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Exit Strategies: What Are They
When specific conditions are met, exit strategies are plans carried out by traders, investors, business owners, or venture capitalists to sell their stake in a financial asset. How an investor intends to withdraw from an investment is known as their exit strategy.
When Do Exit Strategies Get Employed
Using an exit strategy can help you:
- Shut down a business that isn't lucrative.
- When profit targets are reached, proceed with an investment or company endeavor.
- If there is a substantial shift in the market, shut down your company.
- Sell a business or an investment.
- To reduce losses, sell a failing business.
- Decrease a company's ownership or relinquish control.
Read also: How To Handle Investor Expectations During An Exit
What Are Some Exit Plan Examples
The following are a few of the most popular exit tactics used by investors or owners of different kinds of investments:
- Increase your personal income and give yourself bonuses in the years prior to leaving your business. But be sure you can fulfill your commitments. It is the simplest business exit strategy to implement.
Sell all of your shares to your current partners when you retire. You will be able to exit the firm and receive money from the sale of your shares. - Sell whatever you own for market value. Utilize the earnings to settle debts and retain the remainder.
- Conduct an IPO (initial public offering).
- either be purchased or merge with another company.
- Sell the business completely.
- Transfer ownership of the company to a relative.
Exit Techniques for New Businesses
Entrepreneurs frequently employ exit plans to sell the business they established. Since the choice of exit plan has a big impact on business development decisions, entrepreneurs usually create an exit strategy before starting their company.
For instance, it's critical that your business adhere to specific accounting rules if your goal is to list on the public exchange (IPO). Furthermore, the majority of entrepreneurs are exclusively interested in launching new businesses and have no interest in working for large corporations. A clear exit strategy enables business owners to quickly go to their next major endeavor.
- Typical exit strategy types include:
- Strategic acquisitions and first public offerings (IPOs)
- Buyouts of management
The entrepreneur's exit strategy is determined by the role they hope to play in the company's future. In a strategic purchase, for instance, the entrepreneur relinquishes management of the original business and is released from all tasks and obligations.
Read also: Common Mistakes To Avoid During Funding Negotiations
Exits in Valuation and Financial Modeling
When creating a DCF model in financial modeling, a terminal value is required. There are two methods for determining the terminal value: an exit multiple and a perpetual growth rate. The latter approach, which is more popular among practitioners in the field, makes the assumption that the company is sold for a "multiple" of a certain indicator, such as EBITDA.
The terminal value component of the DCF model example below is based on the assumption that the firm is sold for 7.0x EBITDA.
Why Is an Exit Plan Important
Creating exit options for a business owner may seem counterintuitive. For instance, why would you want to leave your firm if you are the owner of an e-commerce business with growing sales?
In actuality, even if you do not want to sell your business right away, it is still crucial to think about an exit strategy. For instance:
- Family crises or personal health problems: You can encounter a family crisis or be impacted by personal health problems. These problems may divert your attention from efficiently managing the business. An exit strategy would assist guarantee the smooth operation of the business.
- A recession: Recessions may have a big influence on your business, therefore you might wish to keep your business from experiencing the effects of one.
- Unexpected offers: Big players can want to buy your business. If you have considered an exit strategy, you may have a fruitful discussion even if you do not intend to sell the business right now.
- A well-defined objective: You will have a clear objective if you have a well-defined exit strategy. Your strategic choices are greatly impacted by your exit strategy.