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Exit plans are necessary to secure a business owner’s financial future, but many don’t think to establish one until they’re ready to leave.
An exit strategy is an important consideration for business owners, but it’s often overlooked until significant changes are necessary. Without planning an exit strategy that informs business direction, entrepreneurs risk limiting their future options. To ensure the best for your business, plan your exit strategy before it’s time to leave.
What is an exit strategy?
An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.
A fully formed exit strategy takes all business stakeholders, finances and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business and provide a foundation for future goals and new direction.
If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.
[Read more: What Is a Business Valuation and How Do You Calculate It? ]
Benefits of an exit strategy
Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.
Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:
- Making business decisions with direction . With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes.
- Remaining committed to the value of your business . Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best selling situation for your business.
- Making your business more attractive to buyers . Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and goals.
- Guaranteeing a smooth transition . Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions will be clear and expected.
- Seeing through business — and personal — goals after exit . Executing an exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like bankruptcy.
Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.
Weighing your options: closing vs. selling
There are two strategies to consider for your exit plan.
Sell to a new owner
Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.
In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because:
- The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
- The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
- The transition for your employees and customers will be a smooth one since the buyer likely already has a stake in the business.
However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to compromise on value and sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.
Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.
The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.
[Read more: 5 Things to Know When Selling Your Small Business ]
Liquidate and close the business
It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.
Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry and then closing up shop.
The benefit of this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.
The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.
Whichever way you decide to liquidate, before closing your business for good, these important steps must be taken:
- File your business dissolution documents.
- Cancel all business expenses that you no longer need, like registrations, licenses and your business name.
- Make sure your employee payment during closing is in compliance with federal and state labor laws.
- File final taxes for your business and keep tax records for the legally advised amount of time, typically three to seven years.
Steps to developing your exit plan
To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Prepare your finances . The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally. Having a sound understanding of expenses, assets and business performance will help you seek out and negotiate for an offer that’s aligned with your business’s real value.
- Consider your options . Once you have a complete picture of your finances, consider several different exit strategies to determine your best option. What you choose depends on how you envision your life after your exit — and how your business fits into it (or doesn’t). If you have trouble making a decision, it may be helpful to speak with your business lawyer or a financial professional.
- Speak with your investors . Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid. A detailed understanding of your finances will be useful for this, since investors will look for evidence to support your plans.
- Choose new leadership . Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans. If you already have documented operations in practice in your business strategy, transitioning new responsibilities to others will be less challenging.
- Tell your employees . When your succession plans are in place, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent.
- Inform your customers . Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.
The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.
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How to Create an Exit Strategy Plan
In order to capture and share the critical information regarding your exit plan in an organized and easy-to-reference format, I recommend an approach like the one used by the increasingly popular business model canvas (BMC).
The BMC is a lean startup template. It depicts in a simple, yet highly informative visual layout the nine essential building blocks of a business model: customer segments , value propositions, channels , customer relationships , revenue streams, key resources, key activities, key partnerships and cost structure. This brings us to what I call the exit strategy canvas (ESC) as a template for your exit plan.
The main goal of the ESC is to document the essential building blocks of your exit strategy and create a shared language for communicating and iterating on your exit plan. I recommend that you lay out the ESC on one page to focus on what is absolutely critical and essential.
I recommend that you include the following essential building blocks in your ESC.
6 Essential Building Blocks of an Exist Strategy
- Success definition : What would a successful exit look like?
- Core hypotheses : What do you have to believe to be true for a successful exit to happen?
- Strategic opportunities : What are key areas for value creation through partnerships?
- Key acquirers : Who are your potential acquirers, and what are your selection criteria?
- Risks and challenges : What can jeopardize a successful sale to an acquirer?
- Key mitigants : What can you do to improve your chances of a successful sale?
The entire exit strategy is worthless unless it is crystal clear to all involved what specific outcome an exit is intended to achieve. Once everyone understands the destination, then they can support the journey.
For many entrepreneurs, a successful exit is one that ensures the survival of their startup. And this survival is all about the continuation of what lies at the heart of a startup’s core values and what the founding team considers to be a part of their personal legacy. That may consist of taking its products from a regional offering to the national or global level, creating new distribution channels, or enabling new features that can make it appealing to wholly new customer segments.
As you consider breathing life into your dream scenario, make sure your definition of success answers the following:
- How would an exit best manifest the values of your startup?
- How could an exit best promote the mission of your startup?
- What would be the ideal time frame for an exit transaction?
The next task is to make explicit what you would have to believe to be true for that outcome to manifest. Explicitly stating your assumptions helps you and other team members to discuss and gain clarity about what are the necessary conditions for success, and use them to gauge your future progress.
For example, if a successful exit for you would entail providing growth opportunities for your employees, then at the time of the acquisition you have to believe that your employees have sufficient skills and expertise of value to an acquirer. Thus, stating the hypothesis allows you and your team to reflect on whether this holds true for the current state of affairs, and if not, what you can do to make that a reality going forward.
To adopt a more quantitative approach, especially if your definition of success has a valuation threshold, you need to investigate and make explicit what it would take to justify your valuation goal based on either other comparable transactions or public market valuation benchmarks. Your desired valuation will likely necessitate achieving a certain set of financial (e.g., revenues, margin, profitability profile, or unit economics) or user (e.g., customer size, growth rate) metrics. A specific valuation goal makes it much more efficient for you to screen and filter acquisition opportunities as they arise.
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In its simplest form, strategic opportunities are the key areas for value creation with your acquirer. They are the areas of complementarity between your strengths and those of the acquirer.
As such, to identify areas of strategic opportunity you have to start with a good sense of the strengths and weaknesses of your startup. Then, you need to consider the strengths and weaknesses of potential acquirers and how your strengths can fill in the missing piece for their weaknesses and vice versa. This is what is referred to as “synergy.”
If you have a prohibitively high cost of customer acquisition that prevents you from profitably growing and acquiring new customers at scale, you would have a strategic opportunity to partner with a company that has already figured out a way to acquire those customers at scale profitably but is looking for additional products to sell to those customers.
Think of companies in your ecosystem for whom you could fill a strategic need, such as adding revenue, adding profits, staving off a competitive threat, accelerating time to market for a product or service, or improving their market share.
As you enter into discussions with potential strategic partners, you will want to validate and revise your assumptions around areas of synergy and strategic opportunities and be on the lookout to uncover new areas to add to your list.
Enjoying the Excerpt? Check Out the Book! Exit Path: How to Win the Startup End Game
This is your wish list of potential acquirers. It will also serve as the list of potential strategic partners whom you will be building a business relationship with over the course of the coming months and years. Be as aspirational as possible. You are not looking for who could be an acquirer of your startup today; instead, you are looking for whom you would be thrilled to join forces with long-term.
For most cases, you could simply state the category or type of company. For a startup serving small businesses, you could refer to “domain registrars,” “website creation platforms,” “e-commerce tool providers” as potential acquirers.
Keep in mind that at this stage your goal is to provide directional guidance as to what are critically important criteria for assessing strategic partners and what the universe of those potential partners looks like.
Risks and Challenges
When considering your exit path, there are in general three types of risks that most businesses have to contend with: execution risk, market risk, and competitive risk.
Execution risk is a reflection of your core competencies, external relationships, reputation, and capitalization structure, all of which can make or break a successful exit. Weakness in your core competencies (such as an inability to manage the mergers and acquisitions process effectively, leadership gaps or a lack of a scalable business model) can stop many acquirers in their tracks. That is why building a strong business is table stakes for a successful exit.
Another often-overlooked risk factor in selling one’s startup is its capitalization structure: you increase your exit risk as you raise more money at higher valuations as well as when you grant voting rights to financial and strategic investors , as it reduces the founding team’s control and increases the possibility for others to block a transaction. It’s important that you understand the implication of those increasingly lofty valuations which at some point may render you “too expensive” for many acquirers.
More on Startups 4 Strategies for Growing a Company Without VC Funding
As those of us who have tried to sell a company during a market crash know, market risk is always around the corner, and changes in macroeconomic conditions can very much impact the appetite of potential acquirers without forewarning. Because market risk is always present, the more desperate you are to sell, the higher the impact of market risk will be on your startup, so it is ideal not to time a potential exit around a time when you think you will be running out of cash.
No matter how unique your startup’s offering is, there is always competition in the market. And thus there exists the competitive risk that your ideal potential acquirers snatch up your competitor instead. Be sure to identify and list your largest competitive threats as an important strategic reminder for your organization.
For each risk and challenge you identify, call out a clear and specific set of mitigants.
Mitigating execution risks and competitive risks will generally involve building the requisite capabilities and creating strong relationships with your potential acquirers. The best way to mitigate against market risks, in my opinion, is to increase your operating runway so that you can live through short-term market fluctuations.
Remember that the ESC is a tool intended to efficiently capture and communicate your exit plan. As you create your ESC, feel free to customize it to your own needs, modifying what is captured in each block or adding new blocks that you may find to be particularly well-suited for your startup’s unique set of values, challenges, and opportunities.
Excerpted from the book Exit Path: How to Win the Startup End Game by Touraj Parang, pages 44-53. Copyright © 2022 by Touraj Parang. Published by McGraw Hill, August 2022.
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Exit Strategies - All You Need to Know about Business Exit Planning
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
The question, “What is your exit plan?” tends to draw blank expressions when asked to business owners.
A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.
Business owners need to think about exit planning before searching for potential buyers. The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.
By working with a team of professional advisors, accountants, lawyers, and brokers, you can ensure the right documents are in place for a business exit whenever the time comes.
In this article, we talk about creating a business exit plan and how to make one for your business.
What is a Business Exit Strategy?
A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners don’t always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.
Investor exit strategy
An investor exit strategy is similar to that of a business exit strategy. However, investors look for a financial return on their exit from a company, so bequeathing is never one of the options considered. An investor will often have a list of potential acquirers in mind, as well as a timeframe, as soon as their investment is made. In this type of scenario, there is often an exit multiple in mind (i.e. a multiple of EBITDA or a multiple of the original investment made in the business).
Venture capital exit strategy
Another business exit strategy option is a venture capital exit strategy. As our article on venture capital outlines, if a company is venture funded then consider that your investor will have a pre-planned exit. As an early stage company, this is a natural part of taking investments. Usually, with a VC investment, the aim is for an exit after five years, either through an industry sale or an IPO, where they can liquidate their original equity investment.
Motives for Developing Exit Strategies
Technically, it is important for equity owners to have a broad outline of what an exit would look like. For example, the image below represents various motives ranging from financial gain to mitigating environmental risk.
