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What is an exit strategy?

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Last editedDec 20202 min read

Whether you’re someone investing in a business or a sole proprietor running that business, you need to think about your exit strategy. An exit strategy is a carefully thought through plan that means that you can shift your money from the business in question as seamlessly as possible. 

Why do you need an exit strategy?

No business investment lasts forever. With the right business exit strategy you’ll be able to choose exactly the right moment to shift your money from a business at the same time as maximising the amount of money you actually take out. 

Different types of business exit strategy

There are various types of exit strategy – each has its pros and cons. The exit strategy you pursue will depend on the nature of the business and the degree to which you want a quick, clean break.

Liquidation as a quick exit strategy

This is technically the simplest exit strategy and particularly suited to a business that depends upon the skill set and performance of an individual. The main advantage it offers is simplicity – the business can be wound up and the assets sold to realise any value at relatively short notice. The disadvantage of liquidation is the relatively low return on investment it offers. 

The only money comes from the sale of assets such as plant, real estate and stock, with other saleable assets such as the goodwill inherent in the business disappearing. The money realised from assets such as second-hand plant may be relatively low, particularly if the exit strategy prioritises the speed of the sale.

Liquidation over time as an exit strategy

Using this exit strategy the owner(s) of the business gradually removes value from the business over a period of years, by drawing any profits rather than reinvesting in expanding or modernising the business. When the value of the business drops low enough it can then be wound up.

The advantage of this exit strategy is that it enables the owner(s) to maximise cash in hand and maintain their lifestyle over a period of time. The disadvantages include the fact that any shareholders might object, and the salary being drawn will be taxed as income. 

Selling the business to employees as an exit strategy

If you sell your business to the current employees then you can be sure it’s in the hands of people who know and understand it. Arranging the sale as an Employee Share Ownership Plan taking place over a period of time will encourage employees to drive the business forward and maintain operational excellence until the process is complete. 

The chief drawback of this exit strategy is that the employees might not be qualified to run the business, and training them to do so could be a time-consuming and costly process. A further risk is that current clients might object to a change in management, leading to a drop in trade in the period leading up to the exit. 

Selling the business as an exit strategy

This is the exit strategy most likely to be pursued by a business owner(s) who feels they’ve taken the business as far as they can and now wish to retire with sufficient funds to pay them back for years of hard work and investment. The advantages are clear – a profitable business should sell quickly and for a good price, particularly when assets such as goodwill are included. 

On the flipside, a less-profitable business might struggle to find a buyer on the open market, and may end up fetching a price far below the value first envisioned. If selling the business is to be a successful exit strategy you need to spend some time in the period before sale ensuring that it is as attractive a proposition as possible. 

We can help

If your business is reaching a point where a viable and effective exit strategy is needed then get in touch with the experts at GoCardless. Maximise the return on your investment and find out how GoCardless can help you with ad hoc payments or recurring payments.

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