While there is a lot of content around how to successfully get your business off the ground, there isn’t much talk about creating an exit strategy to successfully quit a business. After all, who would want to think about leaving when you have likely spent years, if not decades, establishing your empire? Many businesses think of an exit strategy as a sort of “doom and gloom” outlook. In reality, it’s a good safety net to have, especially when you understand what it is and what it means for your business.
What is an exit strategy in business?
An exit strategy is a proactive plan to shift out of or liquidate an investment position, business transaction or venture. “An exit plan provides a roadmap for how businesses or investors will exit after realizing gains from their investment,” notes Carey Smith, senior vice president and chief operating officer of Blue Cross and Blue Shield of Minnesota. “Having a plan to exit helps manage risk by reducing exposure to potential downsides if conditions change and is especially important for startups or high-risk investments that face higher levels of uncertainty.”
Just as important as the strategy that initiated the business is the one that guides the “how” and “when” to exit. In an ideal situation, this plan is detailed along with triggers, measures and even events that could signal the right time to exit and move to the next thing.
“Being deliberate in defining the exit triggers is important because they may not be recognizable when they arise, if there hasn’t been proactive thought as to what they may be,” Smith adds. Also, business models, strategies and market conditions frequently change and evolve as the business progresses, so it is important to revisit them periodically. While not all exit triggers might need drastic action, defining them helps the business understand when to persevere and when to move on.
“Remaining flexible is important. In our case at Plurilock, we went public very early during the pandemic, as that was an option available to us then,” says Ian Paterson, CEO and founder of Plurilock, a leading AI cybersecurity company. “However, if we wanted to do the same thing right now, it would have been very difficult to accomplish that.”
Plan your business with the end in mind
As creators and entrepreneurs, starting with the end in mind is not an easy mindset to have and certainly requires a shift in perspective. Be aware of business environments and world factors that could influence or impact your decision, and make that a point of focus while building the strategy.
When thinking about the “how to” of exit strategies, Paterson recommends thinking of it like a car trip.
- Start with the end in mind. Know who you’re going to sell to and what they value.
- Plan a route. Know what milestones you need to hit at various stages along the journey.
- Ask for directions. Engage with service providers like bankers and accountants frequently.
- Don’t run out of gas. Make sure when you go to sell the company you don’t run out of money and negotiating power.
- Pace yourself. It’s a long ride.
And contrary to popular belief, an exit strategy does in fact align interests, incentives and goals regarding growth and profitability because it defines targets aimed toward business growth. “A well-defined exit strategy allows both businesses and investors to set expectations, manage risks, provide motivation and unlock the value created in an investment,” Smith notes.
Are there different types of exit strategies?
Key types of exit strategies available to businesses include sale of ownership, initial public offering (IPO), liquidation, recapitalization, debt restructuring or refinancing, ownership transfer, merger or buyback.
To determine which strategy might work best for you, a good place to start is to look at industry models applicable to similar businesses. Paterson advises that if the exit strategy is acquired by a competitor, certain aspects of the company, like corporate finances and internal controls, are more important than if the goal was to take the company public.
If the goal is to get acquired by a venture capital, intellectual property, personnel and other assets might be more valuable. “With my company Plurilock, where we are acquiring regional cybersecurity providers, we are looking for strong sales and marketing teams with strong contracts,” he adds. “We value the strength of those relationships, and it is a strong component of our value process.”
Exit strategy models to emulate
When looking at industry models to emulate, both Smith and Paterson share examples of both successes and failures. Smith notes that Facebook’s acquisition of Instagram ($1 billion), Oculus ($2 billion) and WhatsApp ($19 billion) provided significant returns for its investors.
Likewise, Walt Disney Company’s acquisitions of Pixar and Marvel provided significant revenue and strategic market positioning. Perhaps one of the most notable is Google’s acquisition of Android, “which has successfully positioned Google as the market leader in smartphone operating systems, allowing significant control and access to consumer data,” Smith shares.
“Twitter is an interesting case study because it played out on the public stage,” Paterson notes. “Like many exits, at some points during the process, it looked like the deal would not go through, but eventually it closed roughly as expected.”
For all the successful exits, there are an equal or greater number of failed exits that didn’t get the expected results. “Yahoo is one of the best examples of failing to acquire other exiting companies and failing to maximize on their own exit,” Smith recalls. “Yahoo refused to buy Google for $1 billion in 1998 and again refused $5 billion in 2002. In 2023, Google has a market cap of $1.7 trillion. And sadly, in 2008 Yahoo turned down an offer to be acquired by Microsoft for $44.6 billion and instead sold themselves to Verizon in 2016 for only $4.6 billion.”
How to create an exit strategy
When building a successful exit strategy, Smith suggests a checklist to help you get started:
- Document all the potential situations that would call for an exit, like market considerations, industry challenges and business model economics.
- Allow for flexibility to support changes in priorities and space for new ideas, alternatives and changes in market conditions.
- Define success metrics and articulate the outcome objectives and the value they will generate.
- Note investor expectations to ensure alignment with the achievable value expected.
- Create a roadmap with an exit timeline and expected targeted returns.
The choice of business model and industry influences the selection of an appropriate exit strategy. Startups take time to build an attractive valuation and therefore require patient investors with long-term exit plans such as venture capital firms. High-growth businesses require large capital investments, so they typically prefer acquisition exits in order to scale.
High capital-intensive businesses have exit plans that require mergers where value is created through combined scale. Business models that generate value from intellectual property (IP) typically have exit plans that involve acquisition or revenue sharing and licensing deals that provide royalty.
Plan B: Less conventional options
If none of these types of exit strategies work, the good news is that there are a few less conventional exit strategies to consider. Employee stock ownership plans (ESOPs) give employees a more vested interest in the company, thereby allowing the original investor or owners to step back. Joint ventures (JVs) are co-owned partnerships where external parties are brought into the company fold.
“Special Purpose Acquisition Company (SPAC) is a newer exit strategy that is growing in popularity, where a merger takes place with external SPAC providing capital investment opportunities that allow it to go public (IPO) at a much higher valuation,” Smith advises. Lastly, earnouts are contingent payments that can be based on future company performance.
Creating an exit strategy is a smart business decision from the get-go and shows a forward-thinking approach to any business. For one to be successful, it is important to research and think about all factors that would impact the how, why and what of an exit strategy.
“The most helpful thing to do would be to talk to a specialist, such as an investment banker and business broker to talk through strategies,” Paterson suggests. Smith adds, “Aligning the exit strategy with the vision and entrepreneurial motivations allows achieving value while also serving goals beyond just an immediate financial return.”
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