Planning and Executing an Exit Strategy

Most businessmen want to run the business successfully. But a time comes when alert businessmen consider it necessary to decide on an exit strategy to continue or bury the business. Business is a commercial activity earning profits or incurring losses according to the environment and market conditions for its products and services. When situations are adverse the only choice before the businessman is to wind up the business. But liquidation is a painful process and this involves total loss or meagre gain.

The alternative is to look for an upswing as in the case of the share market and decide on the timing to sell the business. In that case the exit strategy of the business becomes relevant and important. The market value of the shares of the promoters or the assets of the company might rise substantially and there is a great difference between the potential price realized and the purchase cost. The shrewd business man capitalizes on the opportunity and decides to sell the business in its entirety. He is not sure whether the upswing in prices will continue. So he quickly takes a decision. He no longer wants to continue in the business. He is eager to recover the investment and cash down the opportunity. He realizes a great cash surplus.

For e.g. a promoter of a soft ware company issued 10000 shares at $ 10 per share and after five years he watches the market for the industry. He finds share value of his company has shot up to $500 per share. His initial investment of $ 10000 has appreciated to $ 5 million. He is not sure whether the market will continue this upswing and bullish nature He looks for a buyer and sells the shares at $ 500 per share. By sale of his shares he realizes total sales proceeds of $5 million. He gains $ 4.99 million. That is his capital gains. This capital appreciation is subject to tax. He sells the shares and gives up has management or controlling rights and considers alternatives for further investment. Being a careful entrepreneur he wants to save tax and invests the surplus funds in shares of another promising company. He has followed an exit policy and succeeded.

Another example is of a promoter who invested $ 1 million in a company. After ten years he finds the shares have declined in value due to the nature of business. His share value is only $0.50 million. But his physical assets have appreciated in value and are worth two million dollars. He decides to sell. He sells his controlling shares. He benefits from following a timely exist strategy Being a proprietary concern the assets and good will are valued at a much higher level and he gains. The surplus is available for further investment.

In another case a firm in which the Managing Director had controlling interest bought imported machinery worth $ 500000. The company did not take off due to the government's lethargy in granting various clearances. The promoter decides on selling the machinery and found an opportunity. The machinery had a ready buyer and it appreciated in value. He sold it for $2 million and gained $ 1.5 million.

There is a case of a seafood firm which won meritorious award for the best export performance in a year. It was known for its reputation. But the recession due to the 1973 oil crisis hit it hard and the firm incurred a loss of $ 15 million. It reconsidered its decision to be in business and finally over a period evolved a strategy to sell its assets, mainly land and machinery which enabled lit to clear all liabilities. The capital gains did not attract tax .It was a wise decision.

For achieving the benefits you have to make the business attractive to prospective buyers. You can sell the equity to someone, curtail your firm's operations, evaluate profitability of various operating divisions and discard those that are less profitable, .discard dead inventory and bad debts, quantify accurately the worth of the business, set right financial records, get books of accounts audited, improve systems, and project an efficient management team.

You must take care to report capital gains realized. From this you can deduct all capital losses on all invested assets in the business. This will give you the benefit of reduced tax burden. Tax rate applicable for capital gains will be at a lower rate than for personal income tax.

Selling a business involves a crucial decision. So you must be fully prepared to part with it when a prospect shows up. In that case it is advisable that you plan your exit strategy without delay. In reality many entrepreneurs after years learning to run and develop a business fail when they come to plan, sell and exit. They find they have been unable to capitalize on their precious investment wasting away years of hard work.