When and How to Develop a Business Exit Strategy in an Economic Downturn?

A business exit plan is the last thing on your mind when you start your dream venture. However, it is as important as any other type of business strategy to secure your financial goals.

You need a business exit plan before you are forced to create one. That’s why it’s important to understand what is a business exit strategy, its types, and when to create one for you.

What is a Business Exit Strategy?

A business exit strategy or plan is a formal procedure to close or sell your business. It helps you complete the business transition when you plan to leave your business.

An exit plan isn’t a course of action to end your business only. It is a comprehensive plan that considers all stakeholders and tries to maximize their benefits.

Unlike the common notion of selling or winding up a business through an exit plan, it can be used tactically to transform a business.

For a profitable and established business, an exit plan should maximize profits and ensure liquidity. For other businesses, it should focus on minimizing losses and bridging the gap.

Types of Business Exits

A business exit strategy may end up in closing or selling the business. It can take different routes depending on the size, nature, and type of the business.

Mergers

A merger is an exit plan when two or more businesses join hands. They can continue to take the existing businesses to grow further or start something new.

A merger can take place between two businesses in the same industry (horizontal), two businesses in different industries (conglomerate), or two businesses in the same supply chain line (vertical).

It is often a good strategy for growing businesses seeking market or product expansions through joint operations by retaining some or all assets of both businesses.

Acquisitions

An acquisition happens when one business takes over another. It is a commonly used exit strategy for small and large businesses alike.

An acquisition can be hostile or friendly. Hostile takeovers usually come from competitors when they reach out to shareholders and offer them a good price.

Business sellers can plan friendly acquisitions by reaching out to other businesses and planning ahead of time.

Selling to New Owners

Most small or medium businesses prefer this route of selling their businesses to someone they know.

Often business management can be interested in buying a business they have built over the years. Management Buyouts (MBOs) are common for large organizations.

Selling your business to your friends, family members, employees, trade partners, or customers can be a viable option for a smooth business transition.

Initial Public Offering (IPO)

Although it is an expensive option, many growing businesses prefer going public as their exit plan. However, it requires significant resources and compliance requirements.

In an IPO, you can keep the major proportion of the shareholding of your business. It doesn’t dilute your ownership stakes completely.

Liquidation and Closing

You may consider closing your business through a liquidation process as a last resort too.

If you create a business plan ahead of time, you may avoid selling your business at a loss. In fact, you should focus on selling a business at the right time to maximize the sale price.

When You Should Develop a Business Exit Strategy?

Successful entrepreneurs create a business exit strategy as part of their strategic business planning.

Every business owner must create an exit plan in the initial or growth stage. It means the earlier you create an exit plan the better it is for you.

Like any other business strategy, your exit plans can change at any time. In fact, it’s a good practice to revise and align your exit plans with your strategic goals.

Many businesses think of an exit strategy only when they incur losses for a while. In practice, that’s the worst time to do so.

Remember, it takes about one year to sell a business successfully. So, creating and implementing an effective exit strategy requires time and careful planning.

Why Do Businesses Need an Exit Plan?

Selling or closing a business shouldn’t be an emotional decision but a rational one.

Creating a sound exit strategy helps business owners avoid emotions and know when to sell or transition their business realistically.

It helps business owners create contingency planning to avoid common pitfalls of selling a business as a loss-making entity.

Also, planning ahead of time will help you keep the trust of all stakeholders. You’ll be in a position to cater to the needs of all stakeholders including investors, employees, and customers.

Finally, an exit plan helps you realize your financial goals realistically. You can change your strategic goals at any time and update the exit strategy accordingly.

How to Develop a Business Exit Strategy in an Economic Downturn?

Creating an effective exit strategy in an economic downturn is challenging. When more businesses are making losses, it’s hard to sell them at the right prices.

If you create and execute your exit strategy well, you can achieve your financial goals in an economic downturn too.

Revisit Your Strategic Goals

Keep an eye on your strategic business goals. Revisit them to remind yourself why you started this business.

Seeking answers to some critical questions on achieving your financial and personal goals can help you decide on how and when to create a business exit strategy.

Hire an Expert

Business transitions and closures require special skills and expertise. Talking to an expert in the field can help you transition smoothly.

An experienced advisor can help you understand the current and future market scenarios as well as appraisal of your business valuations.

Consider Your Options

You can then move on to the next critical phase of deciding on which options to consider.

If you want to keep your business running, you may consider a merger, acquisition, or selling it to someone you know.

On the other hand, if you’re nearing retirement, a sell-off or closing your business could be a better option for you.

Prepare Your Finances

The next step is to prepare your finances. It includes reviewing the assets, liabilities, and cash flow of your business.

You may need time to recover money from your customers and also to repay business loans. Also, consider your personal finances and a realistic business valuation through an exit.

Inform Your Stakeholders

Once you have documented your business and personal finances, it’s time to inform all stakeholders about the decision.

It will help you create a smooth transition without affecting the interests of key stakeholders like your employees, customers, and lenders.

Time the Implementation Perfectly

Finally, timing your exit strategy is critical. Keep in mind that executing an exit plan may take up to one year or even more.

You’ll need more time and resources to execute an exit strategy if your business is making losses. So, keep the execution time in mind for a successful business exit.