A plan for a partner or owner to transition out of ownership of a company
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What is an Exit Strategy?
An exit strategy is a plan for a partner or owner to transition out of ownership of a company. It is accomplished through a merger and acquisition (M&A) with another company, through an initial public offering (IPO) to investors, through a transfer to a successor (e.g., family member), through liquidation, or through a management buyoutby employees.
Exit strategies are often used when the owner wants to cash out their ownership in a company.
Bankruptcy is another example of an exit strategy that is often considered in a liquidity crisis or other financial struggles for a company; however, it is usually less preferable and offers a less profitable outcome for business owners.
Exit strategies can also be used to prepare for the end of a contract. It can be due to poor performance, changes in company strategy or hierarchy, or the end of an existing contract. Such strategies can be after achieving a pre-established goal or to mitigate loss, either way, taking their remaining value out of the company.
Summary
- An exit strategy is used to aid in the transition out of ownership of a company.
- There are many different exit strategies, all of which work more effectively for specific companies depending on their size, structure, performance, and future goals.
- Liquidation is often the last resort for struggling companies, while gradual liquidation is more often a choice to move slowly towards retirement for a small business owner.
Liquidation as an Exit Strategy
Liquidation entails the closing of a business through the sale of all its assets. The strategy is often used when a business cannot be sold through any of the other methods, usually due to dependence on a specific employee/owner of the company or overall poor strategy/performance.
Liquidation as an exit strategy will often generate low returns, and any value of current clients will not be recognized in the sale of the company. Business owners should consider restructuring for the purchase of the whole company, rather than a liquidation to optimize returns.
Gradual Liquidation as an Exit Strategy
Gradual liquidation as an exit strategy is similar to regular liquidation, but it occurs over an extended period. It is most common for owners who want to wind down their business.
The systematic exit is accomplished by taking profits out of the company through large salaries, bonuses, or dividend payments, rather than reinvesting into the company.
Simultaneously, the operations of the business will slow down until it is too small to operate. Often, small business owners who want to reduce their workload slowly towards retirement will choose the gradual liquidation strategy.
Transfer to a Successor as an Exit Strategy
Transferring a company to a successor will usually keep the businesses within the owner’s family. It allows for the same or similar vision of the company to be continued and can keep the previous owner involved if that is their wish.
Some transitions go less smoothly based on the drive and knowledge of the individual inheriting the corporation.
Sale to a Business, the Open Market, or Through an IPO
A business sale to another organization requires unique positioning to make it an appealing acquisition to the other company. Corporations that are looking to acquire a new business segment will be looking for synergies between the brands or operations, a chance to reduce competition, or as a move to increase their market share.
Selling to the open market is another exit strategy and is often used when a company is highly sought after, and the demand for it can drive prices up – higher than that of a sale to a business.
Finally, an IPO (initial public offering) can provide an exit for private company owners who are looking for large profits and want to see their business continue to grow in the future through equity financing.
Trading Exit Strategy
Trading exit strategies are used when dealing with securities and portfolio management. Although similar in theory, exit strategies and trading exit strategies are very different.
Trading exit strategies are used to prevent risk and maximize profits. Traders who fail to establish a strong exit strategy often lose out on potential growth or end up with a loss.
Some methods often include “take-profit” and “stop-loss” tactics, both of which turn to market orders to sell when a specific price is reached. They are only two of the many complex trading strategies used in securities markets.
More Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
FAQs
An exit strategy is a plan that allows a business owner , investor or trader to sell their ownership in a company. Types of exit strategies include liquidation, acquihire and bankruptcy. Exit strategies outline actions to maximize profits, minimize losses and ensure the success of their companies upon their departures.
What are the three main exit strategies? ›
Initial Public Offering (IPO)—The sale and/or issuance of shares in a private company on a public stock exchange. Private equity—The sale and/or issuance of shares to a financial investor. Sale to another business—The sale and/or issuance of shares to another operating company.
What is an example of an exit strategy? ›
Initial public offerings (IPOs), strategic acquisitions, and management buyouts are among the more common exit strategies an owner might pursue. If the business is making money, an exit strategy lets the owner of the business cut their stake or completely get out of the business while making a profit.
