What is an Exit Strategy and why do you need one?

It can take years to execute a successful exit, so the endgame needs to be in your mind from the start


Everyone must have read or have watched Mahabharata once. So, after Arjuna, his son Abhimanyu was the only warrior who knew how to enter the Chakravyuh. The Chakravyuh or a circular maze was the military formation, initially tricked for Arjuna by the Kauravas in the Kurukshetra battle. But Abhimanyu imbibed only the entry part of it, and he missed the crucial part of escaping the Chakravyuh. As a result, he died at the battlefield. Had Abhimanyu been knowing the exit part, he would have survived the battle. Now or then, exit strategy is the crucial part of planning!   

The future is uncertain and nobody knows what it holds for us tomorrow. So, preparing things in advance makes other things easy and smooth. Often in life, we wait until a change in circumstances to make a big decision. Similarly, entrepreneurs strive hard to launch their businesses. But one thing they often forget is that decisions made on day one can have huge consequences down the road. It is not just enough to build an empire; one should make sure to have an exit strategy ready, a way to get the money back out.

Exit planning is something many entrepreneurs delay for long. In business, the target is firmly on the here and now decisions, whether it is marketing, HR, inventory, or cash flow. One may doesn’t feel like there is the time or the motivation to create an exit strategy, especially when you don’t plan to sell soon.

When an architect designs a building, he makes sure that every building, floor, or structure, where people will be living or spending their amount of time, has at least two doors, preferably on opposite ends of the space. Why? Because, if tomorrow anything happens inside the building that requires the occupants to vacate the place quickly then there needs to be an adequate number of exits available.

If something like a fire or other natural calamities happen, which might make it impossible to get out one way, then there needs to be another exit available for the people to use. Now, picture yourself in that room or building, with multiple available exits is not just a matter of convenience, but it is a matter of safety and well planning, too.

Around 72 per cent of small business owners have no exit strategy at all, revealed a study. Of course, when you start a business you start it with a positive note. You don’t want to think anything negative like shutting it down or selling it off later. But trust me, it is always advisable to keep a backup plan for the future. The truth is it can take years to execute a successful exit, so the endgame needs to be in your mind from the start. The earlier you establish your exit strategy, the clearer the vision for you and your company becomes.

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Business owners or even investors can actually make a considerable profit if they make a successful exit strategy.

What is an Exit Strategy?

An exit strategy is a contingency plan to liquidate or dispose of a financial asset once the predetermined event or circumstance for the asset has been met by a business owner, or an investor. This planned approach will either maximise benefit or minimise damage. For entrepreneurs, this is a strategic planning on how to sell ownership to investors. Business owners or even investors can actually make a considerable profit if they make a successful exit strategy. You should always assess your personal and business goals to identify which exit strategy lines up with your future goals.

Now, it is most likely that an exit strategy is executed to close a non-performing asset. This will ensure that the losses associated with a particular underperforming asset are limited. However, an exit strategy can also be applied if the financial or business asset has already met the investment goal.

There can be many other reasons due to which an investor or business could execute an exit strategy. Depending on the slowdowns in the economy for other simple reasons, like the investor facing a liability lawsuit or wanting to retire or redeem his investments.

What Should Be Considered in the Strategy?

Different businesses will need different approaches in an exit strategy. There are different elements that can be helpful across the board. An effective exit strategy should be planned for every positive and negative possibility regardless of the type of trade, investment, or business venture one has. This planning should be an important part of allocating the risk associated with the investment, trade, or business venture.

A business exit strategy is an entrepreneur’s calculated move to sell its ownership in a company to sellers /investors or another company. A proper exit strategy gives a business owner a road map to reduce or liquidate its stake in a business venture. And, if a business is running successfully, then how to make a substantial profit.

Similarly, if the business is not running successfully, then an exit strategy or an ‘exit plan’ can be of a big help to enable the entrepreneur to control the losses. An exit strategy can also be used by an investor such as a venture capitalist to prepare for a cash-out of an investment.

Exit strategies and other money management methods can significantly improve dealers and investors’ trading business by eliminating emotion and reducing risk. Before entering into a trade, an investor is advised to set out points at which s/he will sell the business for a loss and a point at which they will sell for a gain.

Managing money is one of the most important aspects of business. Many traders, for instance, enter a trade without an exit strategy and are often more likely to take premature profits or, worse, run losses. Traders should understand the exits that are available to them and create an exit strategy that can minimise losses and maximise profits.

