Business Exit Strategy (An Entrepreneurship Concept)

Every entrepreneur who starts a new venture should think an exit strategy. A number of possible exit strategies are available for the business owner. Exits strategies include an initial public offering (IPO), private sale of stock, succession by a family member, merger with another company or liquidation of the company. An entrepreneur’s strategic plan to sell his or her investment in a company he or she founded. An exit strategy gives a business owner a way to reduce or eliminate his or her stake in the business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy enables the entrepreneur to limit losses.

Ideally, an entrepreneur will develop an exit strategy in the business plan, before actually going into business, because the choice of exit plan can influence business development choices. Common types of exit strategies include initial public offerings, strategic acquisitions and Liquidation. Which exit strategy an entrepreneur chooses depends on factors such as how much control or involvement (if any) he or she wants to retain in the business, and whether the entrepreneur wants the company to continue to run in the same way or is willing to see it change going forward as long as he or she receives a fair price for his or her share of ownership. A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean giving up control.

In entrepreneurship an exit strategy or exit plan is a way to transition of one’s ownership of a company or the operation of some part of the company to another company (e.g. through a merger or acquisition) or to investors (e.g. through an Initial public offering). Other types of exit strategy include management buyouts or employee buyouts (common in the manufacturing industry). Transition companies are professional mergers and acquisitions companies that assist business owners with their exit strategy. Services offered are often referred to as transition management services.

Different exit strategies also offer business owners different levels of liquidity. Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well; for example, an IPO may not be the best exit strategy during a recession. The best type of exit strategy also depends on business type and size. A partner in a medical office’s best exit strategy might be to sell to one of the other existing partners, while a sole proprietor’s ideal exit strategy might simply be to make as much money as possible, then close down the business. If the company has multiple founders, or if there are substantial shareholders in addition to the founders, these other parties’ interests must be factored into the choice of exit strategy as well. No matter how successful your business venture may be, the time will come when you will no longer want to continue its operation, or may be forced to end due to changing economic conditions. When this occurs, you'll need a way to wind up your business activities in the most efficient manner possible. An exit strategy is a way to turn you operation over to another entity or to cease operating altogether.

Exit strategies are something that every investor in a business looks for. But even if you are running a one person sole proprietorship, you need an exit strategy. For you, as for any investor in a business, the questions are the same when it's time to move on. How are you going to get your money out of the business? And how much money are you going to get? Having an exit strategy worked out in advance helps ensure that you like the answers to those questions and gives you some control over your business's future. Following are some exit strategies for your business to choose from: 

• Liquidation

Businesses that are struggling to survive may choose to liquidate their assets. A common example of liquidation is the "going out of business sale." When a company liquidates, it usually marks down the prices of its inventory to sell it quickly. Any proceeds are used to pay off creditors, and then to any shareholders you may have. This is the close up shop and sell all the assets exit strategy. To make any money with such an exit strategy, your business has to have valuable assets to sell, such as land or expensive equipment. And profits from selling assets have to go to pay creditors first. Still, it is an option. And for small businesses, especially those that are dependent on the performance of a single individual, liquidation is sometimes the only option, as there's really nothing else to sell. If you're in this position, you may want to spend some time retooling your business so that it could be operated by someone else – making it a business someone might want to buy. Even lifetime entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to shutdown, close the business doors, and liquidate. There may be a natural catastrophe, like 9/11, or the market you counted on could implode. Make rules up front so you don’t end up going down with the ship.

• The Lifestyle Company

In a lifestyle company, the intent of the owner is to make as much money as possible for herself without planning for future expansion. All profits go directly into her pocket instead of being put back into the business to help it grow, and expenses are kept to the bare minimum. These businesses tend to be private and small in scale, and the owner dissolves the operation when it no longer is profitable or the owner wants to move on to a new venture. A common example of a lifestyle company is a business consulting firm.

• Mergers and Acquisitions

With a merger or acquisition, the owner sells the controlling interest in the business to another party but may still assume a smaller role in the day-to-day operation. This strategy is often employed by an owner who wants to leave the business gradually without selling it outright. However, the owner may be powerless to prevent changes to the operation that he feels are not in its best interest. This normally means merging with a similar company, or being bought by a larger company. This is a win-win situation when bordering companies have complementary skills, and can save resources by combining. For bigger companies, it’s a more efficient and quicker way to grow their revenue than creating new products organically.