What is the exit option strategy? ›
Plan your options exit strategy
You may want to set exits based on a percentage gain or loss on the trade. Using percentages instead of dollar amounts allows you to treat your trades equally. For example, some traders will exit options trades at a 50% loss or a 100% gain.
How to create an exit strategy? ›
To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Prepare your finances. ...
- Consider your options. ...
- Speak with your investors. ...
- Choose new leadership. ...
- Tell your employees. ...
- Inform your customers.
Your exit plan should be focused on two main objectives: 1) maximizing your company's value prior to your exit, and 2) ensuring that you accomplish all of your business and personal objectives as part of the exit.
What is the full exit strategy? ›
An exit strategy is a plan that allows a business owner , investor or trader to sell their ownership in a company. Types of exit strategies include liquidation, acquihire and bankruptcy. Exit strategies outline actions to maximize profits, minimize losses and ensure the success of their companies upon their departures.
What is a clear exit strategy? ›
An exit strategy is a plan for how a venture capitalist will sell or transfer their stake in a startup to another party, such as a larger company, another investor, or the public market. The exit strategy determines the timing, valuation, and method of the exit, as well as the expected return on investment.
What is the difference between exit plan and exit strategy? ›
Exit strategies are plans executed by business owners, investors, traders, or venture capitalists to liquidate their position in a financial asset upon meeting certain criteria. An exit plan is how an investor plans to get out of an investment.
How to make an exit plan from a relationship? ›
In general, though, here's how your exit plan should proceed.
- Make sure you're really ready to do this. ...
- Identify the reason you can't leave yet—then work to change it. ...
- Get high-quality legal advice. ...
- Document everything. ...
- Build your timeline. ...
- Become an expert at grey rocking. ...
- Build in as much comfort and support as you can.
An exit strategy, often overlooked in the early stages, is a vital roadmap for the future. It's a crucial plan outlining how business owners intend to leave or transition out of their company, ensuring a smooth and profitable departure, safeguarding the company's future and providing financial security.
What are the best exit strategy in trading? ›
Popular exit strategies include stop-loss orders to limit losses, take-profit orders to lock in gains, trailing stop-losses to capture profits in trending markets, using technical indicators to identify reversal points and time-based exits.
What is an exit strategy at work? ›
An exit plan is a strategy designed to ensure a smooth and profitable exit from the business. By incorporating an exit strategy into their business framework, owners can proactively prepare for future transitions and ensure that the business thrives even after their departure.
How long does an exit strategy take? ›
The timeline for this first step to create the exit plan can take up to 18 months. Business owners usually take time to decide their exit goals and choosing the right exit path.
How to strategically quit? ›
How do you politely quit a job?
- Plan ahead. Don't leave when you are most needed.
- Give adequate notice. Don't leave abruptly.
- Communicate your grievances with your boss well in advance of handing in a letter of resignation.
- A resignation letter won't suffice. ...
- Let your boss know about your next employer.
Exit strategies include selling to an outside buyer, transferring ownership to family members, selling to employees, or even winding down operations and moving on to a new venture. Each strategy has unique implications, from the impact on the business's legacy to financial and tax considerations.
What are the 3 basic of strategy? ›
- Corporate Strategy: Determines the overall scope and direction of the organization. - Business Strategy: Focuses on competing successfully in specific markets or industries. - Functional Strategy: Involves detailed, short-term operational plans for key functional areas.
What are the 3 strategies? ›
Within the domain of well-defined strategy, there are three uniquely different and crucial strategy types:
- Business strategy.
- Operational strategy.
- Transformational strategy.
Exit route means a continuous and unobstructed path of exit travel from any point within a workplace to a place of safety (including refuge areas). An exit route consists of three parts: The exit access; the exit; and, the exit discharge.
What is one of the three main strategies? ›
Corporate, Business and Functional are the three types of business strategies. Corporate strategy is the overall plan that guides the other two strategies. Business strategy is related to the particular market, product or resources whereas functional strategy is specific to various departmental actions.
