What is an Exit Strategy? Types and Benefits in Business

When you hear exit strategy, some people definitely think that this term has a negative connotation. But sometimes an exit strategy becomes an inseparable part of a company's business continuity. Everyone definitely wants success when building a business, namely by implementing special strategies. But some others actually apply the opposite, namely using an exit strategy.

A number of business people implement an exit strategy or leave business for the survival of their company. To deepen your understanding of exit strategy, below we will discuss further about what exit strategy is and its benefits in business. Read more here.

What is an Exit Strategy?

Exit strategy is an approach designed to transfer ownership or control of a business or investment to another party. This strategy aims to maximize the value and returns from the business or investment when the owner wants to exit. Whether to access liquidity, make a profit, or for other personal or professional reasons.

What is an Exit Strategy? Types and Benefits in Business - BFI Finance

Benefits of Exit Strategy in Business

Exit strategy has its own benefits in business, where it can later influence various operational and financial aspects. Here are some of the main benefits of an exit strategy in business.

1. Liquidity and Value Realization

Exit strategies allow business owners to realize the value of their investments in the form of liquidity. For example, through a sale or IPO that allows owners to convert company ownership into cash.

2. Portfolio Diversification

Furthermore, it can help owners to diversify their investment portfolio. After selling or acquiring a company, owners can shift funds to other investments that may offer different growth potential or risk.

3. Optimize Profits

By planning an effective exit strategy, business owners can maximize profits from sales or acquisitions, avoid excessive taxes, and get optimal results from their businesses.

4. Financial and Tax Planning

An exit strategy allows business owners to plan and manage the financial and tax implications of an exit transaction. This may include tax planning to minimize tax liabilities arising from a sale or acquisition.

5. Protection of Family and Inheritance

For family business owners, an exit strategy can ensure that the business can be passed on to family members or inherited. Of course, this strategy can help in inheritance planning and protecting family assets.

6. Maintain Company Values and Heritage

An exit strategy can help maintain company value and ensure that the business continues in a manner that is consistent with the vision and values of the previous owner. This often involves selecting buyers or partners who can continue the company's legacy and mission.

7. Reduce Risks that Result in Operational Expenses

Furthermore, owners can reduce the risks and operational expenses associated with running a business. This may include transferring operational responsibilities to others who are more capable or more interested in managing the company.

8. Flexibility in Adapting

Having an exit strategy provides flexibility to adapt to changing market or economic conditions. This allows owners to make better decisions based on the current market situation.

9. Become Motivation

Exit strategies can provide additional motivation for owners and teams to achieve certain business goals. Knowing that there is a clear exit plan can motivate the team to work harder and achieve the desired results.

10. Minimize Negative Impacts

Exit strategies help in planning and mitigating negative impacts that may arise from a change in ownership or transfer of the business. This includes handling issues that may arise during the sale or transfer process.

Types of Exit Strategies

There are several types of exit strategies to choose from, depending on the specific situation and goals. The following are several types of exit strategies that are commonly known.

1. Sales

First there is sales which refers to the process of selling your business or investment to a third party. This is one of the most commonly used methods to exit an investment or business, and can be done in a variety of ways.

The advantages of a sales exit strategy are:

Provides quick access to cash from sales proceeds.
Reduce risk by selling businesses or investments that may already be producing good results.
Allows owners to move on to other, more attractive business or investment opportunities.

Meanwhile, the disadvantages of this strategy are:

Sales can trigger significant tax liabilities.
Can require significant time and effort to complete transactions.
Loss of control and involvement in the business that has been built.

2. Mergers & Acquisitions

Mergers and acquisitions (M&A) are two types of exit strategies that involve merging or purchasing companies to achieve various strategic goals. Both are often used to expand market capacity, acquire new technology, or improve operational efficiency.

The advantages of this strategy are:

Mergers can produce operational and financial synergies that increase efficiency and profitability.
Provide product, market, or technology diversification.
Increase market share by combining customer bases.
Expand market share by acquiring new customers and distribution channels.
Acquire new technology or capabilities that were not previously available.
Reduce costs through combining functions and operational efficiencies.

Meanwhile, the losses that can arise are:

Integration of different cultures and systems can pose challenges.
The costs of completing a merger, including legal and consulting fees, can be very high.
Employees and managers of both companies may face difficulties adapting to change.
Integrating different cultures, systems and business processes can be difficult and can potentially lead to conflict.
Can cause uncertainty or workforce reductions that impact morale and productivity.

3. Initial Public Offering (IPO)

An Initial Public Offering (IPO) is an exit strategy that involves the process of changing a company from a private entity to a public company by offering its shares to the general public through the stock exchange. For example, startup exit strategies, such as Bukalapak, Mitratel, Gojek Tokopedia, Blibli, and others. An IPO provides an opportunity for a company to raise funds from the public as well as providing an opportunity for initial shareholders, including founders, early investors, and employees, to sell some or all of their shares.

IPO has advantages that can be considered, see the full review below:

Raise significant capital for expansion, research and development, or pay down debt.
Provides an opportunity for early investors and founders to sell their shares and gain liquidity.
Increase the company's visibility and reputation in the global market.
Provide shares as a medium of exchange that can be used for acquisitions or employee compensation.