Some of the common motives for business exit include the following:
Retirement - Arguably the most common reason of all motives is retirement. Business owners will inevitably retire at some stage, and it’s best that they have an exit strategy in place before doing so.
Investment return - A business exit strategy as part of a wider investment strategy - for example, the VC company planning to go to IPO after five years - makes the exit valuation part a component of the initial investment in the business.
Loss limit -A business exit is ultimately a kind of real option for a business. If the business is hemorrhaging money, the best option may be to exit immediately - ‘cutting your losses’ on the business, a sit was.
Force majeure - Like the examples of Covid-19 and Russia’s invasion of Ukraine, sometimes an investor or owner doesn’t really have a choice: The circumstances dictate that they have to exit.
Types of Exit Strategies
Sale to a strategic buyer
Strategic buyers are usually in the same industry as the company whose owner is looking to exit. And in other cases, the buyer can be in an adjacent market looking to compliment their products in an existing market, or expansion of their products into a market.
Sale to a financial buyer
Financial buyers are solely looking for a financial return from their investment in a business and the exit is the primary means of achieving this return. Examples include venture capital and private equity investors.
Initial Public Offering (IPO)
This form of exit, far more common with startups than mature companies, enables company owners to exit by selling their equity to investors in public equity markets.
Management buyout (MBO)
An exit through MBO would occur when the owner sells the company to its current management team, whose familiarity with the business technically should make them the best candidates to achieve value from an acquisition.
Leveraged buyout (LBO)
A leveraged buyout occurs when a buyer takes a loan or debt to purchase another company. The buyer also uses a combination of their assets and the acquired company's assets as collateral. Financial models can be used for multiple scenarios and simulations of when an LBO is an effective choice.
Liquidation can be used by a business owner to exit if they feel like the liquidation would yield cash faster or that the individual assets (i.e. property, plant, and equipment) of the business were more liquid than the business as a going entity.
Exit Strategy for Startups
Startups looking for VC investment can include an exit strategy as part of their initial pitch. It is not mandatory. Sometimes this can work when well, for example, when a startup founder is well versed in the industry and has a credible 5-year forecast.
Startup exit strategies depend on a few different factors:
How have IPOs for startups performed in the past 12-18 months? If public markets are showing enthusiasm for companies like the one being pitched, it makes it easier to show how an exit can occur.
Similar to IPOs, companies can use comparable transactions (industry or private equity sales) to show investors their route to an exit. The comparable firms should be operating in the same or close to the same competitive space.
How to Put Together a Business Exit Plan
Remember that the purpose of the plan is to make the new business owner transition as straightforward as possible.
Although the steps which follow are general, nobody knows a business better than its owner, so take whatever steps are necessary to make your business as marketable to potential buyers as possible.
These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Personal finances, family situations, and other career options are beyond the scope of this article.
Rather, the intention of the points below is to ensure that a business will be ready to sell in the fastest possible time at a fair price.
Business exit plan
- Know the business
- Ensure that finances are in order
- Pay off creditors
- Remove yourself from the business
- Create a set of standard operating procedures
- Establish (and train) the management team
- Draw up a list of potential buyers
1. Know the business
This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes ‘everything to every man.’
This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.
2. Ensure that finances are in order
This should be a priority regardless of any future business plans.
But if you intend to sell your business at short notice, it's best to have a clean, well-maintained set of financial statements going back at least three years.
3. Pay off creditors
The less debt that a business holds on its balance sheet, the more attractive it will be to potential buyers.
A common theme among small business owners in the US is thousands of dollars of credit card debt. This can be a red flag to many buyers and should be paid off as soon as possible.
4. Remove yourself from the business
How important are you to the day-to-day operations? If your business would lose more than 10% of its revenue were you to leave, the answer is “too important.”
If revenues are tied to the owner, buyers are not going to want to buy the business if the owner is going to leave right after.
Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.
5. Create a set of standard operating procedures
Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs), ideally in written form, that would allow any owner to maintain the business in working order merely by following a set of instructions.
6. Establish (and train) the management team
Are the existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ‘no’.
They may need more training, or you may need a different set of managers. In either case, having a capable team in place will be valuable whether you decide to exit your business or not.
7. Draw up a list of potential buyers
A list of buyers should be made and refreshed on a reasonably regular basis. Ideally, you would know their criteria for buying a business, but this is not always practical.
Keeping a long list of buyers means that you can reach out to them at short notice if it is required at some point in the future.
This list is likely to include at least some of your managers or suppliers.
Importance of Exit Strategy
Many owners make the mistake of thinking that a business exit plan means the same thing as a ‘retirement plan’, believing that they can start thinking about putting one together as soon as they hit 55 years of age.
This is an error. Not because your departure is impending, but because it doesn’t give you the flexibility.
Instead of looking at a business exit plan as a retirement plan, rethink it as a divestment option.
An alternative way of thinking about this is, what happens to the business owner that doesn’t have an exit strategy? Think of the value destruction that occurs to the business if something unexpected happens and the owner has to make an unplanned sale, at a discount, in unattractive market circumstances, or even at a time of personal loss.
Instead of thinking about the business exit as something that will happen in the future, rethink it as something that could happen at any moment.
Exercising critical thinking to write a business exit strategy can be exciting as well as enlightening. Thinking of an exit as an end state is not the best approach since this limits businesses to a strict definition. Rather, consider how the process can be supportive of a business' growth strategy. Take these top three considerations:
- Financial considerations: If the exit strategy has a target revenue number in 5 years then how will the business get there? What financial dashboards are needed to properly run the company? How will expenses be managed so a business does not outspend against earnings?
- Supply chain considerations: What products will need to be in your catalog to maximize margins? What inventory turns ratio are you aiming for on a monthly basis?
- People considerations: Who do I hire to grow the company exponentially? What benefits do I offer to attract the best talent but don't cause complications at the exit? How do I write the force majeure so I protect the company and employees?
A business's primary goal is long-term value generation to its customers, itself, and its stakeholders. Having a thoughtful exit strategy shows the maturity of a business's Leadership towards longevity and value creation. There are many facets of the journey from owner motivation to financial strategies.
At DealRoom we help the owners of businesses of all sizes prepare for this eventuality. Our Professional Services team is ready to help businesses think through these details. It is important that an exit strategy be a journey throughout the growth stages.
Talk to us about how our tools can be an asset for you in your exit plan.
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How to Plan Your Exit Strategy
8 min. read
Updated March 8, 2023
Many people start businesses with the goal of seeking acquisition. But others decide later that it’s time to move on—they’d like to pull their time and money out of a particular venture. It’s never too early (or too late) to start planning your exit strategy.
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What is the purpose of an exit strategy?
Who needs an exit strategy, should i include my exit strategy in my business plan, what type of exit strategy is right for my business, planning for the future.
An exit strategy is how entrepreneurs (founders) and investors that have invested large sums of money in startup companies transfer ownership of their business to a third party. It’s how investors get a return on the money they invested in the business.
Common exit strategies include being acquired by another company, the sale of equity, or a management or employee buyout.
For anyone seeking venture capital funding or angel investment , having a clear exit strategy is essential.
Even if you’re a small business, it’s a good idea to plan ahead and think about how you will transfer ownership of the business down the line, whether you choose to sell the business, or try to scale it and seek to be acquired. It’s never too early to plan.
Including your exit strategy in your business plan and in your pitch is especially important for startups that are asking for funding from angel investors or venture capitalists for funds to grow and scale.
Most of the time, small businesses don’t need to worry as much about it because they probably won’t seek investment (not all good businesses are good investments for angels and VCs). The small business founder’s goal might be to own the business themselves for the foreseeable future.
This list should give you an idea of common types of exit strategies. The type of strategy you adopt will depend on what type of company you are and your financial and strategic goals.
Here are some of the most common:
Acquisition, initial public offering (ipo), management buyout, family succession, liquidation.
The acquisition is often known as a “merger and acquisition.” This is because, when a company decides to sell itself to another company, the buyer will often incorporate or merge the services of that company into their own product or service offerings.
This happened when Google bought YouTube, seamlessly integrating the video platform into their own search product. Now, when you google a topic, you will often notice that videos appear on your search result page.
On a smaller scale, it might happen when a coffee chain decides to buy a bakery business so that they can add a line of pastries and tarts to their menu. An acquisition or merger can be an appropriate approach for businesses of all sizes, including startups.
The best thing about an acquisition is that if you get “strategic alignment” right, you stand to sell the company for more than it may actually be worth. And, if there are multiple companies interested in your product, you may be able to raise the price further or begin a bidding war!
Reasons an outside company might seek to acquire or merge with another company range from allowing them to break into a new market, to giving them a competitive edge, or a strong built-in customer base. Or they might be interested in eliminating you as a competitor from the current market.
If you know that being acquired is your exit strategy right from the start, this gives you room to make yourself appear attractive to the companies who may be interested in purchasing you. That said, remember that those particular companies may decide not to purchase you or may never have been interested in doing so. If you do go down the road of creating a very niche product only one specific company will be interested in, you also stand to lose big time if they don’t take the bait.
This exit strategy is right for a small number of startups and larger corporations, but is not suited to most small businesses, primarily because it means convincing both investors and Wall Street analysts that stock in your business will be worth something to the general public.
For smaller companies that have already begun expanding—like restaurants that have franchised —an IPO may be a good way for the owner to recoup money spent, though it is worth noting that he or she may not be allowed to sell stock until the lock-up period has passed.
A couple of well-known examples of restaurants on the stock exchange include Buffalo Wild Wings and BJ’s .
If you think this is the right strategy for you, or you want to at least have the option of going public later, the easiest way to get listed is to seek investors that have done it before with other companies. They will know the ins and outs and be able to better prepare you for the process.
Speaking of the process—it’s long and hard. If you do succeed in winning over the hearts and data-centric minds of Wall Street analysts, you’ve still got to conform to the standards set by the Sarbanes-Oxley Act , you will have underwriting fees you’ll need to pay, a potential “lock-up period” preventing you from selling your shares, and of course, the risk of seeing the stock market crash.
While an IPO may be a suitable route for a company like Twitter or Macy’s, consider whether or not you want to weather the headache of tailoring business decisions to the market and to what analysts believe will do well.
If you’ve built a business whose legacy you want to see continued long after you’re gone, you may want to consider turning to your employees.
That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work.
There’s also the added bonus that you’ll have to do a lot less due diligence. Having management or employees buy your business is a good idea if legacy matters most to you. Of course, you could always consider passing the business on to family, but there’s always the risk there that they won’t understand the business, won’t have the determination to make it succeed, and if you’re splitting the business between family members, the possibility of family rivalry.