• IPO

An Initial Public Offering (IPO) occurs when a privately-owned business decides to sell shares of stock to the public. This can be highly profitable for the entrepreneur and investors, as this can generate a large amount of revenue in a short period of time. However, an IPO is a rare occurrence, as the Entrepreneur website indicates that there are only about 7,000 publicly-held companies in the United States as of 2010. While not suitable for all small businesses, the IPO can be a viable exit strategy. Taking your company public can be extremely profitable. However, depending on how the IPO is structured, you may or may not be able to withdraw any of your capital at the time as new shareholders may want to see all the money raised by the IPO be used to expand the business. This used to be the preferred mode, and the quick way to riches. But since the Internet bubble burst in the year 2000, the IPO rate has declined every year until 2010, and is now at about 15%. I don’t recommend this approach to startups these days. Shareholders are demanding, and liability concerns are high.

• Transition ownership to an Emotional Partner

The dream of many small business owners, keeping your business in the family ensures that your legacy lives on. As an exit strategy, it can also give you the opportunity to groom your own successor and even perhaps give you some continued say in the business. On the downside, developing a family succession plan can be enormously difficult because of the emotions and issues involved. A business owner may choose to sell her enterprise in order to retire or use the proceeds to start a new venture. This often occurs in family businesses where the operation is passed from one family member to another. In these situations, the seller takes comfort in knowing that his venture will operate in the same way that he conducted the business.

To some, an exit strategy sounds negative. Actually, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. This allows you to run your startup and focus efforts on things that make it more appealing and compelling to the short list of acquirers or buyers you target. The type of business you choose should depend on your goals, and the way you grow it should be aligned with your exit strategy. Don’t wait till you are in trouble to think about an exit, rather think of it as a succession plan, or a successful transition. The best exit strategy is the one that best fits your business and your personal goals. Decide first what you want to walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then family succession or selling to employees might be best for you. Whichever exit strategy you choose; you need to start working on it. Planning in advance gives you the time to do it right – and maximize your returns.

Practical Study

Polka is the name of ice-cream that emerged prior to the 90s and was officially the first ice-cream manufacturers in Pakistan. The logo, comprised of three children indulgently licking ice-cream, was a common image in every Pakistani household in the pre-90s epoch. The Polka group had three factories in Hub, Karachi and Lahore, respectively. It employed more than 700 people and had a combined turnover of some Rs. 725 million in 1994, according to the data supplied by the firm itself. Of the three companies of Polka groups, Pakistan Industrial Promoters (Pvt) Limited (PIPLPIPL Port Isabel Public Library (Port Isabel, TX) was incorporated in 1970, the second factory was manufactured in Lahore, named Mehran International Limited (Pvt) (MIL) which was incorporated in 1975 and ultimately, a branch was inaugurated in Karachi under the name of Ambrosia International Limited (Pvt) (ALL) which was incorporated in 1984 and has a factory in Hub. Ambrosia is a public limited company while the other two are private limited companies. Products of the triad were marketed under the Polka brand name. AIL also produced Move pick under license.

The Polka-Unilever Merger:

A suitable example of a merger that took place in Pakistan would be that be of the Unilever-Polka merger. Unilever acquired the shares of Ambrosia International Ltd., Mehran International Ltd., and Pakistan Industrial Promoters Ltd., which form what is often called the Polka group of ice-cream companies. In 1994, Lever Brothers Pakistan appeared on the scene and tried to acquire Polka Ice Cream for a hefty amount of Rs 600 million. Polka refused the bid and instead demanded Rs. 1 billion to close the deal. But one year after the launch of Wall's Ice Cream by Lever Brothers in 1995, Polka approached Wall's with an offer to merge the two companies. Walls accepted and subsequently, Polka was merged into Walls. At the time of the merger, the total production of Polka ice-cream in Pakistan was 13 million tons while that of Walls ice-cream was four million tons. Unilever's international expertise in ice-creams and Polka's long experience of the Pakistan ice-cream market are expected to bring significant benefits to the Pakistani consumer.

Conclusion

Every entrepreneur who starts a new venture should think an exit strategy. Actually, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. So every businessman who starts his or her business should plan an exit strategy before going to business, it will give time to do right and maximize the returns.