Are you contemplating about the future of your business? Building a business worth fortune is not enough, one needs to have an exit strategy to ensure a way to get the money back out. An exit in business happens when the owner decides to end his participation in the business. In most of the cases, exit occurs by a sale of owner’s stake in the company but this is not a mandatory condition. An exit plan provides a way to business owner to reduce or liquidate his stake in the business and if it is a successful business, he may make a substantial profit from the exit. In case business is not successful, it helps an entrepreneur to limit his losses. In this article we will discuss the reasons or situations when an exit is essential and why it is difficult for Indian business owners to exit a business.
When to Exit?
Under following scenarios it is advisable to consider exiting your business:
- Disinterest or Lack of Resources for Further Risks: Sometimes the entrepreneur realizes that some more risks have to be taken to achieve the true growth potential of the business but he may not have resources for it or is not inclined to take those risks. In such case, if there are growth possibilities for the business then the entrepreneur can comfortably make a profitable exit.
- More Opportunities: An entrepreneur starts any business because it seemed most exciting and viable option at that time. Later on, other opportunities may arise which can be more exciting and profitable. If any single opportunity proves to be irresistible, the entrepreneur will want to exit the current venture and try a new business.
- Market Apprehension: Future market trends are unpredictable due to which sometimes owners of successful businesses may decide to cash out. There are many factors attached to uncertainty of market like in times of financial crisis your target customers might have less disposable income to spend on luxury products. Also changes in the business regulations or government policies can negatively affect businesses. The appearance of new economic players with greater competitive capacities that will threaten the future of your business. In these situations, it is favorable for entrepreneurs to prepare a pre-emptive plan and exit the business.
- Complete Washout: If even after trying for several years and putting in all your hard earned money, your business is still running in losses it might be better to call it quits. Declining profit, due to having little to no products that were developed or distinct. Having a scarce amount of development is a clear reason to reflect upon a sale. The business is suffering a progressive deterioration of its balance. Many times instead of creating profit one is diminishing it. Continued operations may result in additional losses which will further decrease your net worth.
- Lifestyle Change: There could personal reasons behind a need for an exit strategy such as:
a. Maybe you have reached a certain point of financial status and now you want to step back and enjoy rest of your life.
b. You have just started a family and want to spend time with them instead of working for long hours.
c. Further, with age as you start slowing down physically you may want to sell your business and spend your energy on your family life.
In addition to above there could other reasons also such as concentration in the sector, need to internationalize or relocate the business (so it can be competitive), loss of human capital, clients are doing vertical integration, or to detach from unprofitable divisions.
Why selling a business is hard?
It is one of the most important decisions for a business owner to sell their company. For an entrepreneur, business is a fruit of years of hard work, dedication, building relationships and facing various challenges and leaving something behind that has been an integral part of his or her life can be difficult especially in India where most of the businesses are family owned and has been running through generations.
Following are four common reasons why selling a business can be difficult for business owners:
Concern for Employees: Employees and their families are depended on businesses for material wellbeing and owners are often concerned that, if the business is sold, these employees will lose their jobs and be left in difficult economic positions.
Concern for Clients: Owners often build a reputation and personal relationships with clients and these clients depend on them for quality products and services. Entrepreneurs have concerns that when the business is sold, the quality of products and services will deteriorate which will negatively affect clients and their years of hard work.
Concern about Economic Alternatives: Businesses provide financial gains to owners based on his investment in the company. Especially in case of successful businesses, owners are often concerned that they will not be able to invest the proceeds from the sale of a company in a new business activity that will provide the same level of financial returns.
Concern about life after the company: Business is more than a job or source of income for an entrepreneur; it consumes a large part of his life. The is journey often involves many professional and personal relationships with co-workers, clients and service providers and it can be very difficult to shift from a life that was filled with meaningful commercial relationships, obligations and timetables to one which has a large professional vacuum.
Conclusion:
Selling a company is a major personal and professional decision for a business owner. Therefore, rather than waiting until the issue hits you in the face it is advisable to include an exit plan as a part of your original business idea. With an intelligent exit strategy, you can maximize returns for all the people involved and leave your company in the hands of people that you trust, providing you with financial means and peace of mind to move on to next phase of your life.
If you would like to know more about how to sell your business and increasing its value, do read our next article in the Valuation series.