On that note, if your family has been brought up with an intimate knowledge and understanding of your business, they may well be the best people to pass things on to.
In fact, this is exactly what happened at Palo Alto Software. Founded by Tim Berry in 1988, his daughter Sabrina Parsons was made CEO and her husband Noah the COO shortly before the recession hit.
The decision was strategic and allowed Tim to pursue other interests, including putting a focus on writing . Since then, Sabrina and Noah have adapted the flagship desktop-based business planning product, Business Plan Pro , into a SaaS tool called LivePlan .
Passing Palo Alto Software on to family was more fortuitous than carefully planned. Tim had always encouraged his children to follow their own path. In fact, none of them got degrees in business. It just so happened that Sabrina and Noah had entered the internet world early in their careers and gained the experience necessary to join and build out Palo Alto Software’s product offerings.
If you are considering passing your business on to your children or other family members, there are a number of things worth thinking about and planning for, including ensuring that whoever is set to take over the business has the relevant skill set, is competent, and is committed to the future and success of the business. This will make it a lot easier to retire.
For small businesses, liquidation is a common exit strategy. It’s one of the fastest ways to close a business, and may sometimes be the only option in cases where the operation of the business is dependent solely upon one individual, where family members are not interested in or capable of taking over, and where bankruptcy is close at hand.
It’s worth noting though that any profits made from selling assets need to be used to pay creditors first.
To make any money using liquidation as an exit strategy, you’re going to have to have valuable assets you can sell—like land, equipment, and so on.
If it’s not too much hassle and if your decision to liquidate is not related to finances, think instead about selling the business to the public. Are there any ways you can make it appealing?
If this isn’t an option and it’s better to close the doors before you lose money, liquidating your assets may be your best bet.
If you’re putting together your business plan or preparing to pitch to investors for the first time, think through your exit strategy. Make sure your financials are up to date and that you’re reviewing them regularly so your business’s valuation is accurate.
If your successful exit is tied up in hitting certain financial milestones, don’t hesitate to ask your strategic business advisor for some guidance. There are other things you can do to prepare your business for acquisition and other exits— check out this article for more information.
Candice is a freelance writer, jeweler, and digital marketing hybrid.
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Business Exit Strategy: Definition, Examples, Best Types
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
What Is a Business Exit Strategy?
A business exit strategy is an entrepreneur's strategic plan to sell his or her ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate his stake in a business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy (or "exit plan") enables the entrepreneur to limit losses. An exit strategy may also be used by an investor such as a venture capitalist in order to plan for a cash-out of an investment.
Business exit strategies should not be confused with trading exit strategies used in securities markets.
- A business exit strategy is a plan that a founder or owner of a business makes to sell their company, or share in a company, to other investors or other firms.
- 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.
- If the business is struggling, implementing an exit strategy or "exit plan" can allow the entrepreneur to limit losses.
Understanding Business Exit Strategy
Ideally, an entrepreneur will develop an exit strategy in their initial business plan before actually going into business. The choice of exit plan can influence business development decisions. Common types of exit strategies include initial public offerings (IPO) , strategic acquisitions , and management buyouts (MBO) . Which exit strategy an entrepreneur chooses depends on many factors, such as how much control or involvement (if any) they want to retain in the business, whether they want the company to be run in the same way after their departure, or whether they're willing to see it shift, provided they are paid well to sign off.
A strategic acquisition, for example, will relieve the founder of his or her ownership responsibilities, but will also mean the founder is giving up control. IPOs are often seen as the holy grail of exit strategies since they often bring along the greatest prestige and highest payoff. On the other hand, bankruptcy is seen as the least desirable way to exit a business.
A key aspect of an exit strategy is business valuation , and there are specialists that can help business owners (and buyers) examine a company's financials to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.
Business Exit Strategy and Liquidity
Different business 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, and a management buyout may not be attractive to a buyer when interest rates are high.
While an IPO will almost always be a lucrative prospect for company founders and seed investors, these shares can be extremely volatile and risky for ordinary investors who will be buying their shares from the early investors.
Business Exit Strategy: Which Is Best?
The best type of exit strategy also depends on business type and size. A partner in a medical office might benefit by selling 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 an exit strategy as well.
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Resources: M&A Encyclopedia
Comprehensive articles on every step of the process of buying or selling a business from the most exhaustive encyclopedia of M&A articles in the industry.
Business Exit Plan & Strategy Checklist | A Complete Guide
It’s not enough to merely hand over the keys at the closing. You need a strategy. An exit strategy.
An exit strategy, as the term implies, is a plan to assist you in exiting your business. All exit plans will vary, but they all contain common elements.
The three common elements that all business exit strategies should contain are:
- A valuation of your company. The process of valuing your company involves three steps, the first being an assessment of the current value of your business. Once this value is calculated, you should plan how to both preserve and increase that value.
- Your exit options. After you have determined a range of values for your company and developed plans for preserving and increasing this value, you can begin exploring your potential exit options. These can be broken down into inside, outside, and involuntary exit options.
- Your team. Finally, you should form a team to help you prepare and execute your exit plan. Your team can consist of an M&A advisor, attorney, accountant, financial planner, and business coach.
If you are considering selling your business in the near future, planning for the sale is imperative if you want to maximize the price and ensure a successful transaction. This article will give you a solid understanding of these elements and how you can put them together to orchestrate a smooth exit from your business.
Table of Contents
- Measure the Value
Preserve the Value
Increase the value, inside exit options, outside exit options, involuntary exit options, team members, the annual audit, business exit plan strategy component #1: valuation.
Your exit strategy should begin with a valuation, or appraisal, of your company. The process of valuing your company involves three steps, the first being an assessment of the current value of your business. Once this value is calculated, you should then plan how to both preserve and increase the value of your business.
Let’s explore each of these components — assess, preserve, increase — in more depth.
Assess the Value
The first step in any exit plan is to assess the current value of your business.
Here are questions to address before beginning a valuation of your company:
- Who will value your company?
- What methods will that person use to value your company?
- What form will the valuation take?
Who: Ideally, whoever values your company should have real-world experience buying and selling companies , whether through business brokerage, M&A, or investment banking experience. They should also have experience selling companies comparable to yours in size and complexity. Specific industry experience related to your business is helpful, but not essential, in our opinion. There are loads of professionals out there who possess the academic qualifications to appraise your business but who have never sold a company in their lives. These individuals can include accountants or CPAs, your financial advisor, or business appraisers. It is essential that your appraiser have real-world M&A experience. Without hands-on experience buying and selling companies comparable to yours, an appraiser will be unprepared to address the myriad nuances of the report or field the dozens of questions that will arise after preparing the valuation.
Action Step: Ask whoever is valuing your business how many companies they have sold and what percentage of their professional practice is devoted to buying and selling businesses versus other activities.
What Methods: Most business appraisers perform business valuations for legal purposes such as divorce, bankruptcy, tax planning, and so forth. These types of appraisals differ from an appraisal prepared for the purpose of selling your business. The methods used are different , and the values will altogether be different as well. By hiring someone who has real-world experience selling businesses, as opposed to theoretical knowledge regarding buying and selling businesses, you will work with someone who will know how to perform an appraisal that will stand the test of buyers in the real world.
Form: Your M&A business valuation can take one of two forms:
- Verbal Opinion of Value: This typically involves the professional spending several hours reviewing your financial statements and business, then verbally communicating an opinion of their assessment to you.
- Written Report: A written report can take the form of either a “calculation of value” or a “full report.” A calculation of value cannot be used for legal purposes such as divorce, tax planning, or bankruptcy, but for the purpose of selling a business, either type is acceptable.
Is a verbal or written report preferable? It depends. A verbal opinion of value can be quite useful if you are the sole owner and you do not need to have anyone else review the valuation.
The limitations of a verbal opinion of value are:
- If there are multiple owners, there may be confusion or disagreement regarding an essential element of the valuation. If a disagreement does arise, supporting documentation for each side will be necessary to resolve the disagreement.
- You will not have a detailed written report to share with other professionals on your team, such as attorneys , your accountant, financial advisor, and insurance advisor.
- The lack of such a detailed report makes it difficult to seek a second opinion, as the new appraiser will have to start from scratch, adding time and money to your process.
For the reasons above, we often recommend a written report, particularly if you are not planning to sell your business immediately.
We have been involved in situations in which CPA firms have valued a business but had little documentation (one to two pages in many cases) to substantiate the basis of the valuation.
In one example, the CPA firm’s measure of cash flow was not even defined; it was simply listed as “‘cash flow.” This is a misnomer as there are few agreements regarding the technical definition of this term. As a result, any assumption we might have made would have led to a 20% to 25% error at minimum in the valuation of the company. By having a written report in which the appraiser’s assumptions are documented, it is simple to have these assumptions reviewed or discussed.
Note: When hiring someone to value your company, you are paying for a professional’s opinion but keep in mind that this opinion may differ from a prospective buyer’s opinion. Some companies have a narrow range of value (perhaps 10% to 20%), while other companies’ valuations can vary wildly based on who the buyer is, often by up to 100% to 200%. By having a valuation performed, you will be able to understand the wide range of values that your company may attain. As an example, business appraisers’ valuations often contain a final, exact figure, such as $2,638,290. Such precision is misleading in a valuation for the purpose of a sale. We prefer valuations that result in a more realistic price range, such as $2,200,000 to $2,800,000. An experienced M&A professional can explain where you will likely fall within that range and why.
Once you have established the range of values for your company, you should develop a plan to “preserve” this value. Note that preserving value is different from increasing value. Preserving value primarily involves preventing a loss in value.
Your plan should contain clear strategies to prevent catastrophic losses in the following categories:
- Litigation: Litigation can destroy the value of your company. You and your team should prepare a plan to mitigate the damaging effects of litigation. Have your attorney perform a legal audit of your company to identify any concerns or discrepancies that need to be addressed.
- Losses you can mitigate through insurance: Meet with your CPA, attorney, financial advisor, and insurance advisor to discuss potential losses that can be minimized through intelligent insurance planning. Examples include your permanent disability, a fire at your business, a flood, or other natural disasters, and the like.
- Taxes: You should also meet with your CPA, attorney, financial advisor, and tax planner to mitigate potential tax liabilities.
Important: The particulars of your plan to preserve the value of your company also depend on your exit options, which we will discuss below. Many elements of your exit plan are interdependent. This interdependency increases the complexity of the planning process and underscores the importance of a team when planning your exit.
Only after you have taken steps to preserve the value of your company should you begin actively taking steps to increase the value of your company.
There is no simple method or formula for increasing the value of any business. This step must be customized for your company.
