why is it important to have an exit plan 
businesses and investors should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments here are several specific reasons why it s important to have an exit plan 12removes emotions an exit plan removes emotions from the decision making process having a predetermined level at which to exit an investment or sell a business helps avoid panic selling or making rushed decisions when emotions are high which could accentuate a loss or not fully realize a profit goal setting having an exit plan with specific goals helps answer important questions and guides future strategic decision making for example a startup s exit plan might include a future buyout price that it would accept based on revenue turnover that figure would help make strategic decisions about how big to grow the company to reach predetermined sales targets unexpected events unexpected events are a part of life therefore it s essential to have an exit strategy for what happens when things don t go to plan for instance what happens to a business if the owner faces an unexpected illness what happens if the company loses a key supplier or customer these situations need planning in advance to minimize potential losses and capitalize on gains succession planning an exit plan specifies what happens to the business when key personnel leave for example an exit strategy might stipulate through a succession plan that the company passes to another family member or that the business sells a stake to other owners or founders carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart exit strategies for startupsin the case of a startup business successful entrepreneurs plan for a comprehensive exit strategy to prepare for business operations not meeting predetermined milestones if cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit further losses most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party ideally an entrepreneur will develop an exit strategy in their initial business plan before launching the business the choice of exit plan will influence business development decisions common types of exit strategies include ipos strategic acquisitions and management buyouts mbos 3the exit strategy that an entrepreneur chooses depends on many factors such as how much control or involvement they want to retain in the business whether they want the company to continue being operated in the same way or if they are willing to see it change going forward the entrepreneur will want to be paid a fair price for their ownership share a strategic acquisition for example will relieve the founder of their ownership responsibilities but will also mean giving up control ipos are often considered the ultimate exit strategy since they are associated with prestige and high payoffs contrastingly bankruptcy is seen as the least desirable way to exit a startup a key aspect of an exit strategy is business valuation and there are specialists who can help business owners and buyers examine a company s financial statements to determine a fair value there are also transition managers whose role is to assist sellers with their business exit strategies exit strategies for established businessesin the case of an established business successful ceos develop a comprehensive exit strategy as part of their contingency planning for the company larger businesses often favor a merger or acquisition as an exit strategy as it can be a lucrative way to remunerate owners and or shareholders rival companies often pay a premium to buy out a company that allows them to increase market share acquire intellectual property or eliminate competition this raises the prospects of other rivals also placing a bid for the company ultimately rewarding the sellers of the business 3however a merger and acquisition focused exit strategy should factor in the time and costs to organize large deals as well as regulatory considerations such as antitrust laws established companies also plan for how to exit a failing business which usually involves liquidation or bankruptcy liquidation consists of closing down the business and selling off all its assets with any leftover cash going toward paying off debts and distributing among shareholders as mentioned above most businesses see bankruptcy as a last resort exit however it sometimes becomes the only viable option under this scenario a company s assets are seized and it receives relief from its debts however declaring bankruptcy could prevent business owners from borrowing credit or starting another company in the future exit strategies for investorsinvestors can use several different exit strategies to prudently manage their investments below we look at several strategies that help minimize losses and maximize gains 4selling equity stake investors with shares in a startup or small company could exit by selling their equity stake in the business to other investors or a family member selling an equity stake may form part of a succession plan agreed upon by founders when starting a business if selling a startup stake to a family member it s important that they understand any conditions tied to the investment the 1 rule investors apply this rule by exiting an investment if the maximum loss equals 1 of their liquid net worth for example if olivia has a liquid net worth of 2 million she would cut an investment if it generates a loss of 20 000 1 100 2 000 000 the 1 rule helps investors take a systematic approach to protect their capital percentage exit using this strategy investors exit an investment when it has gained or fallen by a certain percentage from its purchase price for instance ethan an angel investor may decide to sell his share in a startup if it achieves a 300 return on investment roi conversely amelia a venture capitalist may decide to sell her share in a startup if it drops 20 in value time based exit investors apply this strategy by exiting their investment after a specific amount of time has passed for example noah may decide to sell his stake in a business after 18 months if it has not generated a positive return a time based exit helps free up capital from underperforming investments that could be used for other opportunities 