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Operating a business without an exit strategy is like driving a car with no destination in mind. As a result, you end up to a point where you started!

Why Do You Need an Exit Strategy?

  • Gives Right Direction to the Business

Outlining your exit strategy, above everything else, gives you a clear blueprint for the future and gives a right direction to your business. It gives you a target to achieve for, acts as a measure of your success and clears your vision for life beyond the business.

It also helps you imagine your business with the other person at the helm. Whether you are planning to pass on your business to generation next, sell to a buyer that your merger and acquisition (M&A) team has identified, or liquidate your assets and shut the doors, your exit strategy will guide the direction of your company. Operating a business without an exit strategy is like driving a car with no destination in mind. As a result, you end up to a point where you started!

After defining an exit strategy, every business decision is tuned accordingly. An exit plan can also be proved as a boon if an unexpected event happens. Let’s say, if you meet a severe accident or illness that forces you to leave early, you can easily ensure the exit strategy is activated without causing the business to lose value.

  • Estimates Your Company’s Value; Attracts Investors

It may be an obvious question, but have you actually realised how much your business is estimated? And will it secure your rest of the future? Determining this is more complex than you would expect. It is a tiring process of creating a detailed record of your recast financials, identifying your intangible and tangible assets, and gauge the condition of the market. You will also need an ideal buyer, who can pay a premium for your company based on a strategic fit with theirs.

A thorough evaluation will inform you of your company’s value, but only by combining this with the ambitions laid out in your exit strategy will make you understand if you are on the right track with your financial goals, or if changes are required to realise your expectations or needs.

For entrepreneurs looking for investors, having an exit plan is especially important. Any investor can ask you what your exit strategy is before they can put in their money into your business. The answer you give them can make or break the possibility of getting an investment. In reality, investors shy away from betting big on businesses that don’t have an exit plan. As they believe it might be an indicator that the entrepreneur is more interested in building a lifestyle business rather than building a potential high-growth venture.

To an investor, an exit plan is an assurance that they will get a return of whatever they are investing. This is especially when an investor is buying the equity in a business, and not giving as a loan. Equity in a business has no market value until the company goes public, sold, or merged with another company. If you have no exit plan, investors get worried that you might be reluctant to buy them out or provide the return on investment they’re looking for. Investors also ask founders about their exit strategy to gauge their flexibility and ability to make hard decisions when thinking about risk and return. They want to know if you are capable of imagining possible scenarios and have a grasp of the business landscape.

  • Gives Clear Picture When to Sell; Attracts Buyers

Your exit strategy will help you to determine an end point for your venture. This could be five years, ten years, or more but it will give you a timeline to work within, allowing you to prepare it for a buyer ready. Simultaneously, you can update your exit plan and make strategic business decisions according to the growth of your venture. This will help in upgrading your company’s value.

On the same side, an exit strategy also makes your business more attractive to buyers, which is crucial if you decide to sell your venture. Buyers want a company that has a clear vision and a proper exit plan. An exit plan also shows how much a buyer is committed to sell his business. Your exit plan will also help you in identifying the ideal time frame for selling your company with the maximum returns. This will psychologically prepare you for your future activities, have a thorough evaluation of your business’ market value, and negotiate a best deal for your business. So, it’s not about securing your financial future, but adding your appeal to prospective buyers. It also shows you are a committed seller.

  • Relieves Stress and Helps Handling Unwanted Offers

An exit plan gives you a firm grip and framework of your expected business lifecycle. This makes decision making much easier for you whenever you hit a roadblock or feel overwhelmed by the daily stress of business operation.

Having an exit strategy also helps business owners to renounce control and delegate tasks that they don’t like or aren’t skilled at. Similarly, exit planning focuses on developing a next-level management team that can take the control over the helm when needed. This gives the owner time to focus on the parts of business operations they like to expand.

An exit plan will help you respond to unwanted offers. Did you know that, according to research by the National Center for the Middle Market, 45 per cent of all sales are opportunistic for the buyers? It can be a risk to accept an offer in this manner. But with an exit strategy, you can address this type of offer.

Preeti Verma
Preeti Verma
An alumna of IIMC, Preeti writes on global and domestic business, life cycle of a business and its stages. Her fourteen years of stint includes The Economic Times, Business Standard, Financial Express, Tehelka, Businessworld and Times Internet.

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