Business Exit Strategy

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DEFINITION of 'Business Exit Strategy'

An entrepreneur’s strategic plan to sell his or her investment in a company he or she founded. An exit strategy gives a business owner a way to reduce or eliminate his or her stake in the business and, if the business is successful, make a substantial profit. If the business is not successful, an exit strategy enables the entrepreneur to limit losses.

INVESTOPEDIA EXPLAINS 'Business Exit Strategy'

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

Different exit strategies also offer business owners different levels of liquidity. Selling ownership through a strategic acquisition, for example, can offer the greatest amount of liquidity in the shortest time frame, depending on how the acquisition is structured. The appeal of a given exit strategy will depend on market conditions, as well; for example, an IPO may not be the best exit strategy during a recession.

The best type of exit strategy also depends on business type and size. A partner in a medical office’s best exit strategy might be to sell to one of the other existing partners, while a sole proprietor’s ideal exit strategy might simply be to make as much money as possible, then close down the business. If the company has multiple founders, or if there are substantial shareholders in addition to the founders, these other parties’ interests must be factored into the choice of exit strategy as well.

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