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What Is an Exit Strategy?

Understanding exit strategies, who needs an exit plan, why is it important to have an exit plan, exit strategies for startups, exit strategies for established businesses, exit strategies for investors, why is it important to have an exit plan, what are common exit strategies used by startups, what are common exit strategies used by established companies, what exit strategies can investors use, the bottom line.

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Exit Strategy Definition for an Investment or Business

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

exit strategy for international business

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

exit strategy for international business

An exit strategy is a contingency plan executed by an investor , venture capitalist , or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria have been met or exceeded.

An exit strategy may be executed to exit a nonperforming investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.

An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO) .

Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning , liability lawsuits, or a divorce; or even because the business owner/investor is retiring and wants to cash out.

Key Takeaways

  • An exit strategy is a conscious plan to dispose of an investment in a business venture or financial asset.
  • An exit strategy helps to minimize losses and maximize profits on investments.
  • Startup exit strategies include initial public offerings (IPOs), acquisitions, or buyouts but may also include liquidation or bankruptcy to exit a failing company.
  • Established business exit plans include mergers and acquisitions as well as liquidation and bankruptcy for insolvent companies.
  • Exit strategies for investors include the 1% rule, a percentage-based exit, a time-based exit, or selling a stake in a business.

An effective exit strategy should be planned for every positive and negative contingency regardless of the investment type or business venture. This planning should be integral to determining the risk associated with the investment or business venture.

An exit strategy is a business owner’s strategic plan to sell ownership in a company to investors or another company. It outlines a process to reduce or liquidate ownership in a business and, if the business is successful, make a substantial profit.

If the business is not successful, an exit strategy (or exit plan) enables the owner to limit losses. An exit strategy may also be used by an investor, such as a venture capitalist, to prepare for a cash-out of an investment.

For investors, exit strategies and other money management techniques can greatly help remove emotion and reduce risk . Before entering an investment, investors should set a point at which they will sell for a loss and a point at which they will sell for a gain.

Business owners of both small and large companies need to create and maintain plans to control what happens to their business when they want to exit. An entrepreneur of a startup may exit their business through an IPO, a strategic acquisition, or a management buyout, while the CEO of a larger company may turn to mergers and acquisitions as an exit strategy.

Investors, such as venture capitalists or angel investors, need an exit plan to reduce or eliminate exposure to underperforming investments so they can capitalize on other opportunities. A well-thought-out exit strategy also provides guidance on when to book profits on unrealized gains.

Businesses and investors should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments. Here are several specific reasons why it’s important to have an exit plan.

Removes emotions : An exit plan removes emotions from the decision-making process. Having a predetermined level at which to exit an investment or sell a business helps avoid panic selling or making rushed decisions when emotions are high, which could accentuate a loss or not fully realize a profit.

Goal setting : Having an exit plan with specific goals helps answer important questions and guides future strategic decision making. For example, a startup’s exit plan might include a future buyout price that it would accept based on revenue turnover. That figure would help make strategic decisions about how big to grow the company to reach predetermined sales targets.

Unexpected events : Unexpected events are a part of life. Therefore, it’s essential to have an exit strategy for what happens when things don’t go to plan. For instance, what happens to a business if the owner faces an unexpected illness? What happens if the company loses a key supplier or customer? These situations need planning in advance to minimize potential losses and capitalize on gains.

Succession planning : An exit plan specifies what happens to the business when key personnel leave. For example, an exit strategy might stipulate through a succession plan that the company passes to another family member or that the business sells a stake to other owners or founders. Carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart.

In the case of a startup business, successful entrepreneurs plan for a comprehensive exit strategy to prepare for business operations not meeting predetermined milestones.

If cash flow draws down to a point where business operations are no longer sustainable, and an external capital infusion is no longer feasible to maintain operations, then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit further losses.

Most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital. Business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party.

Ideally, an entrepreneur will develop an exit strategy in their initial business plan before launching the business. The choice of exit plan will influence business development decisions. Common types of exit strategies include IPOs, strategic acquisitions , and management buyouts (MBOs).

The exit strategy that an entrepreneur chooses depends on many factors, such as how much control or involvement they want to retain in the business, whether they want the company to continue being operated in the same way, or if they are willing to see it change going forward. The entrepreneur will want to be paid a fair price for their ownership share.

A strategic acquisition, for example, will relieve the founder of their ownership responsibilities but will also mean giving up control. IPOs are often considered the ultimate exit strategy since they are associated with prestige and high payoffs. Contrastingly, bankruptcy is seen as the least desirable way to exit a startup.

A key aspect of an exit strategy is business valuation , and there are specialists who can help business owners (and buyers) examine a company’s financial statements to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.

In the case of an established business, successful CEOs develop a comprehensive exit strategy as part of their contingency planning for the company.

Larger businesses often favor a merger or acquisition as an exit strategy, as it can be a lucrative way to remunerate owners and/or shareholders. Rival companies often pay a premium to buy out a company that allows them to increase market share , acquire intellectual property, or eliminate competition. This raises the prospects of other rivals also placing a bid for the company, ultimately rewarding the sellers of the business.

However, a merger-and-acquisition-focused exit strategy should factor in the time and costs to organize large deals as well as regulatory considerations, such as antitrust laws .

Established companies also plan for how to exit a failing business, which usually involves liquidation or bankruptcy. Liquidation consists of closing down the business and selling off all its assets , with any leftover cash going toward paying off debts and distributing among shareholders . 

As mentioned above, most businesses see bankruptcy as a last-resort exit; however, it sometimes becomes the only viable option. Under this scenario, a company’s assets are seized, and it receives relief from its debts. However, declaring bankruptcy could prevent business owners from borrowing credit or starting another company in the future.

Investors can use several different exit strategies to prudently manage their investments. Below, we look at several strategies that help minimize losses and maximize gains.

Selling equity stake : Investors with shares in a startup or small company could exit by selling their equity stake in the business to other investors or a family member. Selling an equity stake may form part of a succession plan agreed upon by founders when starting a business. If selling a startup stake to a family member, it’s important that they understand any conditions tied to the investment.

The 1% rule : Investors apply this rule by exiting an investment if the maximum loss equals 1% of their liquid net worth . For example, if Olivia has a liquid net worth of $2 million, she would cut an investment if it generates a loss of $20,000 ((1 ÷ 100) × 2,000,000). The 1% rule helps investors take a systematic approach to protect their capital.

Percentage exit : Using this strategy, investors exit an investment when it has gained or fallen by a certain percentage from its purchase price. For instance, Ethan, an angel investor, may decide to sell his share in a startup if it achieves a 300% return on investment (ROI) . Conversely, Amelia, a venture capitalist, may decide to sell her share in a startup if it drops 20% in value.

Time-based exit : Investors apply this strategy by exiting their investment after a specific amount of time has passed. For example, Noah may decide to sell his stake in a business after 18 months if it has not generated a positive return. A time-based exit helps free up capital from underperforming investments that could be used for other opportunities. 

Businesses should have a clearly defined exit plan to help manage risk and capitalize on opportunities. Specifically, an exit plan helps remove emotion from decision making, assists with strategic direction, helps to plan for unexpected events, and provides details about an actionable succession plan. 

Exit strategies used by early-stage companies include initial public offerings (IPOs), strategic acquisitions, and management buyouts (MBOs). Entrepreneurs typically select an exit plan before launching a business that fits their longer-term business development decisions and goals. The exit strategy that an entrepreneur chooses depends on factors such as how much involvement they want to retain in the business and its future long-term potential.

More established companies favor mergers and acquisitions as an exit strategy because it often leads to a favorable deal for shareholders, particularly if a rival company wants to increase its market share or acquire intellectual property. Larger companies may exit a loss-making business by liquidating their assets or declaring bankruptcy.

Investors can capitalize on gains and reduce risk by using exit strategies such as the 1% rule, a percentage-based exit, a time-based exit, or selling their equity stake in a business to other investors or family members. Investors typically set an exit strategy before entering into an investment, as it helps to manage emotions and determine if there is a favorable risk-return tradeoff .

Exit strategy refers to how a business owner or investor will liquidate an asset once predetermined conditions have been met. An exit plan helps to minimize potential losses and maximize profits by keeping emotions in check and setting quantifiable goals.

Common exit strategies for startups include IPOs, strategic acquisitions, and MBOs. More established companies often favor a merger or acquisition as an exit strategy but may also choose to go into liquidation or file for bankruptcy if becoming insolvent . Meanwhile, investors can exit investments using strategies such as the 1% rule, a percentage-based exit, a time-based exit, or selling their equity stake in a business.

Selling My Business. “ The Importance of Having an Exit Plan .”

AllBusiness.com, via Internet Archive. “ 10 Reasons Why Your Exit Strategy Is as Important as Your Business Plan .”

Ansarada. “ Different Business Exit Strategies, Their Pros and Cons .”

Experian. “ What Is an Exit Strategy for Investing? ”

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Business Exit Strategy: Key Types, Best Practices, and Examples

exit strategy

It is not news that any operating organization, not depending on its level of business performance, should have a clear exit strategy. So, what’s an exit plan? How can an exit strategy align with the overall business development? Why is an exit strategy important?

The answers to these and other questions, including types of common exit strategies, their strengths and weaknesses, examples, and tips for implementation, can be found below.

What are business exit strategies?

An exit strategy is a plan designed by a business owner, trader, or investor to liquidate or sell a financial asset once specific requirements related to this asset’s performance have been met.

Typically, entrepreneurs develop several different exit strategies to sell their ownership stakes. As a result of this business venture, entrepreneurs reduce or liquidate their involvement in the business and potentially yield significant profits in the case of success or limit losses in the event of failure.

An investor or business may choose to execute an exit strategy for various reasons — from economic downturns to more straightforward factors like an investor is dealing with a liability lawsuit or they’re looking to retire and want to redeem their investments.

Types of business exit strategies range from strategic acquisitions, mergers, and initial public offerings (IPOs) to management buyouts and sales. Additional types of exit strategies include liquidation or resorting to bankruptcy filings.

In this article, we’ll take a closer look at each business exit strategy type, defining the specifics, pros, and cons of each.

Top 8 business exit strategies to consider

Determining the best exit strategy depends on various factors, including the nature and scale of the business, its growth opportunities and needs, as well as the interests of additional stakeholders, such as multiple founders or significant shareholders. Their points of view should be considered for both proper exit strategy planning and execution.

While there are many different business exit strategies to choose from, the motives behind each vary drastically. Let’s review the most common exit strategies.

Acquisition mergers

Mergers and acquisitions is the process of consolidating companies through various transactions, including:

  • A strategic acquisition. From an exit perspective, a business may choose to follow an acquisition exit strategy to sell its ownership stake or a complete entity to another company. This business exit strategy provides liquidity to the owners while maximizing profits and leveraging synergies between the merging entities.
  • A merger. A struggling business may decide to merge with a stronger partner to maximize profits, increase its competitive potential, and improve its reputation in the eyes of venture capitalists and potential buyers.

Initial Public Offering (IPO)

An IPO is the process of offering shares of a privately held company to the public for the first time. It involves listing the company’s stock on a public stock exchange. From an exit standpoint, an IPO allows small business owners to sell assets to the public, providing liquidity and potentially generating significant value. It also enables the company to raise capital.