This plan begins with an in-depth analysis of your company, its risk factors, and its growth opportunities. It is also crucial to determine who the likely buyer of your business will be . Your broker or M&A advisor will be able to advise you regarding what buyers in the marketplace are looking for.
Here are some steps you can take to increase the value of your business:
- Avoid excessive customer concentration
- Avoid excessive employee dependency
- Avoid excessive supplier dependency
- Increase recurring revenue
- Increase the size of your repeat-customer base
- Document and streamline operations
- Build and incentivize your management team
- Physically tidy up the business
- Replace worn or old equipment
- Pay off equipment leases
- Reduce employee turnover
- Differentiate your products or services
- Document your intellectual property
- Create additional product or service lines
- Develop repeatable processes that allow your business to scale more quickly
- Increase EBITDA or SDE
- Build barriers to entry
Note: A professional advisor can help you ascertain and prioritize the best actions for your unique situation to increase the value of your business. Unfortunately, we have seen owners of businesses spend three months to a year on initiatives to increase the value of their business, only to discover that the initiatives they worked on were unlikely to yield any value to a buyer.
Business Exit Strategy Component #2: Exit Options
After you have determined a range of values for your company and developed plans for preserving and increasing this value, you can begin exploring your potential exit options.
Note: These steps are interdependent. You can’t determine your exit options until you have a baseline valuation for your company, but you can’t prepare a valuation for your business until you have explored your exit options. A professional can help you determine the best order to explore these steps, or if the two components should be explored simultaneously. This is why real-world experience is critical.
All exit options can be broadly categorized into three groups:
- Inside: Buyer comes from within your company or family
- Outside: Buyer comes from outside of your company or family
- Involuntary: Includes involuntary situations such as death, divorce, or disability
Inside options include:
- Selling to your children or other family members
- Selling to your business to your employees
- Selling to a co-owner
Inside exits require a professional who has experience dealing with family businesses, as they often involve emotional elements that must be navigated and addressed discreetly, gracefully, and without bias. Inside exit options also greatly benefit from tax planning because if the money used to buy the company is generated from the business, it may be taxed twice. Lastly, inside exits also tend to realize a much lower valuation than outside exits. Due to these complexities, most business owners avoid inside exits and choose outside options. Fortunately, most M&A advisors specialize in outside exit options.
Outside exit options include:
- Selling to a private individual
- Selling to another company or competitor
- Selling to a financial buyer, such as a private equity group
Outside exits tend to realize the most value. This is also the area where business brokers, M&A advisors, and investment bankers specialize.
Involuntary exits can result from death, disability, or divorce. Your plan should anticipate such occurrences, however unlikely they may seem, and include steps to avoid or mitigate potential adverse effects.
Business Exit Strategy Component #3: Team
Finally, you should form a team to help you plan and execute your exit plan. Many of these steps are interdependent — they are not always performed sequentially, and some steps may be performed at the same time. Forming a team will help you navigate the options and the sequence.
Your team should involve the following:
- M&A Advisor/Investment Banker/Business Broker: If you are considering an outside exit.
- Estate planning
- Financial planning
- Tax planning, employee incentives, and benefits
- Family business
- Accountant/CPA: Your accountant should have experience in many of the same areas as your attorney, along with audit experience and retirement planning. Again, it is unlikely that your CPA possesses all of the skills you need. If further expertise is needed, the CPA should be able to access the skills you need, either through colleagues at their firm or by referral to another accountant.
- Financial Planner/Insurance Advisor: This team member is critical. We were once in the late stages of a sale when the owner suddenly realized that, after deducting taxes, his estimated proceeds from the sale would not be enough to retire on. An experienced financial planner can help with matters like these. They should have estate and business continuity planning experience, as well as experience with benefits and retirement plans.
- Business Coach: A business consultant or coach may be necessary to help implement many of the changes needed to increase the value of your business, such as building infrastructure and establishing a strong, cohesive management team. Doing this often requires someone who can point out your blind spots. A coach can help you take these important steps.
Where to find professionals for your team
The best way to find professionals for your team is through referrals from trusted friends and colleagues who have personally worked with the professional in question. Don’t ignore your intuition, however. It’s important that you and your team members have good chemistry.
We recommend that you assemble your professional advisors for an annual meeting to perform an audit of your business. The goal of this audit is to prevent and discover problems early on and resolve them. As the saying goes, “An ounce of prevention is worth a pound of cure.”
Your advisors are a valuable source of information. This annual meeting is an opportunity to ensure that they’re all on the same page and that there are no conflicts among your legal, financial, operational, and other plans. An in-person or virtual group meeting enables you to accomplish this quickly and efficiently.
A sample agenda might include a review of the following:
- Your operating documents
- New forms of liability your business has assumed
- Any increase in value in your business and changes that need to be made, such as increases in insurance or tax planning
- Capital needs
- Insurance requirements and audit, and review of existing coverages to ensure these are adequate
- Tax planning — both personal and corporate
- Estate planning — includes an assessment of your net worth and business value, and any needed adjustments
- Personal financial planning
If you are contemplating selling your business, creating an exit plan will answer these critical questions:
- How much is my business worth? To whom?
- How much can I get for my business? In what market?
- How much do I need to make from the sale of my business to meet my goals?
Taking the strategic steps discussed in this article — assembling a stellar professional team and optimizing the team’s collective experience — will get you well on your way toward successfully selling your business and turning confidently toward your next adventure.
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Writing an Exit Strategy
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An exit strategy is a plan to close a business and distribute its assets in a profitable way. It’s important to have an exit strategy in place even when the reason for closing is a positive one, such as retirement or the sale of a business. Writing an exit strategy allows business owners to ensure their business will have a smooth transition and that their assets — both financial and strategic — are passed on in a way that will benefit them most.
Definition of an Exit Strategy
An exit strategy is a set of procedures and processes that will enable the business to have a graceful closure. It focuses on preserving assets and winding up operations. It should also set out a plan for the future, determine how assets are to be handled, and identify timelines for completion of the strategy. An exit strategy plan should take into account all legal and financial requirements.
Reason for Writing an Exit Strategy
Many business owners set up an exit strategy as a backbone for their business. An exit strategy plan accounts for the future of the business and serves as a framework for decisions such as what services to offer, how to manage finances, and how to maximize revenues. It also serves as a plan of action in the event of unforeseen circumstances such as a downturn in the market or a major change in the business landscape. An exit strategy should provide the foundation to ensure a successful transition.
- It can help mitigate risk by creating a plan to address unexpected changes.
- It can provide clarity and security for a business.
- It can help a business owner capitalize on opportunities to maximize the profitability of their business.
- It can provide peace of mind that the business will be transitioned smoothly.
The Process of Writing an Exit Strategy
Writing an exit strategy requires careful planning and consideration. The process should involve researching the market, setting a timeline, determining your goals, and formulizing a financial plan.
Research the Market
The market should be studied in order to get a better understanding of the field and area it operates in. Knowing the potential buyers, industry trends, and the overall landscape will help create a suitable exit strategy.
Establish a Timeline
Decide on a timeline for the implementation of the exit strategy. It may take months or even years to implement, depending on the size and scope of the business. Mapping out a timeline will help to keep the process on track.
Determine Your Goals
Setting specific goals for the exit strategy will help keep the process focused and organized. Consider the financial goals, the timeline to meet them, and how the strategy will align with the overall vision of the business.
Create a Financial Plan
Craft a financial plan for the exit strategy. Think about the financial risks and determine how to manage them. Consider the costs involved and what investments may be necessary to ensure success. A financial plan will help to maximize the return from the exit strategy.
3. Considerations When Writing an Exit Strategy
Writing an exit strategy for your business is an important task that provides business owners with a plan for exiting their company. Crafting a successful strategy requires taking into account numerous aspects, including raising capital, calculating market value, and investigating potential buyers.
a. Raise capital
Raising capital is essential when developing an exit strategy, as it will provide the owner with the necessary funds needed to exit the business. Entrepreneurs may choose to take out a loan, accept a private investor, or receive capital from a venture capital fund.
b. Calculate market value
Calculating market value of the business helps owners to determine the estimated worth of their company for potential buyers. Carefully assessing the current value of the business allows owners to set the sale price that buyers are willing to pay in order to purchase the business.
c. Investigate potential buyers
Investigating potential buyers is important in order to locate qualified buyers who are willing to purchase the business. Business owners need to carefully research and vet potential buyers to ensure they have the necessary funds and the right connections to purchase the company at the sale price.
Consider Legal Advice
When it comes to exiting a business, there is often a lot of legal considerations such as formalizing the process, identifying tax opportunities, and drafting contracts. Having professional legal advice is key in order to ensure that all legal requirements are met and that you are making decisions that are in your best interests. Here are some key steps to consider when seeking legal advice.
Formalize the Process
Having a plan that is clear and formalized is important when moving forward with an exit strategy. Depending on the type of business, there may be different regulatory and legal requirements that need to be met as part of the process. Having a legal professional familiar with these regulations can be invaluable to help ensure that everything is done correctly.
Identify Tax Opportunities
Tax implications can be a major factor when deciding to exit a business. Not only can working with a legal professional help to make sure that you are in compliance with all tax regulations, but it is also important to be aware of any tax credits, deductions, or other opportunities which can help to minimize your taxes. This can be a complex area, so being able to draw upon the expertise of a legal professional is key.
When it comes to exiting a business, it is likely that contracts will need to be drafted. In order to have legally binding agreements, it is important to have the terms drafted in an appropriate manner that is compliant with any relevant regulations. A legal professional can help to ensure that contracts are drafted correctly and that the appropriate parties are involved.
Market and Market the Exit Strategy
When creating an exit strategy for a company, the first step is to assess the competitive landscape. Understanding how the brand fits in with others and how the competition is affecting the space is important in developing a successful exit strategy. Once the competitive landscape has been assessed, the company should make efforts to connect with industry leaders and build relationships with those already established in the market.
Assess Competitive Landscape
When building an exit strategy, it’s important to understand the competitive landscape. Companies should gain insights into the competitive advantages and competitive threats they face. Having a clear picture of the competitive environment allows the company to develop a competitive strategy, including initiatives to counter the competitive threat and capitalize on competitive advantages.
Connect with Industry Leaders
To ensure that a company’s exit strategy is successful, it’s necessary to build relationships with industry leaders. This can be accomplished by networking at conferences, attending trade shows, participating in business associations and tapping into professional connections. It's also important to research the different professionals that lead the industry and contact them. By connecting with key industry players, the company can gain insights into the opportunities and risks associated with their exit strategy.
