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What is a Business Exit Strategy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 11 September 2016
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    Conjecture Corporation
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A business exit strategy is a plan that outlines the steps necessary for current owners to remove themselves from association with the company. Strategies of this type are usually developed in advance, depending on the long-term goals of the owners. In many instances, the plans can be adapted to deal with situations where exiting from the business becomes prudent due to unforeseen circumstances, including a loss of demand for the goods and services produced or some other factor that requires a shutdown of the business.

Owners develop a business exit strategy based on what they hope to ultimately derive from the business. In some cases, companies are established for the express purpose of creating an entity that will be attractive to larger competitors and sold at a profit within two to five years. At other times, a company may be created and developed as a means of providing a source of income now and later serve as an asset that provides a nest egg for the retirement years.

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One of the most common examples of a business exit strategy is selling the company to a new owner. In this scenario, the two parties work closely to make sure that the transition in ownership is smooth, creating no concerns on the part of customers, employees, or others that are affected by the change. Both parties are likely to conduct appraisals as a means of determining the sale price of the business and ultimately settling on a price that each party considers equitable. The transfer of assets is conducted in accordance with local laws, observing any time constraints or procedures that may apply. It is usually a good idea for the buyer and seller to retain their own legal counsel to ensure the interests of both parties are protected.

Shutting down a company calls for a slightly different exit strategy. Here, there is a need to settle all outstanding debt associated with the company, liquidate assets, distribute final dividends to investors, and comply with any procedures required by government entities as part of the disincorporation process. As with a sales, owners would do well to seek legal counsel to ensure all necessary tasks associated with the business exit strategy are completed in an orderly or timely manner, so that there is nothing to cause problems at a later date.

Unanticipated events can lead to the need to implement a business exit strategy. A successful hostile takeover would require current owners to transfer ownership to the raider who was able to gain control of the company, while making sure that all company related debt is transferred along with the company assets. Depending on governmental regulations, the former owners may also be able to salvage all or part of their retirement plan balances by rolling those balances into some sort of independent retirement plan. Since laws related to takeover attempts vary from on nation to another, obtaining competent legal counsel is imperative when faced with the reality of a takeover.

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