Acquihires refer to acquisitions primarily made for the purpose of acquiring talented individuals or a team rather than the company’s products or services. In this strategy, a business allows itself to be acquired by a larger company, primarily to gain access to its skilled employees. From an exit perspective, the business owners can benefit from the acquisition by receiving compensation for the acquisition of their company and potentially securing employment within the acquiring company.

Family succession

Family succession transition involves passing on the ownership and management of a business to another family member from the next generation. Family succession planning allows the business owners to exit the company while maintaining its legacy and ensuring continuity. A successful transition may be arranged through a business sale, gift, or other plan of action.

Selling a part to an investor or business partner

In this strategy, a business owner may choose to sell a portion of their company to an investor or business partner. This approach provides an opportunity to secure capital for expansion or other business needs while allowing the owner to retain partial ownership. It can offer liquidity and expertise from the investor or partner while reducing the owner’s stake in the business.

Employee buyouts

An employee buyout involves the purchase of a company by its existing management team or employees. This strategy allows the current employees to acquire ownership and control of the business, often with the help of external financing. It offers a succession plan for the current owner and provides an opportunity for the employees to become owners and benefit from company profits.

Bankruptcy is a strategy used when a business is unable to pay its debts and seeks legal protection from its creditors. From an exit perspective, bankruptcy involves the liquidation of the business’s assets to repay its debts. This strategy allows the business owners to cease operations and exit the business, but it typically results in little to no value for the owners, as the proceeds are used to settle outstanding liabilities.

Liquidation

Liquidation refers to the process of winding down a business and selling off its assets to pay its debts. It is often used as a last resort when a business is no longer viable or when the owners wish to exit but cannot find a buyer. Liquidation provides a way to distribute the remaining value of the business to creditors and shareholders, effectively closing down the company.

Pros and cons of business exit strategies

When is the best time to plan an exit strategy.

The best time to plan an exit strategy is well in advance, preferably during the early stages of starting a business or when a business is stable and successful. This is because the business exit process execution and planning are rather time-consuming.

However, it’s never too late to start planning an exit strategy, even if your business is already well-established.

Best practices for planning an exit strategy

When planning your exit strategy, you have two main approaches to consider — whether to sell a business or liquidate it.

1. Selling to a new owner

Selling your business to a trusted buyer, such as a current employee or family member, offers a smooth transition out of day-to-day operations. This strategy allows you to find a buyer who shares your passion and can continue your business’s legacy. Benefits of this approach include:

  • Seller financing. Allowing the buyer to pay for the business over time benefits both parties. The seller continues to generate income while the buyer takes over with a manageable upfront investment.
  • Mentorship and involvement. The seller can provide guidance and remain involved in shaping the business’s direction.
  • Smooth transition. Employees and customers are already familiar with the buyer’s involvement and experience minimal disruption.

An alternative option is targeting a larger company for acquisition . This approach often yields higher profits, especially when there is a strong strategic fit between both parties. Challenges may arise due to merging cultures and systems, potentially resulting in employee layoffs during the transition.

2. Liquidating and closing the business

While it can be challenging to shut down a business you’ve worked hard to build, it may be the best option for repaying investors while still managing to recoup some of your investment. Two approaches for liquidation are:

  • Lifestyle business. Paying yourself until business funds are depleted and then closing up shop. This method allows you to maintain your lifestyle, but it may upset investors and employees. It also limits business growth and decreases its value if you decide to sell later.
  • Quick asset sale. Closing the business and swiftly selling assets like real estate, inventory, and equipment. While this approach is straightforward, the money generated solely depends on the assets sold. Creditors must be paid before the owner can receive payment.

Regardless of the chosen liquidation method, certain essential steps must be taken before permanently closing the business:

  • File business dissolution documents
  • Cancel unnecessary registrations, licenses, and business names
  • Comply with labor laws when paying employees during closure
  • File final taxes and retain tax records for the advised period

3. Developing your exit plan: Key steps

Creating an effective exit strategy requires careful planning and attention. Follow these six steps to develop an exit plan that maximizes your business’s value:

  • Prepare your finances. Gain an accurate understanding of your personal and professional finances, including expenses, assets, and business performance. This knowledge enables informed negotiation for offers aligned with your business’s true value.
  • Consider your options. With a comprehensive financial overview, explore various exit strategies to determine the best fit for your post-exit vision. Seek guidance from a lawyer or financial professional if needed.
  • Engage with investors. Inform investors and stakeholders about your intent to exit, creating a strategy outlining repayment. A detailed financial understanding will support your plans and provide evidence to gain investor confidence.
  • Choose new leadership. Start transferring responsibilities to new leaders while finalizing your exit plans. Well-documented business operations facilitate a smoother transition of responsibilities.
  • Inform your employees. Share the news of your succession plans with employees, being empathetic and transparent. Be prepared to address their questions and concerns during the transition.
  • Notify your customers. Inform clients and customers about your exit plans. Introduce them to the new owner if the business continues or provide alternative options if you’re closing for good.

By following these steps, you can prepare and execute your exit business plan with clarity and consideration for the various stakeholders involved in your business.

Remember, the best exit strategy is the one that aligns with your goals and expectations. If you desire the legacy to continue, selling is a viable option.

Examples of exit strategy implementation

Now, let’s take a look at examples of successful companies that chose different approaches to exit strategy planning and execution but still achieved their strategic goals:

  • Instagram — Acquisition Exit Strategy. In 2012, Facebook acquired Instagram — the popular photo-sharing platform — for approximately $1 billion. Instagram’s exit strategy involved selling the company to a larger, established player in the industry. The acquisition allowed Instagram to leverage Facebook’s resources, user base, and technology while continuing to operate as a separate entity under the Facebook umbrella.
  • WhatsApp — IPO Exit Strategy. The messaging app WhatsApp IPO’d in 2014. This exit strategy involved offering shares of the company to the public, enabling investors to buy and trade those shares on a stock exchange. The IPO provided WhatsApp with significant capital infusion and allowed early investors and shareholders to monetize their holdings while still retaining some ownership in the company.
  • Ben & Jerry’s — Employee Buyout Exit Strategy. In 2000, the well-known ice cream company Ben & Jerry’s implemented an employee buyout exit strategy. Rather than selling the company to a larger corporation, the founders and board of directors chose to sell the majority of the company’s shares to its employees. This decision aligned with their values of social responsibility and employee empowerment, ensuring that the company remained independent and employee-owned.
  • A business exit strategy is a plan devised by a business owner to sell their ownership stake in a company to investors or another company, providing a means to potentially increase revenue streams in the case of success or minimize losses in the event of failure.
  • The most common types of exit strategies include M&As, IPOs, acquihires, family successions, selling assets, employee buyouts, bankruptcy, and liquidation.
  • Some of the best practices for a successful business exit strategy include deciding on the right exit type (selling an asset or liquidating it) and developing a well-structured exit plan.
  • Key steps for planning a successful business exit strategy include financial preparation and communication with investors, new leadership, employees, and customers.

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Start » strategy, ready to move on how to create an exit plan for your business.

Exit plans are necessary to secure a business owner’s financial future, but many don’t think to establish one until they’re ready to leave.

 Two coworkers looking at tablet as they walk through an office hall.

An exit strategy is an important consideration for business owners, but it’s often overlooked until significant changes are necessary. Without planning an exit strategy that informs business direction, entrepreneurs risk limiting their future options. To ensure the best for your business, plan your exit strategy before it’s time to leave.

What is an exit strategy?

An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.

A fully formed exit strategy takes all business stakeholders, finances and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business and provide a foundation for future goals and new direction.

If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.

[Read more: What Is a Business Valuation and How Do You Calculate It? ]

Benefits of an exit strategy

Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.

Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:

  • Making business decisions with direction . With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes.
  • Remaining committed to the value of your business . Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best selling situation for your business.
  • Making your business more attractive to buyers . Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and goals.
  • Guaranteeing a smooth transition . Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions will be clear and expected.
  • Seeing through business — and personal — goals after exit . Executing an exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like bankruptcy.

Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.

Weighing your options: closing vs. selling

There are two strategies to consider for your exit plan.

Sell to a new owner

Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.

In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because:

  • The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
  • The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
  • The transition for your employees and customers will be a smooth one since the buyer likely already has a stake in the business.

However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to compromise on value and sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.

Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.

The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.

[Read more: 5 Things to Know When Selling Your Small Business ]

Liquidate and close the business

It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.

Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry and then closing up shop.

The benefit of this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.

The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.

Whichever way you decide to liquidate, before closing your business for good, these important steps must be taken:

  • File your business dissolution documents.
  • Cancel all business expenses that you no longer need, like registrations, licenses and your business name.
  • Make sure your employee payment during closing is in compliance with federal and state labor laws.
  • File final taxes for your business and keep tax records for the legally advised amount of time, typically three to seven years.

Steps to developing your exit plan

To plan an exit strategy that provides maximum value for your business, consider the six following steps:

  • Prepare your finances . The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally. Having a sound understanding of expenses, assets and business performance will help you seek out and negotiate for an offer that’s aligned with your business’s real value.
  • Consider your options . Once you have a complete picture of your finances, consider several different exit strategies to determine your best option. What you choose depends on how you envision your life after your exit — and how your business fits into it (or doesn’t). If you have trouble making a decision, it may be helpful to speak with your business lawyer or a financial professional.
  • Speak with your investors . Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid. A detailed understanding of your finances will be useful for this, since investors will look for evidence to support your plans.
  • Choose new leadership . Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans. If you already have documented operations in practice in your business strategy, transitioning new responsibilities to others will be less challenging.
  • Tell your employees . When your succession plans are in place, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent.
  • Inform your customers . Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.

The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.

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Home > Books > Risk Management

Discerning the Strategies for Exiting Your Business

Submitted: 24 March 2021 Reviewed: 11 May 2021 Published: 03 June 2021

DOI: 10.5772/intechopen.98338

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For many business owners, strategies for operations are well thought out, whereas strategies for exit are not. Exiting a business does not need to occur due to a challenge or disaster. It is possible to plan and exit for the purposes of business growth, retirement, mergers and more. An exit affects the business owner, as it means that they are no longer involved in running or operations of the organization. The aim of this chapter is to identify common exit strategies and understand how they are of benefit to both the business owner or manager and the individual taking over the business. Secondary qualitative research is the research method used, with analysis of strategies and structures used across countries. These findings include differentiation between exit strategies with an understanding of their impact or influence on the business. These include the process of creating and exit strategy and the benefits for having one in place. The expectations of the investor and how they are to be paid back are taken into consideration. The chapter concludes with a solution for any business owner, including how to work with a qualified team to create a logical, well thought out exit plan.

  • Exit Strategies
  • Business Owner
  • Next Generation Entrepreneurs

Author Information

Jeffrey m. shepard *.

  • Union Institute and University, Cincinnati, Ohio, USA

*Address all correspondence to: [email protected]

1. Introduction

Business owners work hard to build up their businesses in a bid to attain success. They experience incredible excitement and enthusiasm to get a business going right from the start. However, business owners need to think about what would happen if they were no longer able to be part of the business [ 1 ]. Numerous circumstances may occur which drive a business owner to exit their business. Exiting a business is not always negative. For this reason, the exit strategy should be in place as part of the long-term plan for the business. This will ensure that any future exit is well planned for, with a smooth transition or continuity where necessary. Also, a business exit may be an excellent option for a business owner seeking to make a significant return on their investment.

