Exit strategies

By Tormod H. Stikbakke

business developer @InsjUiO

What is an exit strategy?

An exit strategy is a strategic plan that a business owner has to sell the business, or parts of the business to investors. An exit plan gives the owner a way to reduce or liquidate their stake in a business and make money if the business succeeds. If the business is doing badly, the exit strategy helps to limit the loss of money. Investors also make such a plan for how they can get back the money they have invested. 

Tormod Stikbakke

Tormod H. Stikbakke - business developer 

Why do you need an exit strategy?

The founder of a company will leave the company at some point. However, an exit strategy is not just a plan for when and how a founder or owner quits. It is a plan that will convey what the goals of the company are. Some companies aim to be sold as soon as possible. Such companies need a different strategy than a company that wants to grow step by step alone. From the beginning of the entrepreneurial journey, the entrepreneur should answer this: how do you want to protect investments and limit losses? This question will help you guide the decisions you make as a business owner or founder.

 

Different exit strategies

There are several different exit strategies. An exit strategy may involve selling some shares in the company or selling the company altogether. When deciding what goals to have for your business, you should look at the various exit strategies described below.

    • Strategic acquisition: when another company buys your business. With this strategy, you give up the ownership of the company to the company you are selling it to.
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    • Do not sell: You do not have to sell the company. Several large companies do not sell and remain private in the long run. Investors can still get a return on their investment along the way by distributing parts of the company's profits as dividends. However, this means that the company takes away money that can be used for investments back in the company.
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    • Merger: an exit strategy where you and another company merge into a new company. There are several reasons to do this and ways to do it. They are usually made to expand into new segments, expand the company's reach or gain market share.
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    • Initial Public Offerings (IPO) / IPOs: a company is listed on a stock exchange and is therefore the first time the public can buy shares in your company. Upon listing, the owner (s) sells a percentage of the shares to the public. IPOs are considered to be the most prestigious and most profitable, but are also expensive to go through and the costs of maintaining a listed company are high.
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    • Liquidation: an exit strategy where you liquidate the company by selling the assets, paying down debt and restoring money to creditors and investors. This is rarely the preferred option, but is sometimes necessary.

 

5 questions you should ask before creating an exit strategy

  1. What is your goal for the business? To grow into a big company or to sell it fast?
  2. Are you the sole owner of the company or are there several shareholders?
  3. What field is your business in?
  4. What time frame do you have as an owner in the business?
  5. Does your business have a large competitor, or are you alone in the market?

 

If you are interested in learning more about exit strategies, book Built to Sell: Creating a Business That Can Thrive Without You, by John Warrillow, be a great place to start. This is a good book to read about how to build a business so that it can survive when you are no longer a part of it.