What Is An Exit Strategy?
An exit strategy is a contingency plan used by an investor, venture capitalist, or business owner to liquidate a financial asset position or dispose of tangible business assets when certain criteria have been reached or surpassed.
An exit plan can be used to leave a nonperforming investment or end an unproductive firm. In this situation, the exit plan is designed to reduce losses.
Understanding Exit Strategies
Plan a good exit strategy for both positive and bad scenarios, regardless of investment type or company endeavor. This planning should be used to assess the risk involved with the investment or company activity.
An exit strategy is a business owner's plan to sell their firm to investors or another entity. It describes a procedure for reducing or liquidating ownership in a firm and, if successful, making a significant profit.
If the firm does not succeed, an exit strategy (or exit plan) allows the owner to reduce losses. An investor, such as a venture capitalist, may also utilize an exit strategy to plan for cashing out on an investment.
Exit plans and money management approaches may help investors decrease emotional stress and risk. Before making an investment, investors should determine the point at which they will sell for a loss and the one at which they will sell for a profit.
Who Needs an Exit Plan?
Business owners, whether small and big, must develop and maintain strategies to manage what happens to their company should they decide to quit. Entrepreneurs of startups may depart via IPOs, strategic acquisitions, or management buyouts, while CEOs of bigger companies may use mergers and acquisitions as an exit strategy.
Investors, including venture capitalists and angel investors, want an exit strategy to minimize exposure to failed investments and focus on new prospects. A well-thought-out exit plan also indicates when to register profits on unrealized gains.
Why Is It Important to Have an Exit Strategy?
Businesses and investors should have a well-defined exit strategy in place to reduce possible losses and maximize revenues from their investments. Here are a few particular reasons why you should have an exit strategy.12
Exit plans eliminate emotions from decision-making. Having a defined level at which to leave an investment or sell a company helps prevent panic selling or making rash choices while emotions are high, which may exacerbate a loss or fail to achieve a profit.
Goal setting: Having an exit strategy with clear targets helps to answer crucial issues and influence future strategic decisions. A startup's exit strategy may include a buyout price determined on revenue turnover. That statistic would aid in strategic choices regarding how large the firm should develop in order to meet set sales objectives.
Unexpected incidents occur throughout life. As a result, having an exit strategy in place for case things do not go as planned is critical. For example, what happens to a firm if the proprietor has an unforeseen illness? What if the firm loses a major supplier or customer? These scenarios need earlier preparation in order to reduce possible losses and capitalize on opportunities.
Succession planning: An exit strategy outlines what happens to the company when important employees depart. An exit strategy may include a succession plan that transfers ownership to a family member or sells a portion to other owners or founders. Careful succession planning for an exit strategy may assist minimize possible problems when a firm owner wishes to or is forced to leave.
Exit Strategies For Startups
Successful entrepreneurs create an exit strategy for their starting firm in case it does not fulfill set milestones.
If a business's cash flow is insufficient to continue operations and external capital injection is not viable, a scheduled termination and asset liquidation may be the best alternative to avoid future losses.
Most venture funders need a well-thought-out exit strategy in a company plan before contributing funds. Business owners or investors may opt to quit if another party makes a substantial offer for the company.
Exit Strategies for Established Businesses.
Successful CEOs in established businesses have a detailed exit strategy as part of their contingency planning.
Larger companies sometimes choose a merger or acquisition as an exit plan since it may be a profitable method to compensate owners and/or shareholders. Rival corporations may pay a premium to buy out a company to gain market share, acquire intellectual property, or remove competition. This increases the likelihood of other competitors bidding for the firm, eventually benefiting the sellers of the business.3
A merger-and-acquisition exit plan should take into account the time and expense of organizing such acquisitions, as well as legal issues including antitrust laws.