A non – profitable business could require the business to be closed down entirely, or the business owner could consider exiting and allowing the next generation with fresh ideas to run the business and lead it to success.

Changes in market conditions – The economic climate makes it challenging for the business owner to run and manage their business.

Reduce business ownership – A business owner may be willing to reduce their ownership and also give up some control in the business to a family member or employee, if they can get financial value by doing so.

Opportunity to sell – There are times when things fall into place and open up the opportunity for the business owner to sell their business, even if it was not their initial plan.

Other circumstances could precede an exit, with those mentioned above being the most recurrent.

The exit strategy is a plan more than a statement as several factors need consideration. They include clarity on the benefits of having the exit strategy in place, aligning the exit strategy with business goals and objectives, and determining the impact an exit will have on investors and successors. With a business exit strategy in place, it becomes clear what direction the business should take if or when a transition is necessary.

2. Understanding the scope of the exit strategy

In business, the exit strategy document is often a basic document that may only be referred to in the event of a change in business. For the most part, it is not well thought out unless there is an urgent need for it as a tool. For these reasons, businesses require education that explains how the exit strategy directly links with the health of a business.

How the exit strategy affects the business owner

Reasons and benefits of having an exit strategy

The implications of the exit strategy on investors and other stakeholders

The different types of exit strategies, and their potential influence on the business

Key financial concerns for revenue continuation following an exit strategy

With exit strategies being shallow documents in most organizations, each of these approaches requires in in-depth review to determine how they fit into the overall picture of the organization. This information is particularly important for upper-level management who are tasked with decision making during an exit. This paper seeks to connect the dots of exit strategy, allowing any manager to craft a comprehensive exit strategy that evaluates present success and a potentially thriving future. Using analysis of qualitative research, key insights are revealed, as is how these insights affect the bigger picture for the business.

2.1 Key benefits of putting an exit strategy in place

The exit strategy can help a business better define what success looks like and clarifies the goal that the company is working towards achieving. It also offers a timeline that can help with measuring progress.

The exit strategy also ensures that business leaders can create and execute insightful strategic decision making. Rather than getting stuck in the day to day running of the business, the plan focuses on achieving long term plans and objectives.

As a potential blueprint for business, the exit strategy indicates what should happen if certain events occur. These could include the sudden death of a business owner, or even an acquisition decision. When transitions are necessary, they are smoother and more efficient, saving both time and money when an exit strategy is in place.

The value of the business is flexible as it can change from one year to the next based on the business activities. With an exit strategy, it becomes possible to determine the current value and plan for future value. For the individual taking over, having a plan for the future increases the value of the business as it indicates there is guidance being used to meet goals.

2.2 The business owner and exit strategy

Business Intention

Business Objectives

Next course of action

The business owner needs to clearly define what their intentions are after they exit the business. If they plan to open up a new business that provides the same product or services, a non-compete clause may be necessary for the exit strategy agreement. If the intention is to simply take the proceeds from the sale and go into retirement, this should be clear as well. The more comprehensive the exit strategy, the better for both the business owner and the investors [ 4 ].

Would you like to remain involved in the business after exit?

This question may seem ironic considering exit means leaving the business. However, it is worth answering to determine which would be the best exit strategy to use, particularly if a younger member of the family is taking over. Remaining involved may require a seat on the board, a management position, offering advice, or even staying in business as an employee. As the business continues to grow, it is worth reviewing this question at least once a year.

When exiting the business, will you make money?

Answering this question will determine whether the exit strategy is based on going through tough times in business or exiting when experiencing growth and success. This requires looking at the long-term financial plan for the business and placing milestones that help measure their achievement. At the end of this process, the business owner will have a threshold to guide whether exit will mean some money received.

How much money would you like to make when you exit?

This ties up with the purpose of the exit. Some business owners begin ventures with the sole purpose of selling the business at the point that it achieves a particular goal. Others are motivated to grow the business until it can qualify for an IPO, and they can make a massive return. For some, the exit strategy is the route to retirement, and the payoff they are seeking should help them cater to the rest of their lives. When clear about the amount of money expected, the time needed for the exit strategy to be effective becomes more apparent.

Should the business continue under new ownership?

This question addresses the type of exit strategy that will be chosen. In the event of a merger or acquisition, the business will be altered to create a new entity. This means that it will not continue in the same way when under new ownership. When the business is being transitioned to family members or employees, it is possible to put in a clause that the business should continue in the same spirit.

How much time is needed to go through the exit process?

The time taken to exit the business is highly dependent on the type of exit that is planned. Ideally, the minimum time required for proper exit is one year. Within this year, the business owner can ensure that the successors have been chosen, informed, and are ready to take on the business once the owner exits. Furthermore, this time is necessary to ensure a smooth transition, particularly with the employees that will remain in the business. The main reason that it should take at least a year is financial. This time is needed for all finances to be evaluated and for clarity on how much the business owner should receive upon their exit. Where finances are concerned, business owners also need the year to ensure that they go through all the required legal channels and sort out any taxes.

Is there a need to train staff members for a smooth transition?

Yes, there is a need for training. A business owner exiting the business does not necessarily mean that the business is grinding to a total halt. It is typically just the business owner who is mandated to leave, while the other employees stay on to ensure the operations of the business continue. With new owners, updated systems and ways of working are likely to be put in place. To ensure that they can manage these situations, training should be done and evaluated so that there are no gaps in running the business.

2.3 Understanding the expectations of the investor

A business owner’s decision to exit the business impacts the stakeholders, especially the investors of the business. Investors may end up making a profit or a loss, depending on how the business owner chooses to exit the business. Even when a family member or employee is taking over, they must know the business owner understands that they want to get their money back from the investment that they make [ 6 ]. In the event the business owner chooses to exit, the potential new owner will have the option to move on as well and remain unscathed in the process.

Profit monitoring – This should be done on an annual basis over several years, with three years being ideal. The main aim is to ensure that there is an increase in profits each year. With this monitoring, the value of the business can increase significantly. Also, keeping excellent financial books that reveal an accurate picture of what is happening within the business is essential.

Long-standing contracts – Even as the business owner is changing, some things should remain the same to ensure the continuity and stability of the business. This requires long term contracts to be in place. Those who receive these contracts should be critical suppliers, the best and most qualified staff members, top customers, and management staff.

Legal compliance – This is concerning legislation that touches on all aspects of the business. It is vital that the business is fully compliant and is not facing any legal challenges. Legal compliance applies to all the different business licenses and certifications. With finances, ensuring that current audited accounts are available for scrutiny is necessary.

If the business is transitioning into the hands of a successor who wants to keep the business running, the business owner may have the option of keeping their shares. With this, the value of their shares may change, and it will be necessary to educate the successor on the new venture and its goals.

2.4 How do you pay back the successors?

Within the exit strategy plan, it is worth considering the motivations that drove the next generation, or employees to put their funds or even expertise into the business. Most new owners are looking for a way to get a good return. The return may be realized in the event the business being sold, recapitalization, or going public through an IPO. A new owner is interested in knowing the exit strategy for the business owner so that they can be clear on how they will realize a return [ 7 ].

To build confidence in the new owner, it is essential to share the plans for the future of the company, especially when it comes to value. It is expected that the value of the company will grow over time, meaning that new owners can look forward to increased returns.

Within the exit strategy, one needs to share the possible time frame for the exit to ensure the new owners can determine whether they will meet their return on the investment. One trap to avoid falling into as a business owner is to forecast what the rate of return will be. The new owner should work on making the calculations on their own based on their understanding and experience. As a business owner, you can support them by sharing financial documents and comprehensive projections.

It is also possible that as a part of the exit strategy, mainly if a deal is in place with another business, shareholders are offered the shares of the other company. The terms and conditions of such an agreement should be hashed out when planning an exit strategy.

2.5 The different types of exit strategies

Transition to family members or employees

Selling with a broker, or employees

Mergers and acquisitions

Businesses go through ups and downs, and when a business is losing money, mergers and acquisitions can help bring stability to the business. A merger brings together companies that have complementary abilities so that they can create a new entity. Mergers offer incredible flexibility for a business owner, as the owner may choose to sell their stake in the business or remain involved with business management.

Private equity buyout

Initial public offer (IPO)

Rapid business growth is excellent, though, in the process, the business owner may realize that they do not have adequate funds to take the business to the next level and maintain consistent growth. This issue occurs with a business that is several years old and appears to have achieved a peak in success. At this point, a key consideration is taking in public investors through an IPO. IPO stands for initial public offering, indicating the first time the shares of the company are available to the public, often at a low price that is bound to increase in value.

The business will need to have achieved a pre-determined minimum amount in pre-tax earnings over at least three years. Also, planning for an IPO is expensive, so the company should be stable enough to go through the entire process unscathed. Once the shares are sold, they will then be traded on the stock exchange, and a pool of numerous investors will become a part of the business. The entrepreneur may choose to sell all their shares, giving the business to the control of a management team and board, and therefore ending involvement with the business and getting a good return.

Liquidation

This should be a last resort option as it is equivalent to simply closing the business down. When this is the option, there are often challenges around debt, revenue, and profit. Liquidation requires the sale of all the assets so that creditors can be repaid the amount they are owed. If there are any funds left once this is done, the balance is divided between different shareholders to return for their investment. With so many ways to keep a viable business operational, this is one exit strategy that should not be considered unless necessary, and there is no alternative.

2.6 How the exit plan influences the business

Legal Structure

An effective exit strategy requires a legal agreement that outlines the terms and conditions of the potential exit. During the crafting of the legal agreement, an exit advisory team must go through all the parts of the agreement in detail. With the support of this team, the exit strategy agreement may be drafted several times before a final one that meets all criteria is done [ 11 ].

Letter of Intent

This is a letter prepared by the successor to formally expresses their interest in making an offer for the business. It often requires specific information, including how the transition will be done to fit the structure of the business. This letter of intent becomes particularly important if the next generation owner intends to purchase the business from an exiting business owner. This is to allow for fair negotiation and can ensure there is a focus on the expectations of the business owner to reach an agreement.

Purchase and Sale Agreement

This document is also referred to as the Definitive Purchase Agreement. It includes the final agreement between the parties and acts as a legally binding document for the ownership exchange. Within it, the shares and how they will be divided is outlined. Also, there will be details on how stocks and assets are to be purchased. This agreement should be drafted by an attorney who is well-versed in all the requirements and payments necessary. Furthermore, the attorney can support the exit strategy advisory team with their expertise. With the Definitive purchase agreement, the tax implications for each transaction are captured.

Earn-Out Agreement

One aspect of an exit strategy is offering the successor a guarantee that the business will continue to grow and thrive even after the business owner has made their exit. For most business owners, getting a one-time cash payment to close the deal is the best strategy. This may not be ideal for the buyer. With the earn-out agreement, the buyer offers to make payments to the exiting owner after the exit for some time. This is highly risky for the business owner, as once they exit the business, they have little control over the operations and real success of the entity. If this agreement is used, it needs to have precise and careful wording that offers the exiting business owner some protection.

Non-Compete Agreement

When a business owner chooses an exit strategy, there is one highly valuable asset that they take away with them. That is their expertise and knowledge on how to run the business. This can be of concern to the business successor who will want to take all the necessary steps to protect their new investment in the business. This is where the non-compete agreement is essential. This is a formal agreement that outlines that the exiting business owner will not create a competing business or be employed within the same industry in a competing organization for some time. Typically, the non-compete agreement will cover three years.

