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Liquidation and Exit Strategies

Liquidation and exit strategy are some of the most challenging decisions that would be made by the management or promoters. Many situations, such as absence of successor, change in the strategy to concentrate on other businesses, distress and dispute, etc., may arise and require management/promoters to evaluate this strategy.

The reality is that selling a business with significant assets is easier said than done. Potential buyers are few and seldom truly serious. Most with the required assets and credit lines required to buy your business will not want to invest for the same reasons your heirs have declined the opportunity. The vast majority will not pay for goodwill or "blue sky."

The exit strategy needs to be carefully evaluated and accordingly executed. Typically, the following exit strategies are adopted:

1) Liquidation

  • This strategy is mostly adopted by companies in distress. To make any money with such an exit strategy, the business should have valuable assets to sell, such as land or expensive equipment, and profits from selling assets have to go to pay creditors first.

2) Management buy-out

  • Current employees and/or managers may be interested in buying the business. Management buy-out can be a win-win situation as management/employees get an established business with which they are hands on, and the promoter gets enthusiastic buyers that want to see your business continue to thrive.

3) Sell to another business

  • Positioning your small business to be a desirable acquisition can be a very profitable exit strategy. Businesses buy other businesses for all kinds of reasons, from using a new acquisition as a quick path to expansion through buying out (and getting rid of) the competition.
  • The trick to success with this exit strategy is to target the potential acquirer(s) in advance and position your company accordingly.

4) The IPO (Initial Public Offering)

  • IPO can be a viable exit strategy for a business with substantial size. Taking your company public can be extremely profitable. However, depending on how the IPO is structured, you may or may not be able to withdraw any of your capital at the time, as new shareholders may want to see all the money raised by the IPO to be used to expand the business.

One can adopt the strategies listed above, or any other strategy, but each one of them will require a focused approach by management to make the company exit ready.