You can never guess what the next moment has in store for you. Life's too unpredictable to live an informed life all around the clock. At times, unexpected joys may make your day. Other times, unexpected disasters shatter your foundations. It may tear your world apart.
While we cannot avoid this unpredictability, we can surely keep ourselves prepared. The case is particularly important when it comes to business and financial dealings. An entrepreneur and his team build a business in years. And so, they ought to insure their efforts with all sorts of backup plans.
Amongst these backup plans, an exit strategy is of immense importance. Read on to unravel more about this essential measure.
What is a Business Exit Plan?
A business exit plan will make sense to you if you do believe in the fact that everything eventually comes to an end. For those who hang on to immortality, the case may be different.
Coming back to the business exit plan, fundamentally, it refers to a strategy or a plan that guides your business towards its end. Now, this end need not necessarily mean that your business comes to a literal end, and it stops operating once and for all. It may as well mean the end of your tenure in the very business.
Either way, the plan contains complete detail about the time, mode, and mechanism of the power shift or transition. For those who opt for the third and fourth exit strategies mentioned below, the business plan also sketches a plan of potential profits.
Reasons to Have an Exit Strategy Ready
Well, the very first reason is to avoid panic and poor eleventh-hour decisions. After all the struggle that you currently indulge in, you most likely would not want it all to go in vain. Right?
To keep that from happening, you ought to prepare an exit strategy plan beforehand. A planned exit will protect your business and your financial reserves from any possible severe blow.
According to statistics, about 64% of entrepreneurs aged over 50 years of age had no succession plan for business. Due to such cases, we see a business losing its value and worth for no good reason now and then. Instead, owners sometimes have to pay compensation to close down the business.
A business exit plan is important to avoid this very situation! Also, remember, a business exit plan is not an emergency or crisis measure. Instead, all calculated and successful business always prepare their exit plans beforehand. It gives them a guided and direct approach, keeping them from over-burdening their self. Plus, it also serves as motivation as it limits time and encourages entrepreneurs to do more in the little time they have.
Related: 13 Ways to Exit Your Business
Top 4 Exit Strategies
Now, here comes the awaited section of this post – at least for us, for we are eager to explain the impact of each strategy. Note that to determine which one will best serve your needs, you will need to assess your business model and your personal needs.
ESOP, short for Employee Stock Ownership Plan, resembles the mechanism of a profit-sharing plan. The primary difference between an ESOP plan and a profit-sharing plan is of prior investment.
In an ESOP plan, the employee of the company (who willingly participates in the ESOP plan) initially invests in the shares of stock of the actual ESOP sponsor. The company encourages the employees to adapt the course of action that is in benefit of the shareholders as they become the shareholders themselves, eventually. Typically, it's a transition of employees towards ownership. Even during the process, the employees get several benefits. Hence, ESOP is an excellent way of exiting your business while simultaneously rewarding hardworking and dedicated employees.
2. Transfer in Family
The second-best strategy of devising a business exit plan is to lead its ownership to a family member. In this way, the business remains within your home, such that you will have some degree of control over what happens. Even if you don't, you will at least be able to witness and monitor what's going on. And if need be, you may as well run to the rescue!
For example, say your business of ceiling fans is facing tough competition in the market. And your apparently-grown littles ones can't seem to get the business back on track. You can always advise them with your extensive and relevant experience.
With that said, it's the offspring or heirs that inherit the ownership. Since they are most familiar with the mechanism of work, they easily adjust in the office and also get to have a thriving career. Despite this naturally convenient business exit strategy, about 84% of Americans do not see their children handling their business in the future. Perhaps, it's because of the complex procedures of transfer involving hefty taxes.
3. Management Buyout (MBO)
As the name states for itself, the MBO or Management Buyout is an exit plan wherein business staff buys out the business. How so? Well, sometimes part of the business staff, i.e., a team collects its resources together to either buy out their respective section or the complete business. When they buy the complete section, they intend to work in the same business team. However, the ownership of a respective department gives them the authority to deal with it in better terms and also benefits financially. Remember, an MBO may be adopted by either a whole team or an individual.
Video: The management buy-out process explained | Moore & Smalley TV
4. External Sale
The last and most common approach towards the business exit is the external or outside sale. Now, even to sell your business to a third-party, you will have to do lots of work, such as paperwork and strengthening your business to make it look more promising. The immediate advantage that you get for selling your business to a third party is instant cash. You set up your very own terms, ask for an amount that seems reasonable, and the deal's done. However, in the long run, you may have no say about what happens with your employees, locations, etc.
Related: How to Sell a Business
Summing up, a business exit plan can save you from loads of unnecessary stress. Even if you don't plan on retiring anytime soon, it brings a sense of relief and confidence. Thus, allowing you to take greater risks and build a better business. Technically, it is fuel and savior in disguise. But when planning it, you need to do your part in self-assessment and opt for an existing plan wisely.