To ensure that the full legal process is followed, some documents need to be updated continuously for ease of transition. These include all intellectual property licenses, patents, trademarks, and copyrights. The same applies to any software that may hold sensitive or confidential information. These types of documents have an impact on royalties and the way they are collected.

Also, contracts with vendors and clients need filing and updating as they tie into the value of the business. They also provide information on the length of time these stakeholder relationships are valid.

2.7 Types of revenue models

Money and how to get a good return are top of mind when creating an exit strategy. From a financial standpoint, it is necessary to understand financial risks, any barriers to entry due to a change in the business owner, and also if there is any advantage that remains sustainable.

Transactional Revenue Models

With this revenue model, it is easy to transition as part of the exit strategy. This is because, for the most part, the business will remain as usual, which is the most ideal scenario for a next generation successor. Revenue is earned through the company offering a product or service, and the customer making payments for it.

Subscription Revenue Models

With this revenue model, customers pay a subscription fee to gain access to the product or service. It could also be a subscription model where customers pay for a product in installments over some time. For an exit strategy, it is crucial to determine whether this model is in place as it has a high risk. Customers may not finish their payment or choose to unsubscribe in the event of a chance of the business owner. It remains an attractive option for next generation successors due to generating recurring revenue.

2.8 Trade-offs between long vs. short term exit strategy

When considering a long term or short-term exit strategy, the goals, as well as the sustainability of the company, can more easily be aligned. Consider the following example. A business wants to work towards an IPO option within five years. To meet this long-term goal, there are specific steps that will be taken with a short-term strategy. These could include the product or service offering and even pricing and competition. In effect, the long-term goal for investment is the primary consideration, while everything in the short term is viewed as a tactic towards meeting this goal.

The type of exit strategy that you choose, whether long term or short term, will also affect the value you can receive. This is why a business owner needs to select their preferred exit strategy. Exiting can take as little as one year, and even up to ten years to accomplish well.

3. Research methods

The research method that was used to collect data for analysis and discussion is secondary qualitative research. This data was collated from a range of journals, all of which were addressing a different touchpoint of exit strategies. The aim of seeking for information across different platforms was to identify joining factors as well as identify any patterns in approaching exit strategies. Therefore, the review and analysis have been carried out on existing literature, including literature that offers comparisons of exit strategy situations in different countries.

The data collected was non-numeric. The journals and other content sources that were referred to were based on small studies that offer insight into a business or section of industry. For this reason, this paper focuses on analysis of their conclusions, more so than their data sets. This allows for deductive reason, though may also be viewed as a practical limitation. Furthermore, this paper attempts to understand cultural nuances that may impact the exit strategy process, as explored through the literature studies.

The analysis focuses on the meaning of exit strategies, both for the business owner and the investors. Through research analysis, it became clear that from end to end, exit strategies begin with the owner and culminate with the potential effect on the investors. By seeking to analyze this process, this paper seeks to understand the implications of choosing one specific strategy, as well as how to ensure that the strategy is carried out from start to finish. The secondary qualitative research is interpretive in nature, as this paper offers exploration into the topic building on theoretic principles that are in existence within the literature [ 12 ].

3.1 Discussion

The research reveals that there are positive reasons for an exit strategy, and that this strategy should form a core component of any business documentation. The exit strategy guides decision making, both for the next generation owner and the exiting business owner. This means that it acts as a blueprint for what actions should be taken in the event that an exit is imminent. With this blueprint, it becomes easier to determine the factors that can affect any exit strategy including the time needed, intention and business objectives for the business. Furthermore, there are numerous courses of action that a business owner can take following the strategy that include being available for consultation within the business, or a full exit meaning the business and its operations are totally in new hands.

For the new owner, it touches on how they can ensure a return on the investment that they make with the business. By the business owner understanding the goal of the investor, the exit strategy can ensure that the business operations are competent and aligned to a certain exit strategy that is most likely. Money, or a return on investment is also essential for the business owner, and this may guide the number of months or years that the business owner works through making their exit.

Therefore, there are ongoing actions that the business owner needs to ensure take place, both for them and the investor. These including profit monitoring, staying legally compliant and setting up contracts with suppliers and stakeholders. From the literature, it becomes clear that ensuring these actions are in place will result in the right exit strategy being chosen.

4. Conclusion

A business owner who starts their venture may create five-year plans that seek to drive profits and sales. Also, business owners desire to achieve growth, taking their business from one level of success to the next. However, it is essential to create an exit strategy if things do not go according to the plan. Not only is this a plan that will guide business operations, but it is also a fail-safe to ensure that the business is never caught off guard in case of any operational challenges. The earlier in the life of the business, the easier the transition will be when it is necessary.

An exit strategy is vital to ensure that the company has the right revenue models and legal structure. Furthermore, it provides direction on investment, especially when looking at short and long-term growth goals and the types of investors that would be beneficial to the business. In the heat of the moment, putting together an exit strategy with tight time restraints may result in gaps that cost the business owner dearly. A logical and well-thought-out plan will ensure that there is minimal loss and that investments of all stakeholders are well protected.

To create the exit strategy, a finance professional like an accountant should be at the forefront of the draft plan. This finance professional should coordinate their work with a business attorney so that all due process is followed. Together, they will create the initial draft. Additional information can be added in from key managers and members of an exit strategy advisory committee. With all these contributions, it becomes possible to have a highly comprehensive document that can be updated when necessary.

Many people opt to write a will to ensure proper division of their assets should they pass away. This does not mean that they are planning to die. In fact, it is viewed as something highly responsible to do. It is similar to creating a business exit strategy. It does not speak to the commitment of the entrepreneur. It is merely a readiness tool to prepare for any eventuality [ 13 ].

There is something worth considering when creating an exit strategy, and that is how to react and respond to an unexpected offer by large companies who may be seeking an acquisition. This helps ensure that the business owner has some insight and can guide a negotiation well if a buyer is available. Sometimes exit is not voluntary, and even in this situation, significant benefits can be realized.

Future research should seek to analyze an actual exit strategy, seeking insights and opinions from all stakeholders. These should help to determine the planning phase effectiveness, those involved in the process, and the end result. Carrying out these end to end studies will help with understanding which processes are the most effective from start to finish. Furthermore, it will become easier to identify loopholes that may cause an interruption to executing an exit strategy.

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Home » International Business » Global Market Entry and Exit Strategies

Global Market Entry and Exit Strategies

Each company has a specific strategy may be selected to suit a company’s needs. Many companies use a combination of global and national strategies. Some firms use a global strategy elsewhere some countries and some products are more receptive to global strategies than others. Global strategies are directed at those national product markets that are large and have low barriers to foreign products and companies. They are also likely to compromise the center of world demand, particularly in the newer, more technologically intensive product. Companies adapting global strategies are not likely to target seriously countries with high barriers and small national product markets. However given the long term trend in declining trade barriers coupled with the economic growth , more companies will adopt global strategies.

Global Market Entry Strategies

Strategy is planning through companies achieve their goals and move forward. A company makes a decision to enter an international market , this strategy works to expand its wings. Company could use many ways to get it. These ways can be a shade of company’s strength, potential and the level of interest in marketing. Exporting is main entry strategy in international arena which can be used direct or indirect mode. A company’s aim to international market can require minimal investment and be limited to infrequent exporting with title thought given to market development. Or a company can make large investments of capital and management effort to get strength of its shares in foreign markets. Both approaches can be profitable. Entry market strategy can be fulfilled through these mechanisms.

A company can decide to enter foreign market by exporting from home country. This means of foreign market development is the easiest and most common approach employed by companies taking their first international steps because the risk of the financial loss can be minimized. Many companies engage in exporting as their major market entry method. Generally early motives are to skim the cream from the market or gain business to absorb overheads. Even though such motives might appear opportunistic, exporting is sound and permanent from of operating in international marketing.

1. Exporting as an Entry Strategy

Exporting represents the least commitment on the part of the firm entering a foreign market. Exporting to a foreign market is a strategy many companies follow for at least some of their markets. Since many countries do not offer a large enough opportunity to justify local production, exporting allows a company to centrally manufacture its products for several markets and therefore to obtain economies of scale. Furthermore, since exports add volume to an already existing production operation located elsewhere, the marginal profitability of such exports tends to be high.

A firm has two basic options for carrying out its export operations. The form of exporting can be directly under the firms control or indirect and outside the firms control. It can contact foreign markets through a domestically located (in the exporters country of operation) intermediary-an approach called indirect exporting. Alternatively, it can use an intermediary located in the foreign market-an approach termed direct exporting.

  • Indirect Exporting: Indirect exporting includes dealing through export management companies of foreign agents, merchants or distributors. Several types of intermediaries located in the domestic market are ready to assist a manufacturer in contacting international markets or buyers. The major advantage for managers using a domestic intermediary lies in that individuals knowledge of foreign market conditions. Particularly, for companies with little or no experience in exporting, the use of a domestic intermediary provides the exporter with readily available expertise. The most common types of intermediaries are brokers, combination export and manufacturers export agents. Group selling activities can also help individual manufacturers in their export operations.
  • Direct Exporting: Direct exporting includes setting up an export department within the firm or having the firms sales force sell directly to foreign customers or marketing intermediaries. A company engages in direct exporting when it exports through intermediaries located in the foreign markets. Under direct exporting, an exporter must deal with a large number of foreign contacts, possibly one or more for each country the company plans to enter. Although a direct exporting operation requires a larger degree of expertise, this method of market entry does provide the company with a greater degree of control over its distribution channels than would indirect exporting. The exporter may select from two major types of intermediaries: agents and merchants. Also, the exporting company may establish its own sales subsidiary as an alternative to independent intermediaries. Successful direct exporting depends on the viability of relationship built up between the exporting firm and the local distributor or importer. By building the relationship well, the exporter saves considerable investment costs.

The independent distributor earns a margin on the selling price of the products. Although the independent distributor does not represent a direct cost to the exporter, the margin the distributor earns represents an opportunity that is lost to the exporter. By switching to a sales subsidiary to carry out the distributors tasks, the exporter can earn the same margin. With increasing volume, the incentive to start a sales subsidiary grows. On the other hand, if the anticipated sales volume is small, the independent distributor will be more efficient since sales are channeled through a distributor who is maintaining the necessary staff for several product lines. The lack of control frequently causes exporters to shift from an independent distributor to wholly owned sales subsidiaries.Many companies export directly to their own sales subsidiaries abroad, sidestepping independent intermediaries. The sales subsidiary assumes the role of the independent distributor by stocking the company’s products and/or services, sometimes jointly advertising and promoting products, selling to buyers and assuming the credit risk. The sales subsidiary offers the manufacturer full control of selling operations in a foreign market. Such control may be important if the company’s products require the use of special marketing skills such as advertising or selling. The exporter finds it possible to transfer or export not only the product but also the entire marketing program that often makes the product a success.

The operation of a subsidiary adds a new dimension to a company’s international marketing operation. It requires the commitment of capital in a foreign country, primarily for the financing of account receivables and inventory. Also, the operation of a sales subsidiary entails a number of general administrative expenses that are essentially fixed in nature. As a result, a commitment to a sales subsidiary should not be made without careful evaluation of all the costs involved.