Once the company has identified industry leaders, the next step is to build relationships with them. This can be done by offering valuable advice and a fresh perspective, as well as by engaging in conversations on social media. Companies should also look for ways to collaborate with industry leaders and create cross-promotional opportunities. Building strong relationships will help ensure the success of the exit strategy, as these relationships can open the door to potential funding and valuable insights.
Monitor Ongoing Updates
After your exit strategy has been implemented, it is necessary to monitor any changes that may have an impact on the plan. Collecting information on updates that occurred during the transition is key to understanding the effectiveness of the plan. These updates include changes in regulatory requirements, new technologies, and changing customer preferences, among others.
Assess Risk and Impact
It is critical to assess any potential risks resulting from the updates that could negatively affect the exit strategy. Companies should consider threats from legal, environmental, financial, and operational perspectives. Among others, the assessment should include developing strategies to mitigate risk, determining the economic impact of the changes, and understanding the psychology of stakeholders.
Reanalyze Exit Strategy
Once the risks associated with updates have been identified and their impact assessed, companies should consider how to adapt the exit strategy to align with the changes. This includes a comprehensive examination of the current plan and taking into account the updates and any new business objectives.
Make Necessary Changes
After the reanalysis of the exit strategy, companies should make changes when necessary to address any potential risks. Companies should be prepared to modify or adjust the strategy over time, depending on the complexity of the exit and any new updates. Businesses should also be open to feedback from any stakeholders involved in the plan.
Writing an exit strategy for your business is an important part of effective management. Taking time to thoroughly analyze the tools and processes of your business is essential for making sure your exit strategy is successful.
In this post, we discussed the importance of an exit strategy and the steps necessary for creating an effective one. We looked at the need for an early understanding of options through research and strategic planning. We delved into the components of a successful plan and looked at ways to create an exit strategy that meets your goals.
Summarize Key Points
- An exit strategy is an important part of effective management.
- Researching the options is essential, as it gives you a better understanding of what is available and which option is right for you.
- Creating a strategic plan is also essential, as it ensures that you are making decisions with a clear direction in mind.
- Components of a successful plan include market analysis, financial planning, and legal considerations.
- Implementing an exit strategy can be difficult but is worth the effort.
Highlight Importance of Exit Strategy
An effective exit strategy is essential for a successful business. It helps you align your short-term and long-term goals, ensures that you are planning for the future, and provides peace of mind in knowing that you have a plan for exiting your business when the time is right.
Stress Need for Thorough Analysis
Writing an exit strategy can be a daunting task, but it is essential to make sure that your business is prepared for the future. Creating a thorough plan requires research, strategic thinking, and the right resources to make sure that you are making the right choices for your business. Taking the time to analyze the process and plan accordingly is the best way to ensure that your exit strategy is successful.
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Your business exit strategy in 9 steps
You’ll leave your business some day, so how do you make sure it’s on the best possible terms?
What is a business exit strategy?
An exit strategy is a plan for wrapping up your involvement in a business. For most people, that means readying the business for a change of owner. Executing a well thought-out exit strategy can increase your sale price, while ensuring the business continues to thrive after you’ve left. This can also be called succession planning. What does it involve?
Succession planning definition and goals
The aim is to leave your business in the best possible shape for a new owner. That means it should be operating at peak profitability, the books should be spick and span, and all your processes will be written down so a stranger can come in and run the place. Oh, and the business won’t need you anymore – no matter how important you once were.
It takes years to do all this. That’s why it’s never too soon to start on your succession plan, or exit strategy.
How to sell a business
Business advisors and brokers recommend these nine steps to help get a succession plan in place.
1. Pick a target buyer
There will be different priorities depending on who you're selling to. If it's family, take pains to make everything transparent and fair. You don’t want the transaction to cause tension or conflict between children. If you’re selling to employees, be prepared for staggered payments. They’ll probably start with a deposit and pay you the rest from business income. If you sell to the highest bidder, then get all your records in order as otherwise they won’t have any idea how you operate, or what sort of money you make.
2. Decide how fast you’ll want out
Some buyers, such as family or employees, won’t have the cash to buy you out straight away. You might have to keep an interest in the business and stay involved to protect your investment. If that’s the case, you’ll need to negotiate consulting fees. If you want a clean break, you’ll probably be better off selling on the open market. That may not work if you have a client services business, however. Buyers of those types of businesses will expect you to stay around to help ensure clients don't leave.
3. Get your accounting sorted
Smart buyers will ask to see at least two years worth of clean and dependable financial records. If your bookkeeping isn't all it could be, get it fixed now. And if there’s something you can do to improve profitability, do it as soon as possible. You want that upswing to show in your accounts as a sustainable trend rather than as a recent spike. Use our balance sheet template to help get things in order.
4. Make yourself redundant
No one’s going to buy your business if it can’t survive without you. If you have employees, give them the training and authority they need to succeed. Scale back your involvement. Be less available to customers and clients. Delegate big decisions. Go into work less often.
5. Ensure your business is a well-oiled machine
Ensure you have formal (and efficient) processes for getting work done. Who does what, when, and how? Make sure there are protocols to guide all this. Potential buyers will be impressed if some things in your business happen automatically.
6. Write down how everything happens in your business
Write a “how to” manual for your business, so that a stranger could pick up the reins and run everything tomorrow. Record every process, including admin. Make a note of the steps you follow for each of these tasks. While you’re at it, write formal job descriptions for employees. And create templates for tasks that are repeated in your business.
7. Figure out how to drive up the valuation of your small business
What are the things that make your business great? Do you have a really outstanding product? Loyal customers? Amazing intellectual property? Find the strengths in your business and grow them, so that they become even more valuable. Similarly, figure out the biggest holdbacks and fix them. You’ll need someone from outside the business to provide this assessment. Get your accountant involved. If they don’t have the particular skills you need, they may be able to recommend someone who does.
8. Get a guideline business valuation
You won’t know what you’ll get for your business until the day it’s sold, but you can get a rough estimate. Ask for a professional opinion. Your accountant should be able to introduce you to someone, or you could search for a local business broker. A guideline valuation will help satisfy your curiosity and set realistic expectations. If they predict a lower price than you’d hoped, you might delay your exit, and spend some time building value in the business.
9. Work on a sales pitch
Buyers need to be excited by your business, so come up with an elevator pitch that captures the essentials. Craft a story that explains why you got started, how you’ve grown, and what you’ve achieved. Paint a positive picture of the future, too, but keep it real. Incorporate stats and facts to support what you’re saying.
Exiting your business is inevitable. It will happen whether you’re in control of it or not. So make a plan now and start getting your business ready for the next owner. It’ll help you command a better price, and increase the chance that your business survives. Learn more about selling your business.
And remember that anything you do to benefit your future buyer, will also benefit you. You’ll have a more efficient, profitable and easier to manage business.
It’s never too soon to build a business exit strategy. Speak to your accountant or business advisor today. If you don’t have an accountant, look for one in the Xero advisor directory .
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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What is Exit Business Planning? How To Develop an Exit Plan For a Small Business
Business Exit Planning is part of every successful business plan. Exit planning guides you on how you can leave your business. You do not want to bear the loss when you close your business.
What Is Business Exit Planning?
Importance of having an exit plan, merger & acquisition (m&a), initial public offering (ipo), management buyout, selling to a partner or investor, how to develop an exit plan.
It answers the question of what you will do after ending your business operations.
It helps you make a graceful exit without risking your investment. Strong exit planning will help you to convince investors that their investment is in safe hands.
No matter if you are running a successful business or handling failure, an exit plan will be part of your business strategy.
Want to learn more about exit planning? keep reading.
This guide will clarify everything from smart exit strategies to how to develop an exit plan.
Make Your Business Exit Smooth and Rewarding
Use WiseBusinessPlans Business Exit Strategy Cosultation and get the most out of exiting business.
” An exit planning allows an entrepreneur to sell his business to maximize the value of Company “
An exit strategy differs from business to business. It depends on the size of the company or what type of involvement you want in your business.
If an entrepreneur wants to sell a 100% share of his company, an exit planning strategy should remove all his involvement from the company.
If you have a company that is not making a profit; It is suggested to make an exit plan to get rid of the business. The exit plan for the non-profitable company should try to minimize loss.
If your company is generating good profit, an exit plan should maximize the profit.
A good exit plan gives maximum value to the entrepreneur when he sells his company.
Are you still unclear about why you should have an exit plan? Go through these points for having a clear idea about the importance of exit planning.
- An exit plan allows investors to be on the safe side when unexpected circumstances seize them.
- Changes in the market and economy can be a reason for selling a company. However, selling your company needs preparation. A strong exit plan will make you prepared for that time.
- You might not have started your company for selling, but if you receive an attractive offer from a potential buyer, this could be a topic of discussion. You are making a good profit and know the value of your company. At that point, an exit plan helps you decide whether you should sell your company or not.
- Illness and bad health can push you to get out of the business. Having an exit plan will prepare you for that time.
- An exit plan will urge you to focus on your targeted goal. It helps you end your business operations at the right time. You can work on your exit plan along with the business plan. An exit plan assists you to make a graceful exit from your business. Exit planning helps you to understand the value of your assets.
- You do not want to be on the losing side when you shut down a company. It is recommended to make your exit planning clear at the beginning of the business.
7 Smart Business Exit Strategies
There is no right or wrong exit plan. Whenever you are ready for an exit, choose the strategy that will work for you.
There are many factors that you must take into consideration when choosing a strategy. Such as :
- Time: what is the right time to sell your business?
- Money: How much money do you need to fulfill your financial needs?
- Business involvement: how much business involvement do you need after an exit?
These three factors will help you choose an exit strategy smartly.
Let’s discuss the smart strategies to exit your business.
- Mergers & acquisition
- Initial Public Offering
- Management buyout
- Sell to someone you know
- A merger means when two companies consolidate and become one. Ex: Exxon & Mobil
- The acquisition means when a company purchases another company. Ex: Google & Android
Merger & Acquisition is referred to as M&A. The process of merger & Acquisition is different.
In a merger, two companies join hands for better benefits and rapid growth. All their resources, brand name, tax, liabilities everything become one. In a merger, money is not exchanged from both sides.
The acquisition is different from merging. In acquisition, a company purchases another company. Ownership will be changed. Everything will be transferred to the new owner. In acquisition, money is exchanged. A company can purchase a portion of the share or the whole company.
M&A benefits both companies. You can merge or sell your company to another big company.
Larger companies often hunt small companies to be purchased. They want to eliminate the competition and increase their geographic footprint.
In the digital world, Google and Android merged for better benefits. Google was a large IT company. However, Android was a start-up and struggling to make a name in the market.
Android was taken by Google for $50 million. After the acquisition, Android made a noticeable share in the mobile phone market.
