With lockdown and a global pandemic initiating a huge economic downturn, many business owners have had to reshape and rethink their business strategy. We’ve seen numerous business models adapt to the changing landscape by offering a different service to their normal offering. Many companies have also completely re-evaluated their products, thereby shifting their industry and the market from what was first traditionally conceived.
Unfortunately, there have been plenty of businesses that, as a result of COVID-19, have been forced to either close or think about selling up to limit losses. This process involves undertaking an exit strategy which is used to formulate a plan on how best to sell the ownership of a company to investors or to another company. In more technical terms, an exit strategy determines how to liquidate a position in a financial asset, or dispose of tangible business assets, once predetermined criteria for either has been met or exceeded.
Exit strategies are most commonly executed by an investor, trader, venture capitalist or business owner. Other reasons for executing an exit strategy may include a noticeable change in market conditions due to a catastrophic event, legal reasons or that a business owner/investor is retiring and wants to cash out. As well as this, an exit strategy could also be exhibited through an Initial Public Offering (IPO), when an investment or business venture has met its profit objective for example.
We explain the benefits importance of exit strategies whilst outlining the different forms of exit strategies to take depending on your current financial position.
Why & When Should I Consider An Exit Strategy?
Exit strategies should be considered if you’re contemplating or feel ready to depart from your business or shares of your business. This could be for many reasons, including:
- Personal health issues or a family crisis – This can quite easily take away your focus on effectively running the company.
- An economic recession – Economic recessions can have a noteworthy effect on business proceedings, as evidenced by COVID-19. Cutting your losses and cashing your chips in could be the most viable option.
- Unexpected offers – Big corporations may look to acquire your company. Considering their offer and having insightful conversations will provide you with the perspective to make an informed decision on you and your business’ future.
- A clearly defined goal – This could be a target that is set or an age you want to retire. By having a well-defined exit plan, your business will be safe and secure from your potential departure.
- Achieving growth – Merging your business or wanting to be listed on the stock exchange are ways to increase revenue and valuation.
There are numerous options that can be set in place to effectively and successfully undergo an exit strategy. Going through an IPO and making your business public is one way to achieve growth however the accounting regulations behind this can be complicated including the filing of lengthy financial reports and the involvement of market experts.
Strategic acquisition is also one of the more popular forms of exit strategy, wherein meticulous planning and forecasting are essential in order to be executed well and efficiently. Buying out another business can be risky, however the opportunities for progressive growth are clearly evident given that your company is essentially expanding. Alternatively, if a company or firm’s main product or service is faltering, it may look be viable to acquire and incorporate smaller businesses into its revenue stream as a new way to profit.
Management buyout (MBO) has also been shown to have success and is essentially a transaction where a company’s management team purchases the assets and operations of the business they manage. A management buyout (MBO) allows for a section of management in a business to gain more control and share from the owner of a business enabling them to take over the reigns from the previous hierarchy installed. MBO’s are a favourable exit strategy for large businesses that wish to pursue the sale of sections of the firm that aren’t part of the core business.
Walking Away From Your Business
It can be extremely stressful and frustrating when your business is faltering, especially during unpredictable economic climates. This could be for a multitude of reasons, including the most likely outcome that cashflow is a problem. This has become a very regular occurrence since the start of the pandemic, with a recent survey from Simply Business estimating that COVID-19 could see two-fifths of UK small and medium-sized businesses close permanently and could cost the UK SME sector more than £69 billion in total.
There is no shame in admitting that you wish to leave your business for the right reasons. It’s important to do this correctly though, allowing a smooth transition that will appease all parties involved whilst leaving you in the best possible position financially.
An exit strategy allows a business owner to reduce or liquidate their stake in the business and ultimately profit if the business is successful. If the business is faltering or isn’t valuable, an exit strategy enables the entrepreneur to limit their inevitable losses. An exit strategy may also be used by an investor such as a venture capitalist to prepare for a short sell. A short sell is typically used when a company’s share price is set to decrease, therefore the investor is lent shares from a broker and sells those particular shares on the market, hoping the price has decreased so they can buy them back at a lower cost and therefore profit.
An effective exit strategy should be planned for every positive and negative scenario, similar to a cashflow forecast, regardless of the type of investment, trade, or business venture. This planning will you a full understanding, whilst calculating the risk associated with the investment.
We’re now offering FREE strategic consultation sessions up to 30th June 2021. Please contact Nordens’ Director of Strategic Consultancy Joe Sword at firstname.lastname@example.org or 020 8530 0720.
If you require any more information on exit strategies or anything accounting or strategic related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.