In 2018, UBS Global Wealth Management released the results of its survey that suggested nearly half of the respondents didn’t have any exit strategy at all. Meanwhile, 75 percent believed that they could sell their company within a year or less.
It seems counterproductive for a business owner to think about “exiting” when they’re just starting or when the company is taking off. But an exit plan remains one of the cost-effective ways to make wise investment and management decisions.
Why Do You Need an Exit Strategy?
First, let’s define an exit strategy. It is a detailed plan on liquidating one’s assets, contributions, investments, or ownership in a firm. It usually has the following goals:
- Ensure a smooth transition between leaderships
- Maximize one’s profitability or revenue
- Reward oneself for the hard work over the years
- Determine the ideal path for the business
- Find the right partners
- Identify the best exit strategies (depending on many factors)
- Guarantee the continuity of the business
- Maintain the organizational culture
The goals of an exit strategy don’t have to be all of these. It can be only one or a combination of various objectives. Either way, a person needs to have one for two reasons:
1. Nothing Lasts Forever
The nature of businesses changes over time, whether deliberately or not. In one of the studies about company changes, the average lifespan of businesses in the Standard & Poor’s 500 was over 60 years—that was in 1958.
By 2011, it significantly declined to 18 years. About 10 years after, at least 75 percent of those on the list would have already disappeared. This also explained why businesses with the biggest market capitalizations are new. These include Amazon, Microsoft, and Apple. As you can also see, these are tech-driven businesses.
What happens then to the others? As explained by McKinsey, they will eventually change management after having been bought out, merged, or acquired. Others will eventually go bankrupt. Think of Lehman Brothers and Enron.
2. Third Generations Can Be Problematic
Family-owned businesses still account for a huge percentage of companies in the United States. According to Family Enterprise USA, there are at least 5 million across the country. They also contribute over 55 percent of the USA’s gross domestic product and employ at least 60 percent of the workforce.
Unfortunately, several of these companies disappear by the time the third generation takes over. Writing for Family Business, Peter Davis asserts that the transition from second to third is often the most difficult because the latter are usually born of privilege and wealth.
They are less likely to know the value and meaning of hard work. Perhaps their parents may share stories about the company’s earliest struggles, but the new breed may feel a sense of detachment because they didn’t experience them.
Moreover, by the third generation, many family members may be capable of working. But even if they come from the same bloodline, they might have grown up in different households. Their leadership and management styles can still vary, and that can affect organizational culture.
Your Options for Exit Strategies
The best exit plan depends on many factors, such as the potential of the business, the presence of other owners or founders, possible heirs to the position, organizational culture, and profitability.
Selling the business is the easiest and perhaps the simplest way to exit the market, and you don’t even have to do this on your own. If you’re in Utah, you can already look for a business broker.
This firm can match you with potential buyers based on your desired parameters, such as price. They can also help you with the business valuation or appraisal to ensure that you get what you deserve or the future buyer doesn’t end up paying more than they should.
You can also liquidate your assets instead of turning over your company to someone else. The winding-down process can take time, and you may need to pay off creditors in the end. But the remaining profits will be yours.
When it comes to acquisition or merger, this exit strategy is more suitable if the business experiences limited growth. However, it can still expand when it receives the right help. You may also want to consider this if you have a growing number of employees, corporations, or co-partners and founders.
There are different styles for mergers and acquisitions. For the latter, the acquiring company can become the primary entity, and your business may become a subsidiary. Or it may absorb everything, including the workforce.
It is also possible that they may remove your team if the roles appear redundant. You can avoid this if you have a well-planned exit strategy.
But what do you get in the end with either merger or acquisition? It depends. Before these changes, your management may decide to buy you out. This means you sell your stake in the business and hopefully get a profit.
You may also retain some ownership rights and receive dividends and interest income from the profits the “new entity” will earn from hereon.
In the real world, it’s either you will outlast the business, or the company will outlive you. Either way, you will disappear at some point. A good exit strategy ensures you can enjoy the fruits of your labor once you lay low or are gone from the company.
