is that it only works in some countries (countries permit not) or will typically attract attention from auditors or tax agencies if an organization addresses global markets.

For these reasons and others mentioned so far, not all companies should pursue this approach when designing their international cash management policies. Instead, what’s recommended for more advanced firms are multinational banking services offered by banks like Loomis International LTD., specialized providers of cross-border money transfers such as World First UK Ltd., although there are other solutions available depending on specific needs.

Strategy 3: Using Overlay Structures

Overlay structures are precious in balancing physical concentration and notional pooling. You can mitigate some of the risks associated with notional pooling and empower more distributed organizations to keep their funds spread out by using an overlay structure strategy. 

Because this technique relies on sweeps for aggregation into cash data, duplicate data is a significant difficulty. If you have missing cash data, these delays might produce a large visibility gap for your treasury staff, which can grow over time.

Step-2: Deal Structure

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A deal structure is a binding agreement outlining the rights and obligations of both parties in an M&A. It states what each party will be entitled to and what it is obliged to do under the agreement. In essence, a deal structure can simply be referred to as the terms and conditions of an M&A.

M&A Deal Structure: The Basics

Mergers and acquisitions involve the coming together (synergizing) of two business entities to become one for economic, social, or other reasons. A merger or acquisition is possible only when both parties are willing to agree on terms that have been agreed upon in advance. These terms are known as an M&A deal structure.

Deal structuring is one of the steps in a merger or acquisition. It consists of ranking all parties’ objectives, ensuring that their top-priority goals are met, and considering how much risk each party must take. Initiating this process requires all parties to state:

  • Their stance in the negotiations
  • Risks that are observable and what can be done to manage them;
  • They can tolerate how much risk they are willing to take; and
  • Negotiations may be canceled in certain circumstances.

The process of creating a proper M&A deal structure can be very complex and challenging because of the number of different factors to consider. 

These factors include preferred financing methods, corporate control, business plans, market conditions, antitrust laws, and accounting policies. Hiring the right kind of financial advice or legal expertise in these areas will make this process less complicated for you.

Structuring M&A Deals

There are three known ways to be structured when it comes to a merger. The first is an asset acquisition, the second is by purchasing stocks, and the third is with unions. All three of these methods can also be combined to achieve a more creative or flexible deal structure than you would think.

  1. Asset Acquisition

In an asset acquisition, the buyer purchases the selling company’s assets. If it prefers a cash transaction, this is usually an excellent deal if they have selected which assets they want to purchase.

Asset acquisitions may offer the following advantages:

  • The buyer chooses whether to buy certain assets from the seller and not others.
  • Even after the sale of the company, the remaining unsold assets and liabilities remain on the books.

The following are disadvantages of asset acquisitions:

  • Some non-transferable assets, such as goodwill, cannot be acquired by the buyer.
  • The seller and the buyer may incur high taxes due to asset acquisition.
  • Additionally, the deal may take longer to close than other structures. 
  1. Stock Purchase

The buyer acquires In-stock purchases, a majority share of the seller’s voting shares. In other words, control of assets and liabilities is transferred to the buyer.

Stock purchase acquisitions have the following advantages:

  • A stock purchase deal minimizes taxes, especially for the seller.
  • Since negotiations are less complicated, closing a stock purchase deal is more accessible.
  • There is a possibility that it is less expensive.

Stock purchase acquisitions have the following disadvantages:

  • Legal or financial liabilities may accompany a stock purchase acquisition.
  • There may also be problems with uncooperative minority shareholders.
  1. Merger

Though the term merger is often used interchangeably with the acquisition, a merger is an agreement between two separate business entities as one new entity. A merger can be less complicated than an acquisition because all liabilities, assets, etc., become the new entity.

In structuring a deal, there are advantages and disadvantages and other influencing factors that need to be considered to reach conclusions on what method should be adopted.

Step-3: Strategic Buyers

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A strategic buyer is someone in the same industry as your company who wants to buy you out. Often, they’re competitors, suppliers, or clients for what you provide. Their main goal is to find a company that does things similar to theirs and likely has products and services aligned with their operations.

Financial buyers and strategic buyers are not the same. A strategic buyer is preferred for small-medium-sized companies especially. Here’s a quick list of reasons why you should sell your company to a strategic buyer:

  1. Getting a better deal;
  2. Faster closure of deals;
  3. A higher degree of closing certainty; 
  4. Providing clients with better opportunities;
  5. A long-term agreement;
  6. Technically, this is an ability to make decisions that will affect the success of a strategic buyer.

Step-4: Partnerships and Joint Ventures

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A joint venture is a business organization that lasts for a specific period, while partnerships are one partner business. The former ends when its purpose is completed, whereas the latter continues until all partners agree to dissolve it. 

One difference between them lies in what happens when there’s disagreement among partners, with partnership disputes being settled by arbitration or litigation and joint ventures typically involving some form of the buyout agreement. Each party has the right to exit on completion at their discretion based on set rules.

Step-5: M&A – Mergers and Acquisitions 

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Merging can result from two similar companies joining forces or being bought by a larger one. It is a win-win situation when bordering companies have complementary skills, ultimately saving resources by combining. A giant company creates better and faster growth in revenue than creating new products organically.