- More room for business price negotiation
- You can set your own terms
- If there is significant demand for your business, you can increase the price and get a better deal
- A time-consuming process with a lot of corporate politics involved
- Costly with hefty attorney fees
- You may not get merged or acquired in the first run
Merger And Acquisition M&A Business Plan
When it comes to M&A transactions, leaving the details to Wisebusinessplans can save you time, money, and effort. To reach your business goals, our consultants can write a business plan for you. A well-prepared M&A Business Plan will allow you to get back to work quickly.
IPO is an exit strategy that allows companies, and private Investors in companies sell their Share to public Ex Alibaba IPO raised $21.8 billion on Sep 2014
Private investors hold equity in companies. They can sell their private equity (PE) to the public when they need cash.
Companies also use this strategy to raise funds. Take Alibaba for example. Since its IPO in 2014, they have significantly increased its products and services portfolio and its revenue has increased
- IPO can be very lucrative in the right settings
- Intense, ongoing scrutiny from shareholders and regulators Strict reporting for the company performance is necessary
Exit Business Strategies to Get You What You Want
Use WiseBusinessPlans Business Exit Strategy Cosultation and get the most out of exiting business.
A management buyout is referred to as MBO. In this strategy, the current management of the company can purchase a portion of the shares or the whole company if they can pool the resources.
This exit method benefits both seller and buyer. MBO selling process can be done quickly as the management team is already familiar with the business and its potential.
The current management will assume more senior roles in the new company.
As they are already running the company, an MBO will increase their loyalty towards the company and you may also be able to retain a position like an advisor, etc.
- You will have the peace of mind that your business is in good hands
- MBO is generally a smooth process
- You can still keep working in the company as an advisor
- Management may not be interested in buying the company or they may not have the resources Big management changes will produce short-term problems
You can sell your stakes in the company to your business partner or an investor. However, this applies to you when you are not a sole proprietor.
The partner or investor buying your share is called ‘friendly buyer’. Mostly, this person is from your circle of friends or family or someone you trust.
- Smooth transition, no visible changes in company operations or revenues
- Not as lucrative as other exit business strategies
Liquidation means closing your business by selling all your assets to get cash.
Business Liquidation is often considered a quick strategy to get out of business. If your business is going well, you can sell off your assets at a good price and can maintain cash flow.
Liquidation is a clear-cut strategy to end your business journey. However, if you have creditors, the money will go to pay off the debt first before you pocket anything.
Before liquidation, make sure to do these things for a smooth transition.
- Make payments to the employees.
- Clear your taxes, and keep a record of them in case you need them in the future.
- End all your business expenses such as registrations and licenses.
- File the business abolition document.
- A liquidation ends your business in toto.
- Liquidation is a faster way to exit your business.
- You may not get the right price for your business
- Creates bad rapport for you in the business community overall
Acquihire is when someone buys your company with the sole purpose to acquire your team.
An acquihire benefits skilled employees of your company as it provides them with growth opportunities and you can be sure that they will be taken care of.
- You can get a higher price for your business from an interested party
- Company employees get the opportunity for long-term growth
- Not many team buyers in the market
- Costly process
Filing for bankruptcy is your last resort in exiting your business. A bankruptcy is filed when you cannot pay your debts or liabilities and the court sells your business assets and give creditors pennies for a dollar.
Bankruptcy comes with bad consequences for your credit report. It might become hard for you to start a new business after bankruptcy unless you are Donald Trump.
Settles your debts and liabilities
Makes it hard for you to get credit in the future
A good exit plan provides you maximum value when you sell your company. Before starting to develop, you need to ask a few questions to yourself.
- Do you want involvement in your business?
- What are your financial goals?
- Do you have to pay the creditors or investors back?
These three questions will clarify things. Answering these questions will help you find the right exit strategies for your business.
If you do not want any involvement in the business, all shares could be sold. You can liquidate the company, and remove your involvement.
Objectives of your Exit Business Strategy
To get maximum value for a company, you should set your exit business strategy objectives.
These objectives will help you understand your requirements. You want maximum return on investment, and knowing your goals will support you to sell your company for a good profit.
Make Business Finance Report
Prepare your finance report for a better understanding of your company’s account and assets.
A clear finance report will enable you to understand your business performance and value. Having a clear idea of finances will help in negotiations with buyers.
As you are going to sell your business, it is recommended to have clear finances. Pay off the creditors if you have any. Less debt will attract more buyers.
The market situation should be taken into consideration while making an exit plan. If the market condition is good, there must be a lot of potential buyers and you can sell your company at a higher rate.
Adopt the Right Strategy and Timeline
There are many strategies to adopt, you need to choose the one that will work for you. Select the time when you are prepared for the transition.
If you do not want to sell a 100% share of the company, it is advised to adopt an IPO strategy. Through this strategy, you can stay connected with your business. IPO helps you to sell a portion of your shares.
Likewise, choose a time when you are prepared to sell your company.
Business evaluation is another crucial step. Business evaluation gives you an idea about the value of your business. After making the finance report, you can easily examine your company.
You can not put your business for sale without a proper idea about the value.
Bonus Tip : Know the worth of your small business by using our business evaluation calculator .
Speak with your Investors
Once you are clear on what you want to do with your business, take your investors and stakeholders in confidence.
Tell them how the investors’ share will be repaid. You’ll need your business finance report to convince investors of your claims.
Choose new Leadership
Starting with choosing new leadership for your business as you continue with the exit business plan.
You can transfer responsibilities to new leadership smoothly if your business operations are already documented.
Tell your Employees
Your employees have an emotional attachment to the company. Tell them about your business exit plan. Face them with empathy and be transparent in your answers. This will make them feel valued and increase their loyalty to the business.
Inform your Customers
Announce the changes in your business to your customers. Introduce them to the new business owners to keep their confidence.
In case of liquidation or bankruptcy, educate your customers about alternative businesses that offer the same or similar products or services as you did.
What Is the Best Exit Plan?
The best exit plan is the one that gives you maximum profit. A plan that is according to your expectations and goal is best for your business.
The best strategy is the one that keeps on updating as per your need.
In the beginning, you may want to merge your company with another corporation for better results. Later on, one of your close relatives wants to buy your company. His offer might be tempting. You change your mind and are ready to sell.
The best plan is always an updated plan. You can make their exit plans themselves according to their goals. Consult a professional if you feel stuck in the process.
Still Not Sure? Get Professional Help with Exit Business Planning
Contact WiseBusinessPlans Business Exit Strategy Cosultation and make a graceful business exit.
Exit business planning refers to the strategic process of developing a plan for the eventual transition or exit from a small business. It involves setting goals, evaluating options, and implementing strategies to maximize the value and ensure a smooth transition when the business owner decides to exit.
Developing an exit plan is important because it allows business owners to proactively prepare for their eventual exit, whether it’s through selling the business, passing it on to a successor, or closing it down. It helps maximize the business’s value, minimize potential risks, and ensure a smooth transition for all stakeholders involved.
An exit plan typically includes determining the desired exit timeline, identifying potential buyers or successors, valuing the business, addressing legal and financial considerations, and creating a comprehensive succession or transition strategy.
Developing an exit plan involves assessing your business’s current state, setting clear goals for your exit, seeking professional guidance from accountants or business consultants, considering tax implications, and creating a detailed plan outlining the steps and timeline for your exit.
It is advisable to start developing an exit plan as early as possible, ideally when starting or acquiring a business. However, even if you haven’t done so yet, it’s never too late to start. The earlier you begin the planning process, the more time you have to implement strategies that can increase the value and ensure a successful exit when the time comes.
I exited from my first business and didn’t know these strategies before. I suffered from huge financial damage. As I know now, I will definitely keep all this in my mind.
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Small Business Exit Strategies: A Brief Rundown of Your Way Out
When you first start a business, the last thing you’re thinking about is leaving it. But, life gets in the way of plans. That’s why you need an exit strategy before starting your small business. Exit strategies help make sure you, your business, and investors are protected.
There are a number of exit strategies for small business you might consider. The path you choose depends on a unique set of circumstances, like business size.
What is a company exit strategy?
An exit strategy, or plan, outlines how a business owner plans on selling their investment in their business. Exit strategies help business owners have an out if they want to sell or close the business. Entrepreneurs must create a business exit plan before starting a business and tweak it as the business grows and the market changes.
So, where does your strategy go? Include your exit strategy in the financial section of business plan .
You especially need a strong exit strategy if you plan on seeking small business financing . Investors and lenders want to know that their money is protected if your business fails.
If nothing else, the central question your business’s exit plan needs to answer is:
- How will you protect business investments and limit losses?
Small business exit strategies
Whether you’re writing your business plan for the first time or updating it, take a look at these types of exit strategies. Remember to weigh the pros and cons of each to determine if it’s feasible.
In a merger, two businesses combine into one. Mergers increase your business’s value, which is why investors tend to like them.
To go through with a merger, you still need to be a part of the business. Through a merger, you will be an owner or manager of the new business. Your employees might be employed by the new merged business. But if you want to sever your ties with your business, a merger is not the best exit strategy for you.
There are five main types of mergers:
- Horizontal: Both businesses are in the same industry
- Vertical: Both businesses that are part of the same supply chain
- Conglomerate: The two businesses have nothing in common
- Market extension: The businesses sell the same products but compete in different markets
- Product extension: Both businesses’ products go well together
Before you merge businesses, make sure that the new business is a good fit with your current one. You could end up losing revenue otherwise.
An acquisition is when a company buys another business. With an acquisition exit strategy, you give up ownership of your business to the company that buys it from you.
One of the positives of going with an acquisition is that you get to name your price. A business might be apt to pay a higher price than the actual value of your business, especially if they’re a competitor.
But if you’re not ready to let go of your business, an acquisition might not be the right exit strategy for you. You may need to sign a noncompete agreement promising not to work for or start a new business similar to the one you just sold.
There are two types of acquisition: friendly and hostile. If you have a friendly acquisition, you agree to be acquired by a larger business. However, a hostile acquisition means that you do not agree. The acquiring business purchases stakes to complete the acquisition.
If an acquisition is your exit strategy, your acquisition should be friendly. You likely will attempt to find an acquiring business that you want to sell to.
3. Sell to someone you know
You may want to see your business live on under someone else’s ownership. In many cases, you can sell to someone you know as an exit strategy.
Take a look at some of the people you could sell your business to:
- Family member (e.g., child)
- Business colleague
Before selling your business to someone you know or are acquainted with, consider the drawbacks. You don’t want to jeopardize personal relationships over your business. Disclose things like liabilities and the profitability of your business before a family, friend, or acquaintance buys it from you.
