What is an Exit? When Should a Small Business Owner or a Start-up Think of Exit?

An exit occurs when an owner or founder decides to reduce or end his/her involvement with the business.


Introduction – The ‘Charkravyuha’

If you loved reading Indian literature, your keen interest in the subject would have made you scroll through books or at least made you watch the classic series of the ancient Indian epic called ‘Mahabharata’. If you did, you for sure would remember the character named ‘Abhimanyu’ who was one of the greatest archers in the world and a great warrior. Abhimanyu was born to Arjuna (3rd Pandava) and Subhadra (sister of Sri Krishna). It is said that Abhimanyu was in his mother’s womb, when Arjuna was narrating an interesting story of how to break into a ‘Chakravyuh’ formation in a battle. While, Subhadra heard the first part of the story i.e., entering/breaking the ‘Chakravyuh’ but she fell asleep just before she could hear the remaining part of the story which explained the strategy to exit the ‘Chakravyuh’ alive and unharmed. Thus, Abhimanyu knew how to enter the ‘Chakravyuh’ but was not aware, how to exit the same as he did not gain complete knowledge. Well, if you had immersed yourself in this story let’s come back in modern times and see around. How is the story of Prince Abhimanyu knowing the fact to enter the “Chakravyuh “and not knowing the exit policy is relevant now?

We will find this out in the subsequent section along with the meaning of ‘Exit’.

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If you have a unique selling point, you may survive the competition but if being competitive throughout isn’t something which keeps you going or your long-term goal, you should start thinking about what and how to exit as per the plan/strategy built in the early stages of the business.

Meaning of ‘Exit’

Exit is a ‘way out’. An exit occurs when an owner or founder decides to reduce or end his/her involvement with the business. An exit is a strategic plan to sell the ownership to investors or another company irrespective of the fact that the company is making a profit or a loss in the business. In case, the business is successful, the owner may earn a good amount of profit or the exit may help him/her to limit the losses depending on the actual scenario.

Exit does not mean closure at all times. Exit can be in the form of a merger, acquisition, Initial Public Offerings (IPOs) which simply means going public or shutting down business so start a new one as per market demand and relevance. It is a part of contingency planning and it may give an opportunity to the business owners to maximize their profits while they are still dominating the market with their product or services.

Reasons for ‘Exit’

I understand you would be keen to know by now ‘when’ is the right time to exit the business – Should it be done immediately when you start the business or when you are half way through the journey? But, ‘why’ is just as important a question to ask yourself irrespective of the fact that you are running a small business or a startup.

What are the trigger points to consider to start looking for a way out/exit in the business and when should you do it? Let’s us take a look at some of the reasons below to find an answer to this:

You are satisfied with the profit; you are currently making and do not aspire to expand your business any further

You are emotionally attached to your family business and wish to keep it within the family. Therefore, as per your succession plan and to avoid any conflict at any later stage of the business, you want to hand over the reign to your family member   

You not interested in the current line of business and looking up for a new challenge due to obsolete market (poor sales due to low demand) for the product so you decide to sell it off and start a new venture which has less competition

A family member may or may not have the right skills but your business is the source of living for them. Hence, you decide to groom the next generation to ensure your legacy also lives on and source of living continues for them

You are uncomfortable with the growing competition and find it difficult to survive

You have the negative cash-flow and selling the business is the only way out to pay off the rising debt

Cash Inflow is an issue. You lack funds or unable to meet the quality

You do not wish to work actively in the organization but still want to keep the equity share so after giving it a considerable amount of though you decide to hire someone externally to run the management

You wish to work under a brand or as per calculation self-marketing and branding cost would be huge

If you are running in losses and are too old to run the business, thinking of a way out then by selling your business may not work well for you.

Business plan failure, merger, acquisition or liquidation maybe some of the other reasons.

‘When’ to plan for the exit?

The above-listed points which primarily focus on ‘why’ should trigger the thinking in you to decide if it is time to ‘exit’. You will definitely be able to rationalize if it is time to look for a ‘way out’.

This means, the right time will be when your small business still earns you profits, it appears as a shining silver lining to others (looking and aspiring for it) or very few rounds of investment or money are funded in your startup and the growth curve is still not flattened. Hence, returns for the business owner and investor are much better.

Also, if you have a unique selling point, you may survive the competition but if being competitive throughout isn’t something which keeps you going or your long-term goal, you should start thinking about what and how to exit as per the plan/strategy built in the early stages of the business.

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You start the business with your savings and angel investments but soon you need more funding for marketing and provide the services in the market.

‘Why’ planning an exit and planning it ‘early’ is important?

In an ideal scenario, an entrepreneur shall develop a comprehensive exit strategy/plan in their initial/original plan before launching their startup. Planning exit at the early stages of a business is important so starting early is the key.