2. Foreign Production as an Entry Strategy

Many companies realize that to open a new market and serve local customers better, exporting into that market is not a sufficiently strong commitment to realize strong local presence. As a result, these companies look for ways to strengthen their base by entering into one of several ways to manufacture.

2.1. Licensing

Licensing is similar to contract manufacturing, as the foreign licensee receives specifications for producing products locally, but the licensor generally receives a set fee or royalty rather than finished products. Licensing may offer the foreign firm access to brands, trademarks, trade secrets or patents associated with products manufactured. Under licensing, a company assigns the right to a patent (which protects a product, technology or process) or a trademark (which protects a product name) to another company for a fee or royalty. Using licensing as a method of market entry, a company can gain market presence without an equity (capital) investment. The foreign company, or licensee gains the right to commercially exploit the patent or trademark on either an exclusive (the exclusive right to a certain geographic region) or an unrestricted basis. Due to advantages of low risk and low investment, licensing is a particularly attractive mode for small and medium-sized firms. Licensing also is an effective mode for testing the future viability of more active involvement with a foreign partner.

Licenses are signed for a variety of time periods. Depending on the investment needed to enter the market, the foreign licensee may insist on a longer licensing period to pay off the initial investment. Typically, the licensee will make all necessary capital investments (machinery, inventory and so forth) and market the products in the assigned sales territories, which may consist of one or several countries. Licensing agreements are subject to negotiation and tend to vary considerably from company to company and from industry to industry.

Companies use licensing for a number of reasons. For one, a company may not have the knowledge or the time to engage more actively in international marketing. The market potential of the target country may also be too small to support a manufacturing operation. A licensee has the advantage of adding the licensed products volume to an ongoing operation thereby reducing the need for a large investment in new fixed assets. A company with limited resources can gain advantage by having a foreign partner market its products by signing a licensing contract. Licensing not only saves capital because no additional investment is necessary but also allows scarce managerial resources to be concentrated on more lucrative markets. Also, some smaller companies with a product in high demand may not be able to satisfy demand unless licenses are granted to other companies with sufficient manufacturing capacity.

In some countries where the political or economic situation appears uncertain, a licensing agreement will avoid the potential risk associated with investments in fixed facilities. Representing an export of technology rather than goods (as in exporting) or capital, licensing is an attractive mode in markets where political and economic uncertainties make a greater involvement risky. Both commercial and political risks are absorbed by the licensee. In other countries governments favor the granting of licenses to independent local manufacturers as a means of building up an independent local industry. In such cases, a foreign manufacturer may prefer to team up with capable licensee despite a large market size, because other forms of entry may not be possible.

A major disadvantage of licensing is the company’s substantial dependence on the local licensee to produce revenues and thus royalties usually paid as a percentage on sale volume only. Once a license is granted, royalties are paid only if the licensee is capable of performing an effective marketing job. Since the local company’s marketing skills may be less developed, revenues from licensing may suffer accordingly.

Another disadvantage is the resulting uncertainty of product quality. A foreign companys image may suffer if a local licensee markets a product of substandard quality. Ensuring a uniform quality requires additional resources from the licenser that may reduce the profitability of the licensing activity.

Thus, the producer loses some control in certain situations. The risk of losing control of intellectual property and/or technological advantages can also be mentioned as another disadvantage of licensing.

Another potential problem is that the licensee may adapt the licensed product and compete head on with the licensor. The possibility of nurturing a potential competitor is viewed by many companies as a disadvantage of licensing. With licenses usually limited to a specific time period, a company has to guard against the situation in which the licensee will use the same technology independently after the license has expired and therefore turn into a competitor.

Although there is a great variation according to industry, licensing fees in general are substantially lower than the profits that can be made by exporting or local manufacturing. Depending on the product, licensing fees may range anywhere between 1 percent and 20 percent of sales, with 3 to 5 percent being more typical for industrial products. Conceptually, licensing should be pursued as an entry strategy if the amount of the licensing fees exceeds the incremental revenues of any other entry strategy such as exporting or local manufacturing. A thorough investigation of the market potential is required to estimate potential revenues from any one of the entry strategies under consideration.

2.2. Franchising

Franchising is a special form of licensing in which the franchiser makes a total marketing program available including the brand name, logo, products and method of operation. Usually the franchise agreement is more comprehensive than a regular licensing agreement in as much as the total operation of the franchisee is prescribed. It differs from licensing principally in the depth and scope of quality controls placed on all phases of the franchisees operation. The franchise concept is expanding rapidly beyond its traditional businesses (such as service stations, restaurants and real-estate brokers) to include less traditional formats such as travel agencies, used car dealers, the video industry and professional and health improvement services. About 80 percent of all McDonalds restaurants are franchised and as of 1999 the firm operated about 24,500 stores in 116 countries.

2.3. Local Manufacturing

A common and widely practiced form of market entry is the local manufacturing of a companys products. Many companies find it to their advantage to manufacture locally instead of supplying the particular market with products made elsewhere. Numerous factors such as local costs, market size, tariffs, laws and political considerations may affect a choice to manufacture locally. The actual type of local production depends on the arrangements made; it may be contract manufacturing, assembly or fully integrated production. Since local production represents a greater commitment to a market than other entry strategies, it deserves considerable attention before a final decision is made.

Under contract manufacturing, a company arranges to have its products manufactured by an independent local company on a contractual basis. This is an entry mode in which a firm contracts with a foreign firm to manufacture parts or finished products or to assemble parts into finished products. The manufacturers responsibility is restricted to production. Afterward, products are turned over to the international company which usually assumes the marketing responsibilities for sales, promotion and distribution. In a way, the international company rents the production capacity of the local firm to avoid establishing its own plant or to circumvent barriers set up to prevent the import of its products. Contract manufacturing differs from licensing with respect to the legal relationship of the firms involved. The local producer manufactures based on orders from the international firm but the international firm gives virtually no commitment beyond the placement of orders. Typically, the contracting firm supplies complete product specifications to the foreign firm, sets production volume and guarantees purchase. Lower labor costs abroad are the major incentive for using this entry mode.

Typically, contract manufacturing is chosen for countries with a low-volume market potential combined with high tariff protection. In such situations, local production appears advantageous to avoid the high tariffs, but the local market does not support the volume necessary to justify the building of a single plant. These conditions tend to exist in the smaller countries in Central America, Africa and Asia. Of course, whether an international company avails itself of this method of entry also depends on its products. Usually, contract manufacturing is employed where the production technology involved is widely available and where the marketing effort is of crucial importance in the success of the product.

By moving to an assembly operation, the international firm locates a portion of the manufacturing process in the foreign country. Typically, assembly consists only of the last stages of manufacturing and depends on the ready supply of components or manufactured parts to be shipped in from another country. Assembly usually involves heavy use of labor rather than extensive investment in capital outlays or equipment. Motor vehicle manufacturers and electronics industries have made extensive use of assembly operations in numerous countries.

Often, companies want to take advantage of lower wage costs by shifting the labor-intensive operation to the foreign market; this results in a lower final price of the products. In many cases, however, the local government forces the setting up of assembly operations either by banning the import of fully assembled products or by charging excessive tariffs on imports. As a defensive move, foreign companies begin assembly operations to protect their markets. However, successful assembly operations require dependable access to imported parts. This is often not guaranteed and in countries with chronic foreign exchange problems, supply interruptions can occur.

To establish a fully integrated local production unit represents the greatest commitment a company can make for a foreign market. Since building a plant involves a substantial outlay in capital, companies only do so where demand appears assured. International companies may have any number of reasons for establishing factories in foreign countries. Often, the primary reason is to take advantage of lower costs in a country, thus providing a better basis for competing with local firms or other foreign companies already present. Also, high transportation costs and tariffs may make imported goods uncompetitive.

Some companies want to build a plant to gain new business and customers. Such an aggressive strategy is based on the fact that local production represents a strong commitment and is often the only way to convince clients to switch suppliers. Local production is of particular importance in industrial markets where service and reliability of supply are main factors in the choice of product or supplier.

Many times, companies establish production abroad not to enter new markets but to protect what they have already gained through exporting. Changing economic or political factors may make such a move necessary. The Japanese car manufacturers who had been subject to an import limitation of assembled cars imported from Japan, began to build factories in United States in the 1980s to protect their market share. As mentioned above, Japanese manufacturers reasons for the local production were partly political as the United States imposed import targets for several years. Also, with the value of the yen increasing to one hundred yen per US dollar, exports from Japan became uneconomical compared with local production. Thus, to defend market positions, Japanese car companies instituted a longer-term strategy of making cars in the region where they are sold.

Moving with an established customer can also be a reason for setting up plants abroad. In many industries, important suppliers want to keep a relationship by establishing plants near customer locations; when customers build new plants elsewhere, suppliers move too.

Another reason can also be shifting production abroad to save costs.

2.4. Piggybacking

Piggybacking occurs when a company (supplier) sells its product abroad using another company’s (carrier) distribution facilities. This is quite common in industrial product but all types of product are sold using this method. Normally piggybacking is used when the companies involved have complementary but non- competitive product. Some companies use this method to share transportation costs and some companies do it purely for the profits as they can make profit on other companies (suppliers) products. This method also can be used a first step towards a company’s own international activities to test the market. This particularly advantageous for small firms as they often lack the necessary resources. Once they realize the market potential, they can start their own exporting.

3. Ownership Strategies

Companies entering foreign markets have to decide on more than the most suitable entry strategy. They also need to arrange ownership, either as a wholly owned subsidiary, in a joint venture, or more recently in strategic alliance.

3.1. Joint Ventures

In a joint venture, an investing firm owns roughly 25 to 75 percent of a foreign firm, allowing the investing firm to affect management decisions of the foreign firm. Under a joint venture (JV) arrangement, the foreign company invites an outside partner to share stock ownership in the new unit. The particular participation of the partners may vary, with some companies accepting either a minority or majority position. In most cases, international firms prefer wholly owned subsidiaries for reasons of control; once a joint venture partner secures part of the operation, the international firm can no longer function independently, which sometimes lead to inefficiencies and disputes over responsibility for the venture. If an international firm has strictly defined operating procedures, such as for budgeting, planning and marketing, getting the JV company to accept the same methods of operation may be difficult. Problems may also arise when the JV partner wants to maximize dividend payout instead of reinvestment or when the capital of the JV has to be increased and one side is unable to raise the required funds. Experience has shown that JVs can be successful if the partners share the same goals with one partner accepting primary responsibility for operations matters. Despite the potential for problems, joint ventures are common because they offer important advantages to the foreign firm. By bringing in a partner the company can share the risk for a new venture. Furthermore, the JV partner may have important skills or contacts of value to the international firm. Sometimes, the partner may be an important customer who is willing to contract for a portion of the new units output in return for an equity participation. In other cases, the partner may represent important local business interests with excellent contacts to the government. A firm with advanced product technology may also gain market access through the JV route by teaming up with companies that are prepared to distribute its products. Many international firms have entered Japan, China and Eastern Europe with JVs. But, not all joint ventures are successful and fulfill their partners expectations. Despite the difficulties involved, it is apparent that the future will bring many more joint ventures. Successful international and global firms will have to develop the skills and experience to manage JVs successfully often in different and difficult environmental circumstances. And in many markets, the only viable access to be gained will be through JVs.