4. Initial public offering
An initial public offering , or IPO, is the first sale of a business’s stocks to the public. This is also known as “going public.”
Unlike a private business, a public business gives up part of their ownership to stockholders from the general public. Public businesses tend to be larger. They also (generally) go through a high-growth period. By taking your business public, you can secure more funds to help pay off debt.
However, going public might be difficult for small businesses because it costs a significant amount of time and money. If you want a fast exit strategy, an IPO might not be the way to go.
To start an IPO, you need to find an investment bank, collect financial information, register with the Securities and Exchange Commission (SEC), and come up with a stock price.
Another exit strategy for small business is liquidation. With liquidation, business operations end and your assets are sold. The liquidation value of your assets go to creditors and investors. However, your creditors—not your investors—get first dibs.
Liquidation is a clear-cut exit strategy because you don’t need to negotiate or merge your business. Your business stops and your assets go to the people you owe money to.
If you liquidate your business, however, you lose your business concept, reputation, and your customers. Your business will not live on like in other exit strategy options.
How to write an exit strategy business plan
Again, you must include your exit strategy at the end of your business plan. That way, you can reference it if your business starts going south. And, potential investors can determine if you have a strong plan in place to protect their money if you leave.
When coming up with your exit strategy, consider the following factors:
- Your business structure
- Your business size
- The economy
- Entrepreneurial family members or friends
Here is an exit strategy example you might include in your business plan:
- Our preferred exit strategy is to merge with another local small business. The business plan supports the possibility of a merge. We believe a product extension merger would be our target exit strategy, but we are also open to a horizontal merger.
Keep in mind that you will update your business plan and exit strategy as your company goals change.
For example, your original exit plan may have been to merge with another business. But after 25 years of owning your business, your daughter says she wants to buy it from you. If you decide to sell instead of merge, update your business plan to reflect your new exit strategy.
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This article has been updated from its original publication date of December 27, 2016.
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How to Create an Exit Strategy for Your Small Business
And Why Your Business Needs One
Why Small Businesses Need Exit Strategies
Liquidation, sell the business to someone you know, sell the business in the open market.
- Sell to Another Business
An IPO (Initial Public Offering)
Choosing an exit strategy for your business might not seem like an obvious step when you’re just getting started, however planning ahead is an important part of building a business. An exit strategy is a plan for how you will eventually leave the business. It also includes details on what will happen to the enterprise after you have left.
We’ll explain the value of having a plan in place , discuss your options for exiting the business, and weigh the benefits and drawbacks of each scenario.
All businesses need an exit strategy at some point, even if that just means transferring ownership of the company when one owner decides to retire. Leaving a business can be stressful, and emotions can often cloud your judgment. Should this occur, a good exit strategy that you’ve come up with in advance will enable you to address tough situations rationally.
Here are some things to consider when making your exit strategy:
- The length of time you plan on being part of the business
- Your financial situation and expectations
- Any investors or creditors who need to be compensated, and what that process will look like
Having an exit strategy in place early on can help you to make decisions that will support your eventual exit. This allows the process to be as easy and profitable as possible.
You’ll want to revisit your exit strategy often to see if it still fits your situation and goals. Then, you can make adjustments as necessary.
Learn five common exit strategies for small businesses.
Liquidation is the process of closing a business and selling off its assets or redistributing them to creditors and shareholders. There are two main ways to do this.
Close and Sell Assets as Soon as Possible
One option is to close the business and sell the assets as soon as you can. This is often a last resort method for a business, as you only make money off the assets you can sell, while valuable items like client lists or business relationships are lost.
Before liquidating a business, you’ll want to work with liquidation experts to make sure you’re following the right procedure for selling your assets, paying back all debts, employee protocol, and finalizing all legal and financial commitments.
- Relatively simple exit
- Depending on the sale of assets, it can be a quick closing process
- You only make money on the assets you’re able to sell (real estate, inventory, equipment, etc.)
- If there are creditors, they must be paid first from any money generated
Liquidating Your Business over Time
The other common liquidation option is paying yourself until your business finances run dry, then you ultimately close the business. This is often referred to as a “lifestyle business.” The owner takes the funds out over time instead of reinvesting them back into the business.
- You have cash flow to maintain your lifestyle
- The business’s growth potential and sale value are stunted
- If there are other investors who aren’t being benefitted, they will likely be upset with the situation
- How you withdraw the funds will affect your tax situation
You may decide to sell the business to someone whom you’re familiar with, whether that’s an existing partner, a manager or employee, a customer, a friend, or a family member.
Commonly, during a seller financing agreement, the buyer is able to pay off the business gradually. This allows the seller to maintain an income while the buyer begins to run the business without making a large initial investment. The seller can also act as a mentor during the transition, which helps to make the process smoother for everyone.
Be aware that valuation, business transfer, and estate planning issues can be complex when selling to a family member. You’ll want to involve attorneys, accountants, and family successors when planning the transition.
- A long-term buyout could help incentivize employees, making them feel more committed to the business’ success
- If sold to someone who’s already familiar with the company, there may be less disruption to the business
- You may be able to remain involved in the business if you want to
- Could stress family relations and cause disagreements among the family
- You may be tempted to sell at a discounted price, which means you won’t recoup the full amount the business is worth
Buying an already established business can be an attractive option for entrepreneurs. This is because it’s less risky than starting a new enterprise, and seller financing makes the purchase easier to fund than it would be if you were financing a startup. Buyers also benefit from assuming a business’ existing systems, its sales stream and cash flow, established client base, and brand reputation.
For these reasons, it’s best to put in the effort to prepare your business in advance and make it as appealing as possible to attract potential buyers. The U.S. Small Business Administration can also be an asset, as it provides helpful information regarding closing or selling your business.
- If your business is in good financial condition, it will likely be attractive to buyers
- The business’ goodwill can be incorporated into the company’s value, enabling the seller to profit from years of relationship and brand building
- It can be a long, tedious process to find a buyer for your business in the open market
- Valuing a business can be complicated, and you might not receive the selling price you want
Sell to Another Business
In some cases, a competitor or similar business may want to acquire your company. Your business could be a strategic fit for their enterprise or a competitor may want to eliminate the competition. This is a good option for someone who wants to continue work in their chosen industry but with less responsibility.
Generally during acquisitions, the business owner is offered a position with the new company. If this is the case, make sure you’re comfortable with the role and fully understand the dynamics and culture of the new workplace. You’ll want to work with an attorney when structuring the acquisition agreement.
- The purchasing business may be willing to pay a high price for your company
- The cultures and systems of the two businesses might clash
- Some or many of your employees may be laid off during the transition
An initial public offering usually refers to when a business first sells its shares of stock to the public. Companies typically go through this process to raise additional capital. Going public is a big step for any business—it’s a long, expensive process, and afterward the company is subject to public reporting requirements.
- It can be very profitable to become a public company
- Going public can help boost publicity, reputation, and brand awareness
- Taking your company public is a tedious, lengthy, and expensive endeavor
- Going public comes with new obligations like filing SEC reports and providing information about business operations, finances, and management
- Shareholders get to have a say over the company’s direction, which could cause you to lose some flexibility in managing the business
U.S. Chamber of Commerce. " Ready to Move On? How to Create an Exit Plan for Your Business ." Accessed May 10, 2021.
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Home » Business Plans
How to Write an Exit Strategy for your Business Plan
Does your business plan contain a fail-proof exit strategy for you? If NO, here is a detailed guide on how to write an exit strategy for a business plan. Unless you are a joker of a business owner, chances are you came up with a solid business plan at the start of your business. I mean, you conducted your market analysis, and you developed strategies to plan and grow your business.
If you really did all of that, then you are right on track. But one thing you are less likely to have done is planning an exit strategy for your business. And you should do this as soonest as possible if you are yet to. Most people write plans on how to start a business but majority fail to write plans on how to exit their business.
Table of Content
What is an Exit Strategy?
- 1. Initial public offering (IPO)
2. Sell your business
3. acquisitions and mergers, 4. liquidate your assets, 5. management buyout, 6. family succession, a. detail your most likely exit strategy, b. prove your exit strategy.
An exit strategy is a method by which entrepreneurs and investors, especially those that have invested large sums of money in startup companies, transfer ownership of their business to a third party, or by which they recoup money invested in the business.
Some forms of exit strategies include, being acquired by another company, the sale of equity, a management-employee buyout et al
Why Prepare an Exit Strategy?
What happens to your business if eventually you die today or get involved in a ghastly accident that incapacitates you? Now I know that nobody prays for bad events or circumstances but one reality of life is that you can never know what’s coming ahead of you. The same holds true in business.
“Prepare for bad times and you will only know good times.” – Robert Kiyosaki
But there are a lot of would-be business owners who love their businesses and would think that having an exit strategy in their business plan is unnecessary. However, there is still a need to have an exit strategy in your business plan. There are two very real and practical reasons why you need to plan an exit:
- Outside investors want to collect their return. Remember that equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold. Even three years is a long time to wait for any pay check.
- Entrepreneurs love the art of the start. Assuming your startup takes off, you will probably find that the fun is gone by the time you reach 50 employees, or a few million in revenue. The job changes from creating a “work of art” to operating a “cookie cutter”.
- If you are seeking for investment from venture capitalist (VC) or angel investors, then an exit strategy is a must have. Even if you’re a small company, it’s a good idea to plan ahead and to actually have an idea of how you will transfer ownership of the business down the line, sell the business, or make a return on your investment.
So just as you had a plan for starting your business, you should also have an exit strategy for transforming your business into cash, should in case you lose interest in the business or run into problems later. Without wasting time, here are the four commonest exit strategies you can choose from and incorporate in your business plan:
6 Types of Exit Strategies You Can Consider and Choose From
1. initial public offering ( ipo ).
Taking your business public is a very expensive and time consuming exit strategy, as it usually attracts huge accountant and attorney fees. But it can be very rewarding. Offering your business to the public has one simple implication: you are no longer the boss, your stakeholders are. And you will be giving reports about the business to the board of directors and stakeholders.
If you just cannot afford to let go of your business ( by selling it ), then you can relinquish a portion of your shares by taking it public. However, this exit strategy is not recommended if your business doesn’t value up to $10 million. In that case, consider other exit strategies.
For smaller companies that have already begun expanding—like restaurants that have franchised—an IPO may be a good way for the owner to recoup money spent, though it is worth noting that he or she may not be allowed to sell stock until the lock-up period has passed. Examples of restaurants on the stock market include Buffalo Wild Wings and BJ’s.