Meanwhile, the disadvantages of an IPO are:

IPO costs can be very high, including advisory fees, underwriting fees, and compliance costs.
Companies become subject to strict stock market regulations and must comply with various reporting and transparency requirements.
Companies must meet market and investor expectations, to produce consistent and profitable financial performance.
Share prices may decline after the IPO, which could harm initial shareholders and create a negative impact on the company's reputation.

4. Liquidation

Liquidation is a formal process in which a company's assets are sold and the funds obtained are used to settle the company's debts and obligations. The remaining funds after debt payments are distributed to shareholders if any.

The following are the advantages of liquidation:

Complete company obligations and avoid the burden of debt that cannot be paid.
A structured process can close a company officially and fairly.
Owners or creditors can control how assets are sold and how the proceeds are distributed.

There are also downsides to this strategy to consider:

Liquidation often results in financial losses for shareholders and creditors, because assets are usually not sold at full price.
The liquidation process involves administrative and legal costs that may reduce the amount of funds available for distribution.
Liquidation can affect the reputation of the company and the individuals involved, especially if the liquidation is due to financial failure.

5. Sales to Family (Family Transfer)

A sale to family involves transferring ownership of the company from the current owner to a family member. This could include children, siblings, or other relatives. These transactions may involve a complete sale, stock transfer, or transfer of business assets to family members.

The following are the benefits of selling to families:

Ensure that the business remains in the family and can be continued in accordance with family values and traditions.
Enables the continuation of existing business relationships with customers, suppliers and employees.
In some cases, the transfer of family ownership may offer tax benefits, such as a reduction in inheritance or gift taxes.
Allows the owner to transfer business responsibilities and risks to known and trusted family members.

Apart from that, the disadvantages that may arise are:

Business transfers can create conflict among family members, especially if there is no clear agreement on ownership and control.
New family members who take over may lack experience or skills in managing the business, which can affect the company's performance.
Ownership transfers can be subject to legal or tax issues, especially if not planned well.
The transfer process can be emotionally taxing, both for the owner changing hands and the family members taking over.

6. Sell Shares to Investors

Selling shares to investors involves the process of selling a portion of company ownership to individuals or institutions interested in purchasing those shares. This transaction can be carried out through various means, such as a public offering, private sale of shares, or raising venture capital.

Profits obtained when selling shares to investors:

Provides the opportunity to obtain cash and liquidity from selling shares.
Provide funds for expansion, innovation, or product development that can accelerate company growth.
Allows owners to diversify investment portfolios by selling partial ownership of the company.
Reduce risk by transferring some of the ownership and responsibility to new investors.

Meanwhile, the advantages of selling shares to investors are:

Selling shares to investors can reduce the old owner's control over the company.
The process of selling shares, especially in an IPO, can involve high costs and complex procedures.
If a company goes public, there are demands for reporting and complying with strict regulations, which can increase the administrative burden.
The presence of new investors may cause conflicts of interest or changes in the company's strategic direction.

7. Bankruptcy

Bankruptcy is a legal situation where a company is declared unable to pay its debts and must undergo a legal process to settle its financial obligations. The bankruptcy process may involve debt restructuring, asset liquidation, or both, depending on the type of bankruptcy filed.

The advantages of a bankruptcy exit strategy are:

Provides an opportunity to write off some or all of the company's debts that cannot be paid.
Provides legal protection against creditor legal action during the bankruptcy process.
For bankruptcies involving restructuring, provide an opportunity to improve financial conditions and continue operations.

Meanwhile, the shortcomings that can occur are:

Bankruptcy proceedings can involve high costs and complex legal procedures.
Bankruptcy can damage a company's reputation and reduce the confidence of investors, customers, and business partners.
In a bankruptcy involving liquidation, the company will typically close, and employees and shareholders will face negative impacts.

8. License

A license is an agreement in which the owner of intellectual property rights (licensor) gives permission to another party (licensee) to use these rights within a certain scope. A license may include a variety of rights, such as the right to manufacture, sell, or distribute products that use the protected technology or brand.

The benefits obtained from licensing are:

Generate passive income from royalties without having to be directly involved in business operations.
Allows intellectual property rights to be used in new markets or territories without having to make large investments.
Provides the opportunity to focus on core business areas while another party manages the product or technology based on intellectual property rights.
Provides an additional income stream and can help diversify income sources.

Meanwhile, the disadvantages of the license are:

Rights owners have limited control over how intellectual property rights are used and marketed by licensees.
Risk of disputes regarding breach of agreements, payment of royalties, or use of intellectual property rights.
The risk that the value of intellectual property rights may decrease if not managed properly by the licensee.
Dependence on the licensee to comply with the terms of the agreement and maintain quality standards.

When deciding to carry out an exit strategy, it is important to plan it carefully. If necessary you can ask for professional support to make wise decisions. Moreover, you also need to adjust to the business goals that have been set from the start. So, are you interested in implementing an exit strategy in business?