It will build the trust and confidence of investors in your business plan as they help you raise funds especially post the seed funding round for further expansion of the business. They will be more interested in listening to your plan and strategy to ramp up the business because of the vision you have for your company even if you are never going to execute the exit plan. But it will definitely build goodwill.

Planning exit will also help the external investors to make a realistic calculation of the timeline and rate of return on their investments.

As per economic survey delay in the exit or lack of exit may incur more cost. It creates at least three types of costs to the business in fiscal, economic or opportunity and political terms.

Fiscal Costs – Exit is hindered through government support in the form of explicit subsidies (for instance, bailouts) or implicit ones (tariffs, loans from state banks)- which represents a cost to the economy 

Economic Cost When the resources and factors of production are not employed in their most productive way, it results in losses. In a capital scarce country like India, misallocation (a situation where capital and labour are poorly distributed) of resources can have a significant cost. Another cost stems from the overhang of stressed assets (non-performing assets) on corporate and bank balance sheets. It reflects the difficulty of sharing costs of past mistakes between equity holders, creditors, taxpayers and consumers. 

Political Cost – The lack of exit can have considerable political cost for the government which is attempting to reform the economy. The benefits of delayed exit may flow to the rich and influential in the form of support for “sick” firms. Thus, it may give the impression that the government favour large corporates which politically limits the ability to undertake measures that will benefit the economy but may be seen as a further benefiting business. Fertilizer is a classic example of these three costs which leaks abroad or to non-agricultural uses and goes to inefficient producers

Starting with a small business or start-up isn’t easy as it seems just like the exit from the market. Let’s take an example that you want to set up a high end/fine-dining restaurant. What all would you need for that?

In the hospitality industry, the bars and restaurant sector are an important source of employment and growth in the world. Because of its nature, this sector faces a high frequency of starting new businesses and shutting down the old ones. As per economic survey 2019-2020, the number of licenses required to open a restaurant in India are significantly more than elsewhere. While Singapore and China require 4 licenses, India requires around 12-16 mandatory licenses like Food safety, Health/trade, Fire NOC, Music License, Employees Safety, Environment Clearance for Gen Sets (Air Pollution Act) and so on) to start the business.

And, you can obtain these licenses and permissions from respective authorities from government portal only unlike New Zealand. The website of Auckland Council (operated by a private third-party agency) has all detailed guides and stepwise procedures about permissions, fees and timeline to open a restaurant in New Zealand.

Now, you start the business with your savings and angel investments but soon you need more funding for marketing and provide the services in the market.

This is just an example to start with the business. However, the closure or selling off the stake, change of ownership or if you no longer wish to be involved in the business or you wish to start a new chain of business, the hassle to do the same will be more. Hence, comes the plan for exit in such scenarios.

How to decide if it is the right time to exit?

Let us understand this with the help of an example where a start-up gets an offer to get acquired by a big brand –

Scenario 1. 

You have recently launched your product and it is dominating the market. You are growing exponentially and you are offered a deal to sell off the business to this bigger brand/company. At this point, you must evaluate:

If accepting the offer would make you the amount of profit you were expecting to make?  

Will it provide a good Return on Investment (ROI) to Investors?

And If your employees’ interest is also being taken care of by the brand

In case, you visualised that at some point, you will get an offer to get acquired by a big brand and if it meets your above expectation as well, you may think of going ahead with the option to sell off the start-up.

Scenario 2. 

Currently, your business performance is really good. You believe you can run independently and make much more money/profit in the coming years than what you are being offered now, you may choose to turn down the offer.

Barriers to Exit 

Any obstacle which stops an organisation to take the decision to exit from a market as the company considers that they need to disengage from is a barrier. If you have specialized assets which are not easily saleable.

Conclusion – It’s better to be safe than sorry!

Having an exit plan in place does not mean you are looking for a way out right away, but, it’s a part of the contingency.

We all have seen ‘Emergency Exit’ boards in a high-rise building and the contingency planning is done while the building is under construction. The emergency exit is not used as an entry and exit point every-day but is used and is the only way-out in crisis.  

By looking at the balance sheet, one would know if their business Is doing well or not, so any business owner knows what is the right time but not planning for it can spoil the game here.

As per the economic survey (2015-2016), it was clearly quoted that the Chakravyuha Challenge is more of a feature of traditional sectors of the economy but is not restricted to the public sector-indeed, delay in exit in the private sector is becoming a major challenge.

After you decide on how you will go about the exit from the market (selling of the business, change in successor etc.), remember to communicate effectively to your investors, employees and customers as Internal and external communication both are critical in entrepreneurship.

Roopali Kotwal
Roopali Kotwal
Roopali is a former author with Dutch Uncles, a subject matter expert with over a decade of experience. She writes on Human Resource Management and Business Operations.

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