3.2. Strategic Alliances

A more recent phenomenon is the development of a range of strategic alliances. Alliances are different from traditional joint ventures in which two partners contribute a fixed amount of resources and the venture develops on its own. In an alliance, two entire firms pool their resources directly in a collaboration that goes beyond the limits of a joint venture. Although a new entity may be formed, it is not a requirement. Sometimes, the alliance is supported by some equity acquisition of one or both of the partners. In an alliance, each partner brings a particular skill or resource-usually they are complementary-and by joining forces, each expects to profit from the others experience. Typically, alliances involve either distribution access, technology transfers or production technology with each partner contributing a different element to the venture. Alliances can be in the forms of technology-based alliances, production-based alliances or distribution-based alliances.

Although many alliances have been forged in a large number of industries, the evidence is not yet in as to whether these alliances will actually become successful business ventures. Experience suggests that alliances with two equal partners are more difficult to manage than those with a dominant partner. In particular, it is important to recognize that the needs and aspirations of partners may change over the life of an alliance and do so in divergent ways. Predicting what the goals and incentives of the various parties will be under various circumstances is a critical part of effective planning. Furthermore, many observers question the value of entering alliances with technological competitors, such as between western and Japanese firms. The challenge in making an alliance work lies in the creation of multiple layers of connections or webs that reach across the partner organizations. Eventually such connections will result in the creation of new organizations out of the cooperating parts of the partners. In that sense, alliances may very well be just an intermediate stage until a new company can be formed or until the dominant partner assumes control.

3.3. Entering Markets Through Mergers and Acquisitions

Although international firms have always made acquisitions, the need to enter markets more quickly than through building a base from scratch or entering some type of collaboration has made the acquisition route extremely attractive. This trend has probably been aided by the opening of many financial markets, making the acquisition of publicly traded companies much easier. Most recently even unfriendly takeovers in foreign markets are now possible. Nevertheless, international mergers and acquisitions are difficult to make work.

A major advantage of acquisitions is that they can quickly position a firm in a new business. By purchasing an existing player, a firm does not have to take the time to establish its presence or develop for itself the resources it does not already possess. This can be particularly important when the critical resources are difficult to imitate or accumulate. Acquiring an existing firm also takes a potential competitor out of the market. Despite these advantages, acquisitions can have serious drawbacks. First and foremost, acquisitions can be a very expensive way to enter a market. In addition to the likelihood of overbidding, acquisitions pose a number of other challenges. Most targets contain bundles of assets and capabilities, only some of which are of interest to the acquirer. Disposing of unwanted assets or maintaining them in the portfolio is often done at significant cost, either in real terms or in management time. Although these obstacles are serious, a number of acquisitions fail on another account: the post acquisition integration process fails. Integrating an acquired company into a corporation is probably one of the most challenging tasks confronting top management.

Preparing An Entry Strategy Analysis

Of course, assembling accurate data is the cornerstone of any entry strategy analysis. The necessary sales projections have to be supplemented with detailed cost data and financial need projections on assets (managerial, financial, etc. resources). The data need to be assembled for all entry strategies under consideration. Financial data are collected not only on the proposed venture but also on its anticipated impact on the existing operations of the international firm. The combination of the two sets of financial data results in incremental financial data incorporating the net overall benefit of the proposed move for the total company structure.

For best results, the analyst must take a long-term view of the situation. Asset requirements, costs and sales have to be evaluated over the planning horizon of the proposed venture, typically three to five years for an average company. Furthermore, a thorough sensitivity analysis must be incorporated. Such an analysis may consists of assuming several scenarios of international risk factors that may adversely affect the success of the proposed venture. The financial data can be adjusted to reflect each new set of circumstances. One scenario may include a 20 percent devaluation in the host country, combined with currency control and difficulty of receiving new supplies from foreign plants. Another situation may assume a change in political leadership to a group less friendly to foreign investments. With the help of a sensitivity analysis approach, a company can quickly spot the key variables in the environment that will determine the outcome of the proposed market entry. The international company then has the opportunity to further add to its information on such key variables or at least to closely monitor their development. It is assumed that any company approaching a new market is looking for profitability and growth. Consequently, the entry strategy must support these goals. Each project has to be analyzed for the expected sales level, costs and asset levels that will eventually determine profitability . Sales, costs and assets levels have to be estimated before. Also, profitability has to be estimated (past sales analysis, market test method). In order to do this, assessing international risk factors, maintaining flexibility and assessing total company impact are required. Market research that focuses on buying patterns, customer segmentation on ability to pay especially in developing countries, etc. (survey of buyers intentions, composite of sales force opinion, expert opinion) ( SWOT Analysis – strengths, weaknesses, opportunities, threats )

Entry Strategy Configuration

In reality, most entry strategies consist of a combination of different formats. We refer to the process of deciding on the best possible entry strategy mix as entry strategy configuration.

Rarely do companies employ a single entry mode per country. A company may open up a subsidiary that produces some products locally and imports others to round out its product line. The same foreign subsidiary may even export to other foreign subsidiaries, combining exporting, importing and local manufacturing into one unit. Furthermore, many international firms grant licenses for patents and trademarks to foreign operations, even when they are fully owned. This is done for additional protection or to make the transfer of profits easier. In many cases, companies have bundled such entry forms into a single legal unit, in effect layering several entry strategy options on top of each other.

Bundling of entry strategies is the process of providing just one legal unit in a given country or market. In other words, the foreign company sets up a single company in one country and uses that company as a legal umbrella for all its entry activities. However, such strategies have become less typical-particularly in larger markets, many firms have begun to unbundle their operations.

When a company unbundles, it essentially divides its operations in a country into different companies. The local manufacturing plant may be incorporated separately from the sales subsidiary. When this occurs, companies may select different ownership strategies, for instance, allowing a JV in one operation while keeping full ownership in another part. Such unbundling becomes possible in the larger markets such as the United States, Germany and Japan. It also allows the company to run several companies or product lines in parallel. Global firms granting global mandates to their product divisions will find that each division will need to develop its own entry strategy for key markets.

Portal or E-Business Entry Strategies

The technological revolution of the Internet with its wide range of connected and networked computers has given rise to the virtual entry strategy. Using electronic means, primarily web pages, e-mail, file transfer and related communications tools, firms have begun to enter markets without ever touching down. A company that establishes a server on the Internet and opens up a web page can be connected from anywhere in the world. Consumers and industrial buyers who use modern Internet browsers, such as Chrome, can search for products, services or companies and in many instances even make purchases online. Whatever the forecasts, most experts agree that the opportunity for Internet-based commerce will be huge. The Internet will eliminate some of the hurdles that plagued smaller firms from competing beyond their borders. Given the low cost of the Internet, it is very likely that many more established firms will use the Internet as the first point of contact for countries where they do not yet have a major base. However, there are many challenges to would-be Internet-based global marketers. One of the biggest is language. The second big challenge is the fulfillment side of the e-business. Here, we are dealing with completing a sale, shipping, collecting funds and providing after-sales service to customers all over the world.

Global Market Exit Strategies

Circumstances may make companies want to leave a country or market. Other than the failure to achieve marketing objectives, there may be political, economic or legal reasons for a company to want to dissolve or sell an operation (management myopia).

International companies have to be aware of the high costs attached to the liquidation of foreign operations; substantial amounts of severance pay may have to be paid to employees and any loss of credibility in other markets can hurt future prospects.

Sometimes, an international firm may need to withdraw from a market to consolidate its operations. This may mean a consolidation of factories from many to fewer such plants. Production consolidation when not combined with an actual market withdrawal is not really what we are concerned with here. Rather, our concern is a companys actual abandoning its plan to serve a certain market or country. This is differentiation between production withdrawal or consolidation and brand withdrawal. A firm can consolidate production elsewhere while retaining a strong brand and marketing presence.

Changing political situations have at times forced companies to leave markets. Changing government regulations can at times pose problems, prompting some companies to leave a country. Exit strategies can also be the result of negative reactions in a firms home market.

Several of the markets left by international firms over the past decades have changed in attractiveness, making companies reverse their exit decisions and enter those markets a second time.

Related Posts:

  • Glocalization - Definition, Advantages and Disadvantages
  • Global Product Division Structure of MNE's
  • Foreign Market Entry Modes - Five Modes of Foreign Market Entry
  • Global Company Competitiveness Analysis
  • Price Component of the Global Marketing Mix
  • Global Marketing Strategies
  • Global Functional Structure of MNE's
  • Development Stages of a Transnational Corporation
  • Push and Pull Factors in International Business
  • The Effects of Globalization on Multinational Corporations

One thought on “ Global Market Entry and Exit Strategies ”

A fabulous guide for any business which wants to expand its market to new countries. Even you have a certain market entry strategy in your hand; you have to make progress with the willingness to be flexible.

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Home » The Tony Robbins Blog » Career & Business » What is an exit strategy in business?

What is an exit strategy in business?

4 examples of business exit strategies – and how to achieve them.

exit strategy for international business

After a seven -year journey through space, Cassini went into orbit around Saturn and stayed there for 13 years. It explored Saturn’s rings and atmosphere, and the information it sent to NASA broadened our understanding of what kind of life might exist on worlds beyond Earth. A 20-year job is no joke, especially in today’s economy.

After 20 years of service, Cassini didn’t come back to Earth for retirement. No one ever wondered “ What is an exit strategy for this mission?” It had one job, and it ended its service being crushed and vaporized as it crashed into Saturn on September 15, 2017. This is how Cassini shows the real difference between having a job and having a business . You can’t leave a job behind, but you can leave a business – if you have an exit strategy.

Will you leverage your business into future success? Or will you crash and burn like Cassini? Watch the video from Tony Robbins below on how to tell the difference between a job and a business, and what life without an exit strategy looks like.

What is an exit strategy?

Exit strategy; noun: a pre-planned means of extricating oneself from a situation that has become difficult or unpleasant in a way that limits overall losses.

A business exit strategy does not have to be unpleasant, though. It can simply mean you have accomplished all you’ve set to do with your company and are ready to move on to the next phase of your life. Your goal could be that your business achieves a certain amount of growth. Another common goal is that your business becomes both sufficiently established and marketable so that you can sell it. Regardless, your business has reached a point that it is appropriate for you to move away from it, and it is now time to act on your exit strategy. Your exit strategy business plan needs to benefit you financially and emotionally and fit in with your desired legacy .

Why do I need a business exit strategy ?

Think about why you started your company in the first place. Was it so you could sit behind a desk all day issuing orders and signing contracts? Probably not. You likely envisioned how having financial freedom could make your life better. If you didn’t have to worry about money, you could travel more. You could spend more time with your family. You could pursue the interests that fulfill your soul, perhaps by giving back or learning new skills.

Your business exit strategy allows you to begin to take a step back from your day-to-day operations. It allows you to start creating a money machine that can sustain you without you setting foot in the office. And eventually, it allows you to sell your business or pass on something profitable to the next generation.

No one wants to purchase a small, unprofitable business, nor do they want to pass this type of business on. Your potential buyer wants to see a thriving company, one that has returned your investment and continues to expand. If you want to eventually sell your business and use the money to fulfill your dreams , you need to create something you can sell. That means knowing from the start that you want to sell it and knowing what a potential buyer would desire . If you don’t plan on selling it, instead leaving it to your children or passing it on in some other way, you need a business exit strategy that plans for this.

