An exit strategy is the intended method by which the owners of a business intend to sell it. There are a number of ways to do so, each with its own advantages and shortcomings. Here are the best options:
- Continue to own it. There is not necessarily a reason to plan for an exit from the business. If the compensation being collected from the business is excellent and running the operation is not overly stressful, then there is no reason not to keep operating the business for as many years as possible. Under this approach, the assumption may be that other family members will take over the business in the future.
- Liquidate the business. It can be difficult to find a prospective buyer that is willing to pay a reasonable price for the business. If so, engage in a plan to milk the business of cash without further investments in it, and gradually sell off assets and terminate employees. The result should be a slow reduction in business until the doors can be closed. However, this means that the intangible assets of the business, such as customer relationships, are being deliberately eliminated, so some value is certainly being lost.
- Sale to insiders. If there is a competent management staff already in place, consider selling the company to them. This provides continuity to the employees, and allows for a gradual and amicable termination of employment. However, it may mean that the owner must accept a loan from the management team, to be paid off from future cash flows. If there is a future decline in the business, the loan may not be repaid. This means that the owner's fortunes are still tied to the business for a number of years, which can be risky. In addition, it is quite likely that the best possible price will not be obtained, since there was never any competitive bidding.
- Sale to outsiders. A way to obtain a higher price and a possible cash payout is to put the company up for bid, and to take the highest offer - no matter who makes the offer. This can involve a cash, debt, or stock price. Each of these types of payments has different tax ramifications, with some payouts allowing for delayed tax payments. However, the business may be radically altered by the new owners, which could result in a large number of layoffs.
- Initial public offering. If the company is large enough, it is possible to take the company public via an IPO. This approach is expensive and requires a large amount of regulatory compliance. Eventually, the owner should be able to sell shares on a stock exchange, though there could be a delay of one or two years before this can be effected without causing an adverse investor reaction from all of the stock sales. This approach is generally not recommended, given the difficulty of the IPO process.
Overall, the best exit strategy is a sale to outsiders, since they will provide the highest price and may be able to pay in cash.