If this is your main exit strategy from the get go or you want to at least have the option of going public later, the easiest way to get listed is to seek investors that have done it before with other companies. They will know the ins and outs and can be able to better prepare you for the process.
The process of getting on an initial public offer can be long and arduous. If you do succeed in winning over the hearts and data-centric minds of Wall Street analysts, you’ve still got to conform to the standards set by the Sarbanes-Oxley Act, you will have underwriting fees you’ll need to pay, a potential “lock-up period” preventing you from selling your shares, and even with all of these, there is still a risk that the stock market could crash.
While an IPO may be a suitable route for a company like Facebook or Microsoft, you should consider whether or not you want to weather the headache of tailoring business decisions to the market and to what analysts believe will do well.
Selling a business to another individual or company is the most common exit strategy for any business owner. This option is very easy because it can be conducted between the two parties involved without all the government regulations and oversight that comes with an IPO. As expected, if you decide to sell your business, you will be receiving cash in exchange for it.
But valuing your company is the trickiest part of any sale; as sometimes, knowing the right amount to sell your business for can be very difficult. One way to avoid selling your business for less is to get more than one appraisal of the business ( seek out some business appraisal companies to help you with this ). This way, you will be confident that you are selling for the right price.
If you are concerned about how the business would fare after you have sold it ( though this isn’t binding on you ), you’d want to sell only to a buyer that knows and understands the business and has the experience to carry on the brand’s legacy. And, depending on the closeness between you and the buyer, you can agree on payment by installments.
Even though acquisitions and mergers are commonly used interchangeably, there is a slight difference between both terms. An acquisition occurs when one business acquires another business. For example, Company A buys Company B and still continues running under the name of Company A but now has the strength and value of both companies combined.
A merger, on the other hand, occurs when two businesses come together to continue as a single company. A change of name usually happens after a merger. For example, Company A and Company B merge to form a new company called Company A-B. Most of the time, businesses that engage in a merger or acquisition are in the same industry and see multiple benefits in merging together or acquiring one another.
When you decide to go into a merger or acquisition deal, you can negotiate price and terms. You can request that your employees ( if you have any ) be kept on for a certain period or that your management team be retained. You can also negotiate final and annual payouts. If you cannot handle these negotiations yourself, hiring an agency would be your best bet.
This is the least desirable of all exit strategies, but sometimes the most necessary. This strategy can quickly bring in a lump of cash, and it doesn’t involve any negotiations or losing control of your business. You simply close the business and end it. If you like, you can decide to resuscitate it again some other time.
Most of the time, business owners liquidate their assets because of huge debts. In such cases, the proceeds from the sales of assets are used for settling debts, and the remainder ( if there’s any ) would be taken by you or divided among your shareholders. Liquidating your business may usually include selling your office building, office furniture and electronics, company cars, and other assets. Usually, you would sell at market price, and you may not make much profit.
If you built a business that you want to continue even after you are gone, you can consider turning to your employees. That’s right—not only will they have a good idea of how things are run already, but they will have intimate knowledge regarding company culture, corporate goals, and a pre-existing determination to make it work. This form of exit strategy is a good idea if you are someone who really wants to keep his or her legacy alive.
There is still an option of giving the business to your family members, but this has some disadvantages. For instance, the family members who inherit the business may not understand the business, have no interest to do the needful in order to ensure that the business survives or they could even descend into bitter rivalry over who gets what at the detriment of the business.
If you family members are quite knowledgeable about your business, then they may be the best people to pass it to. If you would like to pass on your business to your children or any other family member, you should make sure that they have the prerequisite skills, are competent and have the success and future of the business at heart. This will make it a lot easier to retire.
Having reviewed the various exit strategies that are available to business owners, here is how you can write a business plan exit strategy.
How to Write a Business Plan Exit Strategy
Firstly, you have to write in details your most likely or preferred exit strategy. Will you like to go public, sell it to another company, sell it to your employees or just liquidate it. Take some time to review the various options that are at your disposal and document your preferred choice.
This step is very important, and it involves justifying the exit strategy you choose. For instance, if your exit strategy is to go public, then show other companies in similar markets or positions that have successfully gone public in the last three to five years. Research and find out the names of those companies, the dates they went public and the returns their investors received.
In the same vein, if the exit strategy you think is right for your business is to sell it off, you should make a list of potential buyers. Discuss not only who they are and their current financial positions (e.g., estimated total revenues if a private company), but the reasons they’d want to purchase a company like yours. You should also show other companies these firms have acquired in the past and at what price points.
Finally, as much as possible, show other companies that were similar to yours that were recently acquired. As much as possible, determine the sale price of these companies and the returns their investors might have received upon their acquisitions.
Even if you don’t plan to sell your business in the future, keep in mind that circumstances may force you to do just that. And you will end up badly burned if you end up doing it the wrong way. So, choose the most appropriate exit strategy for your business and structure it carefully. This way, even if you lose your business later, you will lose gladly.
As you can see, writing a business plan is no easy task. But after having read this eBook, you should now understand that it is well worth the effort. Aside that it better prepares you to deal with some of the shortfalls any entrant into a new market will experience, a business plan gives you a leg up on your competition through better research and insights gained from the process.
If you follow each step as outlined in this eBook, you will be able to come up with a business plan that will market your idea to investors / lenders in the best way.
- Go to Chapter 15: How to Present a Business Plan with PowerPoint
- Go Back to Chapter 13: Your Financial Plan and Projections
- Go Back to Introduction and Table of Content
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How to Launch a Website Design Business
Having a strong online presence has become almost essential for small businesses in the modern world.
As such, high-quality and attractive website designs are now more sought after than ever. From proposal websites to e-commerce shops, customers expect nothing less than professional web services that meet their individual requirements and preferences.
If you’re looking to launch your own website design business, there are specific steps you will need to take in order to promote growth and attract clients.
The focus of this outline is to provide an overview of the journey from starting up a single operation run by you as the sole proprietor right through to expanding the scope of your services in line with changing trends across industries on an international level.
Defining Your Niche and Target Audience
In order to create a successful website design business, it’s important to first define your niche and target audience. This involves taking a deep dive into the types of websites you want to specialize in (e.g., e-commerce sites, portfolio collections, blogs).
Conducting industry and market research is also an important step for gaining insight into what your target audience is looking for; this could include gathering data on their preferred style and functionality needs or tracking trends within the area of website design.
Once you have all the necessary information at hand, you can start shaping your services according to specific client requirements or marketing goals—positioning yourself not just as a designer but rather as an invaluable partner able to truly make an impact.
Developing a Solid Business Plan
When optimizing for content targeted with certain keywords, it is essential to ensure the website provides value and caters specifically to its target audience. Quality is key when creating content in order for search engines to recognize and reward optimized pages.
Developing keyword-optimized content should be balanced with staying within the reader’s attention devices and addressing the search query from a neutral perspective (avoid forcing superfluous keywords).
Relevant articles offer readers insight into targeted topics without going off track which can help build credibility and trust in your brand.
Additionally, maintaining natural keyword density helps to periodically get popping throughout the article body without disrupting engagement or overstuffing the post leading to optimization failures & possible blacklist warnings from Google.
Building an Impressive Portfolio
Creating an impressive portfolio is one of the most important steps when starting a website design business . It shows clients who you are and what kind of work you do and gives them insight into how it would be to work with you.
Designing sample websites to showcase your skills will allow potential customers to see not only the finished product but also your development process. Furthermore, making sure that different projects demonstrate versatility in order to illustrate many types of services that can be achieved will draw even more attention from users.
Additionally, case studies should provide an accurate description of how problems were solved and give credit where it’s due by letting customers know there was teamwork involved, too, if needed.
Setting Up Your Online Presence
Setting up your online presence is an important step when launching a website design enterprise. First, you need to register a memorable domain name for your business and design a sleek website that reflects your brand’s identity.
It should describe the services & scope of work being offered as well as provide links to showcase portfolios, case studies, testimonials & most importantly, contact information.
Social media platforms offer great opportunities for businesses to expand their reach and visibility online, and good quality content marketing increases traffic towards websites, setting them ahead in the competition.
You might even consider hiring a local SEO agency that would strategize effective SEO campaigns proven to deliver winning outcomes.
Crafting Effective Marketing Strategies
With an online presence being increasingly important for businesses, crafting effective marketing strategies is essential for a successful website design business.
Using social media platforms to showcase work and engage with potential customers, SEO techniques to increase visibility, networking within the industry, and collaborating with other services can help drive engagement and attract new clients.
Strategic advertising on platforms like Google Ads as well as other digital campaigns can draw in even larger numbers of leads while promotions including discounts or referral programs will further boost interest. Quality customer service married with persuasive yet personal messaging consistently delivered across channels will build brand loyalty over time.
But be aware: organic marketing takes years as doing so requires that you build more than just a website, but an actual brand.
Offering Exceptional Customer Service
Great customer service is key to a successful web design business. You should establish clear communication channels from the outset, and provide clients with realistic project timelines and expectations.
Put yourself in the client’s shoes—make sure they have an enjoyable experience working with you every step of the way. Where possible, go the extra mile by exceeding their expectations to gain positive reviews and referrals which can help build overall credibility for your business.
At the end of it all, take the time to gather feedback from both satisfied and dissatisfied customers about improvements that could be made. With exceptional customer service as well as creative skills, you can turn a website design enterprise into a thriving endeavor.
Scaling and Growing Your Business
Scaling and growing a website design business requires careful planning and execution. As your client base expands, you may need to hire additional designers or staff to support the increased workload. Focus on expanding your service offerings too – while retaining current clients and staying up to date with evolving market trends in the industry.
It’s also important to continue honing skills and embracing new technologies along the way. Make sure that every aspect of customer engagement is satisfactory so they keep using your services again in the future. With solid foundations laid, it’s much easier for you to build a flourishing enterprise over time.
Launching a successful website design business requires hard work, careful planning, and the willingness to continuously innovate.
By clearly defining your niche and target audience, creating a solid business plan, showcasing your portfolio with pride, establishing an online presence, formulating effective marketing strategies supported by great customer service, and gathering feedback for valuable insights into what can be done better—you are well on your way to building your flourishing web design enterprise that stands out in today’s markets.
With dedication and passion for this creative profession, you can harness technical know-how and skills and become very successful as a web designer.
Nate Nead is the CEO & Managing Member of Nead, LLC, a consulting company that provides strategic advisory services across multiple disciplines including finance, marketing and software development. For over a decade Nate had provided strategic guidance on M&A, capital procurement, technology and marketing solutions for some of the most well-known online brands. He and his team advise Fortune 500 and SMB clients alike. The team is based in Seattle, Washington; El Paso, Texas and West Palm Beach, Florida.