  • It is common for the terms “mergers” and “acquisitions” to be used interchangeably, but their meanings are different.
  • A company acquires another outright through an acquisition.
  • Combining two firms creates a new legal entity under one corporate name, subsequently becoming a new legal entity.
  • By studying similar companies in an industry and using metrics, a company can be objectively valued.

M&A has historically been most common among large corporations who can afford to make such transactions without impact on their own stock price or ability to compete effectively with smaller businesses.

Acquisitions and Mergers: Types

M&A transactions include the following types of transactions:

1. Mergers

When two companies decide to merge, the boards of directors for both companies approve the combination and seek shareholders’ approval. For example, in 1998, a merger deal occurred between Compaq and Digital Equipment Corporation whereby Compaq merged into Digital Equipment Corporation. 

The ticker symbol for the pre-merger company was CPQ which later became HPQ after it joined with Hewlett Packard’s (HWP) ticker symbol.

2. Acquisitions

A simple acquisition means the acquiring company obtains a majority stake in the acquired firm and does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation’s 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.

3. Consolidations 

Consolidation is joining two companies together to create a new company. Core businesses are combined, and old corporate structures are abandoned to make this happen. For example, in 1998, Citicorp and Travelers Insurance Group announced a consolidation that led to Citigroup.

4. Tender Offers 

A tender offer is when a company offers to purchase the outstanding stock of another firm at a specific price rather than the market price. Acquiring companies typically communicate their requests directly to other firms’ shareholders, bypassing management and boards of directors. 

For example, in 2008, Johnson & Johnson offered Omrix Biopharmaceuticals worth $438 million. Though acquiring firms may continue, existing- especially if dissenting shareholders- most tender offers resulted in mergers.

5. Assets acquired

One company acquires the assets of another company. The acquiring firm must obtain approval from its shareholders. This type of purchase is typical during bankruptcy proceedings, wherein other companies bid for various assets of the bankrupt company liquidated upon the final transfer to acquirers.

6. Management Acquisitions

A management acquisition may be a buyout created by the company’s executives. The majority of shareholders must approve it, typically financed with debt. A well-known example of this type of purchase was in 2013 when Dell Corporation founder Michael Dell took over his company again after a 13-year hiatus from day to time operations.

Step-6: MEBO – Management and Employee Buyouts 

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A MEBO is a corporate restructuring initiative involving managerial and non-managerial employees buying out a company and concentrating ownership into a small group.

The benefits of MEBO

  • When select employees and management join forces to take over an existing company, it is called management and employee buyout (MEBO).
  • As an exit strategy or a means of taking a publicly-traded company private, MEBOs may be used.
  • MBOs can be difficult to arrange and structure when management and employees have competing interests and preferences.

Understanding Employee Buyouts and Management Buyouts

A MEBO is generally used to privatize a publicly-traded company. Still, it can also be used as the exit strategy for venture capitalists or other shareholders in an already private firm. An owner may want to sell their division that is not part of its core business and instead use this type of buyout by bringing greater efficiency and job security for employees.

MEBOs are often seen to bring greater efficiency because they can provide added job security, motivating employees enough to give more effort to improve profitability.

An internal team will pool their resources together like savings or capital to fund such a purchase from one of its members who wish to retire while still retaining some level of control over his former asset. This kind of output was generated using TextAloud.

Step-7: IPO – Initial Public Offering

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An IPO benefits private investors looking to make money off of their investment in a company. Investors who’ve invested in a company during the pre-IPO period can sell their shares for profit, watch the share value grow, or cut losses before quitting an unprofitable investment. 

The exit route given by an IPO happens because it gives them something they don’t have yet: control of this particular situation and the chance to cash out on any shares they’re holding onto from when the business was privately owned.

The benefits of IPOs

  • IPOs provide private investors with a way to sell off their stake in the company.
  • Private investors cannot sell their shares during a lock-in period. Typically, it lasts between three and 24 months.
  • Investing in companies by private investors is called private equity (PE). 
  • In many cases, these private entities are under pressure from their investors (people who own equity in these private investment firms) to cash in on their investments.
  • Following the lock-in period, investors typically sell shares in portions rather than all at once.

The IPO process is typically divided into three stages: pre-deal roadshow, book building, and pricing. But there are many more points to consider.

IPO: A Quick Overview

  • IPOs can serve as an exit strategy for private investors.
  • After the lock-in period expires, private equity (PE) investors can sell their investments to the public.
  • It is widespread for sales of this type to return enormous profits, with returns many times larger than the initial investment.
  • It is still possible for the private investor to own a part of the private equity (PE) and thus have a stake in the company.
  • Private investors often sell stocks in batches to avoid drastic price drops.

Conclusion 

Selling your business is an important decision and not one to take lightly. A business exit strategy allows entrepreneurs and investors alike to reduce or liquidate their stake in a business. If unsuccessful, an exit strategy limits what will be lost. Here, we have discussed the 7 exit strategies to consider when selling your business. The following guide aims to provide you with all the information you need to know about the business exit strategy.

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