Creating an exit strategy can also help you grow your business faster and be more successful. If you are ultra-focused on selling your company, then you will set goals and make choices that will lead to the growth of your business , rather than stagnation.

Who needs an exit strategy ?

In short, everyone.

But if you don’t have an exit strategy just yet, you’re not alone. Many business owners build their companies from the ground up – and then stop. They set out to create a product or offer a service to make their business talkably different , but don’t think ahead any further than that. Why would they? Running a business is tiring work. For many business owners, the thought of leaving their business is unsettling. Because of this resistance, some business owners may never have pondered, “What is an exit strategy?” and “Should I have an exit strategy business plan?” Business owners such as these are likely driven by fear: fear of letting go, fear of failing at a new business venture, fear of retirement – the potential list goes on and on. 

what is an exit strategy in business

For many business owners, the thought of leaving their business is unsettling. Because of this resistance, some may never have pondered, “ What is an exit strategy ?” and “ Do I need a business exit strategy ?” Business owners such as these are likely driven by fear: fear of letting go, fear of failing at a new business venture, fear of retirement – the list goes on. 

Just as fear can be detrimental in other life situations , the same is true in this situation. Like Cassini, these business owners keep going and going, only to find that when they want to turn around and go back to Earth – or recoup their investment and put it toward what they want to do – they have no ability to do so. Their business might provide them income, but they can hardly walk away from it. 

Sounds like a job, doesn’t it? If you want to be a true business owner, not just an operator, you need an exit strategy.

Types of exit strategies

There are two main types of exit strategies: a business exit strategy , for owners who want to move on or retire, and an employee exit strategy, for when employees leave the company. Both have an impact on how your business is perceived and ultimately how profitable it will become.

Business exit strategy

What is an exit strategy in business ? It’s your strategy for transitioning your business to its next stage of ownership. At first, it may sound counterintuitive, especially if you are still at the beginning stages of the business. You’re pouring all you have into this new venture; making plans to exit it – seemingly abandoning it – seems like a terrible mindset for a new business owner to take.

On the contrary: While a business exit strategy isn’t like mapping out a plan for your company , it’s a critical component to your success. Most business owners have strategies to scale, to increase market share and to become profitable , but do not have a strategy to make their exit.

Employee exit strategy

Just as you need a business exit strategy when you’re ready to move on, you also need an employee exit strategy to deal with team members who resign from your company. Whether they leave because they are unhappy at work or to take on a new position that provides them the fulfillment they need, handling their exit sends an important message to your team and can help you retain or even strengthen the loyalty of your other employees.

The key to a successful employee exit strategy is to remain calm and professional, to ensure knowledge gets transferred from the employee who is leaving to whomever will take their role. An exit interview with the employee leaving, as well as interviews with those remaining in their department who are directly affected by the person’s departure, are excellent employee exit strategy tools. When you ask the right questions of both your exiting employee and those they worked with, you can use the departure as a way to improve your organizational culture .

creating an exit strategy

Key elements of a business exit strategy

Your exit strategy is more than a few thoughts you had one night or a quick discussion with your business partner . It’s a written plan of action that accounts for the following:

  • The date you plan to enact the exit strategy
  • The business valuation you will reach before exiting
  • SMART goals and an actionable plan for reaching that valuation
  • All viable options for exiting the business (such as the four examples below)
  • Potential buyers for your business

If you’re creating an exit strategy years in advance, know that things may change. Business triggers like changes in the economy and in your life will happen. Your exit strategy can actually help you stay on track by providing a clear path to follow – and you can always update it.

Examples of business exit strategies

To fully answer the question, “ What is an exit strategy ?” take a look at these four common plans and the pros and cons of each.

Exit strategy #1: Lifestyle company strategy

The lifestyle company strategy involves taking the biggest salary you can, rewarding yourself with bonuses and issuing special shares that produce very high dividends. The reasoning behind this business exit strategy is to take whatever you can from the business while it’s thriving and leaving nothing to sell once you’re ready to exit.

You can live a pretty good lifestyle and you don’t have to worry about putting a lot of thought into developing a massive action plan for growth.

You may be taxed for money you pull out and you’ll have no big pay-out when you’re ready to leave the business . You’ll also be leaving your team high and dry as your business will close when you leave.

Exit strategy #2: Liquidation

If you’re ready to call it quits and don’t owe money, you can simply close your doors and be done with the business. Liquidation is often what happens when a business fails to anticipate problems , does not have an exit strategy business plan or when things don’t go as planned, but it can be something you choose.

It’s easy and there is no need to transfer anything to new owners.

Your business ends up having no value in the end and your reputation and business relationships could suffer. Just as with a lifestyle exit strategy, your employees will be out of a job with this strategy.

Exit strategy #3: Selling to a friendly buyer

If you’ve created a business based on meaning and purpose , it’s likely that others believe in what you’re doing. When you’re ready to put an exit strategy in place, these like-minded individuals could be willing to buy it from you and continue your vision. Often, these buyers are employees, family members or colleagues. You can finance the sale over time to give them the opportunity to pay a fair market value while giving you the freedom to leave the business as they pay off the loan.

You already know the buyers and therefore less background checking is needed. You also can see your business continue to fulfill your vision.

You may end up selling it for less than it’s worth because you want to help out a friend or family member. You could also do major damage to your family or friendship if problems occur with the business and the buyer blames you.

Exit strategy #4: Acquisition

Acquisition is the most common form of exit strategy and involves finding another company to buy yours. If you seek out a strategic fit and are able to convince them of your value, you could make a tidy profit off your business.

You could get much more than what your company is actually worth, and you don’t have to worry about maintaining personal relationships with those who buy the business. Because this is the most common business exit strategy, you can find a number of professionals to help you complete the process.

Acquisitions and the subsequent transitions can be messy and uncomfortable and you may have to watch your valued employees being laid off. They can also come with non-competes or other stipulations that could make it difficult for you to start another company.

What are my next steps?

Now that you’ve reviewed the different business exit strategies, it’s time to be clear with yourself. Take the advice of business guru and marketing mogul Jay Abraham. The first thing you need to do is review your goals and priorities . Your goals for your business exit strategy may be different depending on your stage of life. Whatever your priorities may be, make sure your exit strategy is leading you toward the life you want.

Another bit of advice from Jay Abraham: Don’t value your business yourself. Instead, hire a professional to evaluate your business and all its assets to get a clear picture of its worth. This process will also help you understand which parts of your business are ripe for improvement. If you’re fortunate, you might be able to make a few minor adjustments based on the evaluation to add real value to your business before you take the next step in your exit strategy.

If your business is not as valuable as you think it could be, it might be wise to set aside six months or a year for potential adjustment. Using Jay Abraham’s internal exponential growth factors , you can potentially add real value to your business in a short time.

Now that you’ve got a clear sense of value, decide which of the exit strategies above best suits your needs. Remember, as you proceed with any deal, exercise full disclosure to potential buyers. If you withhold information, it’s possible the entire deal may fall through.

When you answer “ What is an exit strategy in business ?” and “Which exit strategies are the best fit for me?” you can be proactive in moving toward another stage of growth as you build your business.

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The Essential Guide to a Successful Business Exit Strategy

by Davie Mach | Aug 30, 2021 | Small Business Handbook

The Essential Guide to a Successful Business Exit Strategy

When starting your own business, it’s easy to not think about when you’ll need a business exit strategy. 

But as life happens and priorities change, so might your vision for your small business venture. 

That’s why it’s important to have a clear and concise business exit strategy in place; not only to help protect you from unforeseen circumstances but also to ensure that you get the most out of your business endeavour when the time comes to make decisions about how best to move forward with your company long-term.

There is no right or wrong answer when choosing your business exit strategy – there are different exit strategy paths you can take depending on your current circumstances and future goals. 

So, to help you navigate establishing a successful business exit strategy, we’ve put together this guide. 

The guide aims to identify what a successful business exit strategy is, how to establish one and what exit strategies you have to choose from for you and your business. 

  • 1 What Is a Business Exit Strategy?
  • 2 What Should You Consider When Creating Successful Business Exit Strategies?
  • 3 What Are the Most Common Types of Exit Strategies?
  • 4 Key Takeaways

What Is a Business Exit Strategy?

A business exit strategy is a plan that you put in place ahead of time to know what should happen with your business when the time comes for you or another key decision-maker to leave.

For example,  you may want to ensure that there will be an experienced professional available who can take over from where you left off and maintain continuity within your business. There are many types of exit strategies to chose from. 

What Should You Consider When Creating Successful Business Exit Strategies?

Some key elements to consider when crafting your small business plan and business exit strategies: 

  • The sooner, the better: having an exit plan in place from the get-go (even if it’s decades before you plan to exit) minimises the obstacles you may face when the time comes time to exiting (or selling) your business. 
  • Identify your objectives: For some business owners, the primary end goal is financial freedom, so their exit strategy objective (and business plan) involves cashing out on profits. On the other hand, some business owners, who have achieved financial freedom from other investments, simply want to have their legacy live on (succession planning). Establishing how you plan to leave your business helps identify objectives and activities towards accomplishing those specific company objectives. 
  • Establish a timeline: another consideration that you should factor in is the business’ time frame – when would your ideal time be to exit? At retirement? Once your small business has reached a certain profit margin? And while having a timeline is useful, remember always to be flexible and allow your small business to grow and reach its full potential. 
  • Have more than one exit option: What are your business’ plans for a smooth transfer of ownership? Do you plan to sell the company outright, or would you prefer another company buy it from you? What happens if your business can’t reach its full potential and you’re forced into an exit strategy?
  • Review your plan: you must revisit your plan often. Then, as new opportunities arise or challenges come up, you’ll need to update your original approach to ensure that it aligns with your current circumstances and potentially new objectives. 
  • Have a trusted team of advisors: you’ll need a team of trusted business advisors to help you set up your business exit strategy and carry it through. An accountant will help with advice on due diligence issues and tax implications, while a lawyer will help with the logistics of the exit strategy. A business valuer will advise on your business’s current value and its potential value if you do X, Y and Z. You may also want to consider a financial planner to help with your investment options. 

What Are the Most Common Types of Exit Strategies?

The following are the most common ways you can exit your business as a business owner. But remember, the exit option will depend on your business plan and business circumstances: 

  • Merger or acquisition: arguably the most common exit plan is to position your business as an attractive purchase to potential buyers. As the business, owner, you can either elect to sell the business to another company (acquisition) or have the business continue its activities by merging (selling) your business unit within another company. 
  • Initial Public Offering (IPO): an initial public offering (IPO) exit strategy involves selling your private business share to the public. Once they’re sold, the shares are listed on a stock exchange. But this strategy is generally only viable if your business has a strong infrastructure, substantial profit and revenue stream to invite public investment. 
  • Liquidation: liquidating a business is usually last on most a business owner exit strategy list because it involves selling all business assets (at market rate), paying creditors and closing the business. While this isn’t necessarily a winning strategy, you may find yourself in a situation where liquidation is the only option – especially if the business is drowning in debt and acquisition is not a viable option. 
  • Friendly sale: instead of an acquisition, you could sell your company to someone you know, like a colleague, a friend or a family member.
  • Succession planning: if you’re running a family business, the end goal may be to hand over the company to your next generation and have a succession plan in place. A key family member is usually appointed and trained to ensure that the business continues to run once you exit.

