What is the best exit strategy for a business?
When you first set up a business, the very last thing on your mind is to shut it down. However, life gets in the way of the best of intentions. And in reality, exits are unavoidable. In half of all business exits, it is because of the 5 Ds (Death, Disability, Distress, Disagreement and Divorce). As a business owner, do you have your exit strategy lined up? Do you know if it is the right exit strategy for you and your family?
An exit strategy is important because it allows you, the business owner to minimize or sell your ownership stake in a company while still getting a significant profit if the company. 3 key factors to getting the best deal:
1) Getting the right valuation
2) Making sure you are not a forced seller at the point of exit
3) Having the right advisor managing the exit plan for you
In this article, we will share with you 6 types of exit strategies for business owners.
1. Merger and acquisition
For entrepreneurs, a merger or acquisition is a one of the strongest exit strategy options when considering selling or exiting their business. You'll be selling your company to another company that may want to expand internationally, gain a competitive edge, or attain talent, facilities or your brand. In most cases, you would be able to attract the highest valuations using this strategy.
2. Selling your stake to a partner or investor
Selling your stake to a partner or venture capital investor is probably the most common way of exit for small business owners; due to familiarity of the business and a deep understanding of how the business operates. The business will continue to operate normally and with minimal interruptions. In this form of exit plan, you're most likely to sell your stock to someone you know or trust. Disagreements do obviously happen, more often than we wish. Hence, a Buy-Sell agreement or Business Trusts together with Shareholder Insurances are highly recommended tools to facilitate the easy transfer of this sale and exit process.
This is the preferred option for those who wish to pass on their company's legacy to their children or family member. The main goal of a family succession plan is to keep a profitable firm 'in the family' and to continue building their name and legacy. It's worth remembering that when the head of the family is departing the business, it is a crucial time for family succession. Especially in the case where it involves many members within the family, things do tend to get more complicated. Ensuring the smooth succession is an art by itself. And whoever is entrusted to take over the reins, it's critical to make sure the person is qualified for the position.
4. Management buyouts (MBO)
By pooling together their capital to buy all or part of the assets and operations of the company they run, the senior management of a firm will be able to expedite growth and enhance profitability. With the familiarity of the leadership team to the company and to how the business works, they would be the ideal buyers and future of the company. If you have a motivated management and leadership team in place, then this would definitely be an ideal option for all parties involved. The main problem faced in this exit strategy is in terms of securing the necessary funding. Some of the typical sources of funding include personal resources, venture capital or private equity investors, and seller-financing.
5. Initial Public Offering (IPO)
An Initial Public Offering (IPO) is when you take your company public, making a portion of it available for the public to invest in. It is the dream of many when they begin their startup dreams, to eventually list on the stock exchange. Nevertheless, going the public route is not an easy task. Less than 1% of all companies are public listed entities.
This is one of the most frequent exit strategies for a business, where the company is shut down and all assets sold, with the money distributed to those to whom you owe money. Liquidation is one of the most extreme exit methods, and largely undesirable. Any money gained must be used to pay down debts and dividends to shareholders. Since there is no need to negotiate or consolidate the organization, liquidation is a simple exit strategy. However, if a company is closed, you will lose your brand, reputation, and customers. Unlike other exit strategies where you are looking to build and grow, your company is at the end of its journey here.
After learning about the 6 types of business exit strategies, ask yourself, which strategy is the right one for you? How can we help you implement the right strategy?
If you need more advice on selecting and crafting out the best exit strategy, Octave Principal Consultancy is here to help. We have been advising our clients in Malaysia with our wealth advisory services that address a full range of corporate and personal financial needs. We believe in establishing a trusted long-term relationship and providing the highest level of care in delivering this service.
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