What is an Exit Strategy? And Why do you Need One?

An exit strategy is an entrepreneur’s plan to sell his/her investment in a company that he/she founded.  This gives an owner a way to reduce or eliminate his/her stake and, if possible, make a substantial profit in the process.  All good business plans have a clear business exit plan.  It can be discouraging to talk about ending your business before you have even started- much like you would not want to discuss a divorce or pre-nup before you get married.  It is something that you need to think about though, so you are not caught off guard, unprepared for any situation, and are working without an end in mind.  Why?  Without a detailed exit strategy you may be working harder, not smarter, without any real plan for the end in mind.

Looking at it in the simplest terms, or as an investor would, the company is simply a black box with the inputs being entrepreneurs’ effort and investors’ cash and the only output being the purchase price paid by the ultimate buyer.  Everything else that happens inside the black box is simply a component contributing to the single output – the successful exit. While this is no doubt an enormous simplification, it is clearly the most purpose of most companies with external investors.

When at the beginning of your business, you wrote a business plan.  If your business plan does not include an exit strategy, your financial strategy is not realistic or reasonable.  You may inadvertently create misalignment between types of investors and certain types of exit strategies.  This could result in a failure of the company or not getting out of it what you had originally planned.

Over the years, you will make several changes in terms of the vision for your business.  This evolution is not uncommon; as it is not uncommon for your business plan to have many different iterations over the years.  While reassessing your business goals, it is a good time to ask yourself: is the end goal still relevant?  It is good practice to do this every 6 months.  Do you want to sell or go public?  Are all aspects of your business driving toward your end goal?  Checking and re-checking that you goals are still realistic to the competitive landscape is imperative.

Exit strategies don’t need to be complicated; in fact it can be pretty simple.  All you really need is a target date and a price.  They can be more complicated, and might include statements on maximizing value, customers, and even sales strategies.  The two essentials elements are when and how much.