The key to a successful strategy is having more than one business exit strategy on your list. So, when the time comes to exit, you can implement the one that’s best suited for your business and your future beyond the company.

For example, your original business exit strategy may have been to set up your company for an acquisition sale. But, after 30 years of running your business, you may have a family member that’s interested in carrying on your legacy (succession planning). 

Key Takeaways

What should you consider when creating a successful exit strategy? One thing to think about is whether or not you want to sell the business for cash, keep it in the family, continue your legacy, or have another business or an existing key stakeholder.  

All these options can be very different depending on what kind of goals you have in mind. 

Either way, you’ll need a team of trusted business advisors and accountants in your corner who will help with every step from establishing your plan to executing its provisions so that everything goes smoothly.

At Box Advisory Sevices, our expert team of Chartered Accountants strive to understand you and your business better to provide you with the best services tailored to your needs, including strategic guidance on the growth and profitability of your business, risk management, financial forecasting and exit strategies. 

Get in touch or book a free initial consultation if you have any questions about setting up an effective exit strategy. 

Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.

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International Business Exit Strategies

INTERNATIONAL BUSINESS EXIT STRATEGIES International Business Exit Strategies International Business Exit Strategies Business Exit Strategies Business exit strategies depend on the current economic environment. The relative ease of an exit through an IPO or acquisition varies every year depending on the relative appetite of the capital markets and corporate acquisitions. The Current Environment The second half of 2008 will probably go down in history as the worst or possibly second worst, IPO market for technology companies ever. In the third quarter, there were no IPO's of venture-back companies in America. This has never happened before. It's hard to image a worse situation - it would probably have ...

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Barclays jumps 8.6% after announcing major strategic overhaul

  • Barclays on Tuesday reported a fourth-quarter net loss of £111 million ($139.8 million) as the British lender announced an extensive strategic overhaul.
  • On Tuesday, the bank announced a huge operational restructure, including substantial cost cuts, asset sales and a reorganization of its business divisions.
  • It promised to return £10 billion to shareholders between 2024 and 2026 through dividends and share buybacks.

LONDON — Barclays on Tuesday reported a fourth-quarter net loss of £111 million ($139.8 million) as the British lender announced an extensive strategic overhaul, boosting its shares more than 8.6% through the day.

Analysts polled by Reuters had expected net profit attributable to shareholders of £60.95 million for the quarter, according to LSEG data, as Barclays embarks on a major restructuring program in a bid to reverse declining profits.

For the full year, net attributable profit came to £4.27 billion, down from £5.023 billion in 2022 and below a consensus forecast of £4.59 billion.

The bank also announced an additional share buyback of £1 billion, and will set out a new three-year plan designed to further improve operational and financial performance, CEO C.S. Venkatakrishnan said in a statement.

Barclays took a £900 million hit in the fourth quarter from structural cost-cutting measures, which are expected to result in gross cost savings of around £500 million this year, with an expected payback period of less than two years.

Here are some other highlights:

  • Fourth-quarter group revenue was £5.6 billion, down 3% from the same period last year.
  • Credit impairment charges were £552 million, up from £498 million in the fourth quarter of 2022.
  • Common equity tier one (CET1) capital ratio, a measure of bank's financial strength was 13.8%, down from 14% the previous quarter.
  • Full-year return on tangible equity (RoTE) was 10.6% excluding fourth-quarter restructuring costs. Fourth-quarter RoTE was 5.1%, down from 8.9% in the final quarter of 2022.
  • Quarterly total operating expenses were roughly unchanged year-on-year at £4 billion.

Momentum in Barclays' traditionally strong corporate and investment bank (CIB) — particularly in its fixed income, currency and commodities trading division — waned in 2023, as market volatility moderated .

On Tuesday, the bank announced a huge operational overhaul, including substantial cost cuts, asset sales and a reorganization of its business divisions, while promising to return £10 billion to shareholders between 2024 and 2026 through dividends and share buybacks.

The business will now be divided into five operating divisions, separating the corporate and investment bank to form: Barclays U.K., Barclays U.K. Corporate Bank, Barclays Private Bank and Wealth Management, Barclays Investment Bank and Barclays U.S. Consumer Bank.

"This resegmentation will provide an enhanced and more granular disclosure of the performance of each of these operating divisions, alongside more accountability from an operational and management standpoint," the bank said in its report.

Barclays is targeting total gross cost savings of £2 billion and an RoTE of greater than 12% by 2026.

Ambitious targets

Mariva Rivas, vice president of global financial institution ratings at DBRS Morningstar, told CNBC that the strategic update of Tuesday may not be a "game changer," but shows the continuity of the model already in place, with a few refinements.

"We consider the 2026 ROTE target of > 12% to be at the lower end of peers' ROTE, although higher than the 9% in 2023 (10.6% excluding the cost restructuring impact)" she said via email.

"By business line, the ROTE target will be driven by strong although weaker than in 2023 ROTE on UK business, whilst improving ROTE materially in US cards and IB. In the U.S. card business, the 2026 ROTE improvement will be driven by higher operational efficiency and lower impairments, which would also depend on no changes to their macro economic assumptions."

Barclays aims to reduce risk-weighted assets in the investment bank to around 50% from 58% in 2023, and to cut the IB cost: income ratio to the high 50s in percentage terms, from 69% last year.

"These targets seem quite ambitious in our view as IB usually requires constant investments in IT and the improvement is largely expected to be achieved through IB revenue growth of around GBP 1.8 billion by 2026, which seems quite optimistic considering that revenues have been quite flat since 2021, and the nature of IB revenues which tend to have certain volatility," Rivas added.

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  1. Business Exit Strategy

    1. Objectives One aspect that should never be missed in a business exit strategy is the owner's individual goals. Upon exiting the business, is the owner interested in getting profits or does he also want to leave a legacy? Establishing the purpose of exiting the company helps to identify the specific objectives and activities to be prioritized. 2.

  2. PDF KPMG: The Road to Exit guide

    Transforming the business to consistently deliver to a high standard, driving growth, profitability and efficiency. Getting ready to exit Pursuing the right exit strategy and delivering a smooth execution during the sale process. The next chapter Delivering a clean exit and embarking on a new journey. Stage 1 Stage 2 Stage 3 Stage 4

  3. Entrepreneurial exit strategy

    Find new ideas and classic advice for global leaders from the world's best business and management experts. ... Entrepreneurial exit strategy ... Since 2006, Alcatel-Lucent, an international ...

  4. Business Exit Strategy: Definition, Examples, Best Types

    A business exit strategy is 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 a way to...

  5. Exit Strategies: How to Plan a Business Exit Strategy

    1. Initial Public Offering (IPO): An IPO is when a private company begins selling its shares to the public. This is a popular exit strategy for startup companies looking to expand. After an IPO, a business owner may choose to sell the business, or stay on board. 2.

  6. Exit Strategy Definition for an Investment or Business

    An exit strategy is a contingency plan executed by an investor, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once...

  7. How to Develop a Business Exit Strategy [+ Templates]

    Common exit strategies include initial public offering, mergers and acquisitions, liquidation, management or employee buyout and transfer to a successor. Exit Strategy Options: Closing vs Selling When weighing your exit options, you're going to have to choose between selling to a new owner or closing the business.

  8. What is Business Exit Strategy? Types, Best Practices + Examples

    The most common types of exit strategies include M&As, IPOs, acquihires, family successions, selling assets, employee buyouts, bankruptcy, and liquidation. Some of the best practices for a successful business exit strategy include deciding on the right exit type (selling an asset or liquidating it) and developing a well-structured exit plan.

  9. How to Create an Exit Strategy: Everything You Need to Know

    Key types of exit strategies available to businesses include sale of ownership, initial public offering (IPO), liquidation, recapitalization, debt restructuring or refinancing, ownership...

  10. 8 Business Exit Strategies: Which Is Best for You?

    1. Continuing the Legacy in the Family Many entrepreneurs want to keep their business in the family long term, and that means making plans for transitioning the company to a child or another relative at a certain point.

  11. How to Develop an Exit Plan for Your Business

    An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it's a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.

  12. Discerning the Strategies for Exiting Your Business

    As an exit strategy, a business owner can plan a long-term buyout, allowing the employees to purchase shares and increase their control over several years. ... Identify individual factors influenced the choice of exit strategy. International journal of physical and social sciences, 6 (8), 84 - 95; 4. Headd, B. (2003). Redefining business ...

  13. What Is An Exit Strategy and Why Is It Important in Business?

    An exit strategy is a testament to foresight, planning, and astute business acumen. It ensures that after pouring time, effort, and often significant resources into a business, an entrepreneur or ...

  14. Business Exit Strategy

    The top five business exit strategies include merger & acquisition, IPO, liquidation, selling to managers or employees, and bankruptcy. Having a well-defined exit strategy helps business owners plan their future actions and better understand the process of leaving the business. Business Exit Strategy Explained

  15. International market exit by firms: Misalignment of strategy with the

    Misalignment of strategy with the foreign market risk environment is the primary reason for international market exits. • Ineffective strategy formulation and strategy implementation lead to foreign market exit. • An effective external environmental scanning process may significantly reduce international market exits. Abstract

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    According to Investopedia, an exit strategy is a plan for selling or disposing of a financial or business asset when certain conditions have been met or exceeded. It is used by investors,...

  17. What Is an Exit Strategy for Stocks? Definition & Examples

    An exit strategy for business owners can take different forms, depending on the nature of the business. For instance, if you run a family-owned business then your exit strategy plan might revolve around your eventual retirement. If you have a fixed retirement date in mind your exit plan could specify that you will transfer ownership of the ...

  18. Global Market Entry and Exit Strategies

    Global Market Entry and Exit Strategies Each company has a specific strategy may be selected to suit a company's needs. Many companies use a combination of global and national strategies. Some firms use a global strategy elsewhere some countries and some products are more receptive to global strategies than others.

  19. What is an exit strategy in business?

    Exit strategy; noun: a pre-planned means of extricating oneself from a situation that has become difficult or unpleasant in a way that limits overall losses. A business exit strategy does not have to be unpleasant, though. It can simply mean you have accomplished all you've set to do with your company and are ready to move on to the next ...

  20. The Essential Guide to a Successful Business Exit Strategy

    A business exit strategy is a plan that you put in place ahead of time to know what should happen with your business when the time comes for you or another key decision-maker to leave. For example, you may want to ensure that there will be an experienced professional available who can take over from where you left off and maintain continuity ...

  21. How Do I Develop an Exit Strategy for My Business?

    17 Jun 2021 Insights How Do I Develop an Exit Strategy for My Business? Reevaluate your next steps How do I develop an exit strategy for my business? 06 Oct 2023 5 min read As a business owner, you've focused on building a successful company, but have you considered what will happen when you choose to step away?

  22. International Business Exit Strategies

    International Business Exit Strategies. Business exit strategies depend on the current economic environment. The relative ease of an exit through an IPO or acquisition varies every year depending on the relative appetite of the capital markets and corporate acquisitions. The second half of 2008 will probably go down in history as the worst or ...

  23. Barclays jumps 8.6% after announcing major strategic overhaul

    Barclays on Tuesday reported a fourth-quarter net loss of £111 million ($139.8 million) as the British lender announced an extensive strategic overhaul. On Tuesday, the bank announced a huge ...