What Is an Exit Strategy?

An exit strategy is a contingency plan executed by an investor, 澳洲幸运5官方开奖结果体彩网:venture capitalist, or business owner to 澳洲幸运5官方开奖结果体彩网:liquidate a position in a financial asset or dispose of 澳洲幸运5官方开奖结果体彩网:tangible business assets once p🌳redetermined criteria have been met or exceeded.

An exit strategy may be executed to exit a nonperforming invღestment or close an unprofitable business. In thi🃏s 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 澳洲幸运5官方开奖结果体彩网:angel investor in a startup company may plan an exit strategy through an 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:estate planning, liability lawsuits, or a divorce; or even because the business owner/investor is retiring and wants to cash out.

Understanding Exit Strategies

An effective exit strategy should be planned for every positive and negative 澳洲幸运5官方开奖结果体彩网:contingency regardless of the investment type or business venture. This planning should be integral to determining the risk associat💯ed with the💝 investment or business venture.

An exit strategy is a business owner’s 澳洲幸运5官方开奖结果体彩网:strategic plan to sell ownership in a company to invཧestors 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 ga🐲in.

Who Needs an Exit Plan?

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 澳洲幸运5官方开奖结果体彩网: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 unreal🌃ized gains.

Why Is It Important to Have an Exit Plan?

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 mak⛎ing rushed decisions when emotions are high, which could accentuate a loss or not fully reali𝓀ze 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 wo🌱uld 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. Tꦓherefore, 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 unexpecteꦿd 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 澳洲幸运5官方开奖结果体彩网: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 h𒁏as to depart.

Exit Strategies for Startups

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

If 澳洲幸运5官方开奖结果体彩网: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. Busi♊ness 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 澳洲幸运5官方开奖结果体彩网: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 opeꦅrated 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 thei⛦r 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, 澳洲幸运5官方开奖结果体彩网:bankruptcy is se🍰en as the least desirable way to exit a startup.

A key aspect of an exit strategy is business 澳洲幸运5官方开奖结果体彩网:valuation, and there are specialists who can help business owners (and buyers) examine a company’s 澳洲幸运5官方开奖结果体彩网:financial statements to determine a fair value. There are also transition managers whose role is to assist sellerꦑs with their business exit strategies.

Exit Strategies for Established Businesses

In the case of an established business, successful CEOs develop a comprehensive exit strategy as part oᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚf their contingency planning fo💞r 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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:borrowing credit or starting another company in the future.

Exit Strategies for Investors

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 to𓃲 other investors or a family member. Sellin🉐g 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 澳洲幸运5官方开奖结果体彩网:net worth. For example, if Olivia has a liquid net worth of $2 million, she would cut an investment if it gඣenerates 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% 澳洲幸运5官方开奖结果体彩网:return on investment (ROI). Conversely, Amelia, a venture capitalist, may decide to sell h♏er 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.

The Bottom Line

Exit strategy refers to how a business owner or investor will liquidate an asset once predetermined conditionཧs have been met. An exit plan helps to minimize potential losses and maximize profits by keeping emotions in ch⛄eck 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 澳洲幸运5官方开奖结果体彩网: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.