An exit business strategy is an entrepreneur’s plan or strategy to sell their business or share under his own company’s investor or maybe to other companies or firms. In that way, a business owner can lessen his losses and make a substantial profit. The logic behind the “exit strategy” or the “exit plan” is that if the company or business is facing a loss, the entrepreneur can liquidate or reduce his stake in a business to reduce his loss; on the other hand, he can make a remarkable profit if the business is booming.

Importance of an exit strategy

Businesses must build a thoughtful exit strategy because it guarantees an easy exit and helps the company’s owner achieve their financial goals quickly. There are reasons why proper business exit strategy planning or goal formation is necessary for a company.

1. One of the points that makes exit strategy essential is that it gives owners control over their companies or businesses. In that way, they can provide a bright future for their companies instead of leaving them. There are high chances of maximizing earnings and an effortless transfer. Entrepreneurs should also develop their businesses so that it doesn’t depend too much on them. It also implies a good impression on the potential buyers that even if the owner leaves the business, there won’t be any issues.
2. It is also essential to leave your business on clear terms. In that way, the owner can make maximum profits, and this also helps in protecting their reputation. It is a primary way to build better relationships with investors and stakeholders, which, in turn, makes your business even stronger than before.
3. A business owner should never ignore the significance of all the required paperwork before the time when they are going to sell their firms or businesses. Sometimes, the owner of a company is more focused on the progress of his business than on all the documentation and paperwork, but it is crucial to make sure that the staff contracts are accurate. Moreover, it is also important to ensure that all administrative procedures and client agreements are documented such as annual compliances.
4. Selling a business is one of the biggest decisions. So, the owner should take that step whenever he is fully prepared. There are several reasons for selling a business, i.e., for health reasons, lifestyle changes, and financial issues too, but whatever the reason is, the owner shouldn’t take it lightly. For that, proper business strategy planning is needed.
5. Another important point to keep in mind while a business exits is to negotiate and discuss the business. This includes thoroughly assessing the company’s worth, explaining the state of current industry statistics through facts and graphs, and telling about your company’s potential buyers or investors.

India’s business landscape

India is considered one of the most developed countries and has the fastest-growing economies in the world. Several factors are the cause of it – its consumer size, the quick rise in urbanization, and some great government initiatives to enhance the business environment. One of the remarkable government initiatives to boost business growth is the “Make in India” campaign. This campaign encourages the manufacturers of India and has boosted startup registration as more and more people are exploring business.

Another great initiative is “Digital India” which aims to improve the country’s digital infrastructure. According to a report published on October 1, 2014, by McKinsey & Company, according to the 2012 statistics, India is claimed as one of Asia’s most promising markets. (Understanding India’s Economic Geography3)

The Indian market is a hub for a wide range of businesses, from traditional ones like the textile and agricultural industries to modern industries like information technology and pharmaceuticals. For this reason, both developed and underdeveloped businesses can work in India’s diverse and multicultural environment.

Understanding Business Exit Strategies

Purpose of an exit strategy

Any business owner needs to have an exit strategy. It provides different advantages, including retirement planning, shifting focus to a new endeavor, and cashing out their investment.

One can simply say that exit planning is a roadmap for the entrepreneur to step away from their business to improve the financial outcomes and smooth up the transaction.

Key Factors influencing exit decisions in India:

Several reasons influence the decision to exit India.

Current Market situations

The current market situation of a country greatly impacts the type and type of exit strategy at the moment. An established and developed market might offer better selling potential customers. On the other hand, if the market prices go down, it might encourage the firm’s owner to keep delaying selling until the market goes up again.

Timing consideration for exit planning

An important factor while going through exit planning is timing. A business owner who is planning for an exit should begin preparing on an early basis. This allows them to boost their business options and profitability and resolve the flaws that might impact the valuation of their company. Planning in the early stages helps the owner maximize their business’s value and increases the chances of a successful exit without any hurdles or inconvenience.

Stages of the Business Lifecycle

The position of a business also plays a very crucial role. More established and well-developed firms or companies might think about buy-outs or public offerings, but underdeveloped businesses or startups generally search for acquisition options.

Understanding where the business stands right now in the market is also a part of proper exit planning and can lead to different consequences according to the decision made.

Common Exit Strategies for Indian Businesses

Initial Public Offering (IPO)

Initial public offering (IPO) happens when a private firm or company offers its shares to the public for the first time after its formation. The startup businesses sell their equity to the public in IPO. Through the tactic of selling their equity, they can get an ample amount of money that can be further utilized to pay their debts or the company expansion. At that time, as the owner shifts from a private to a public company, he can easily cash out their investments since they might get a higher valuation. On the other hand, it also plays an advantageous role in the public investor’s buying shares in the company.

Let’s talk about how an initial Public Offering (IPO) works. So, before an IPO, the company is considered a private firm. At that stage, the company has a really small number of stakeholders, i.e., they might be some close friends, family members, and the co-founders. Still, an IPO is a major step for a company as it gives a chance to raise money and a great ability to progress and expand. When a company matures and feels ready for the strict regulation of the SEC and can easily handle its public stakeholders, it can start the process of going public. According to a report published in Jan 2024 titled (What Is an IPO? How an Initial Public Offering Works), the given scenario usually happens when a company touches a private valuation of almost $1 billion, known as “unicorn status.”

Moreover, an IPO is not only for larger and well-developed companies; even smaller companies that are financially stable, have growth potential and can meet their market competitors qualify for an IPO.

Mergers and Acquisitions (M&A) in India

Mergers and Acquisitions<

The process of merging two companies or one company buying another one is referred to as a merger and Acquisition (M&A). This strategy is so popular these days in India because it enables a business to develop and enter new markets faster. Both the selling and buying companies benefited from it as the selling company got more exposure. At the same time, the purchased firm may be able to maintain some degree of control or continue operating under its brand, depending on the terms on which the deal has been done.

Let’s talk extensively about mergers and acquisitions. We can simply say that if a company buys another company and claims to be the new owner, this process is called acquisition. On the other hand, a merger happens whenever two companies come together and form a single company instead of claiming to be two separate companies. If both companies are the same in terms of size and progress, then it is known as a “Merger of equals.”

For example, when the two companies Daimler-Benz and Chrysler merged themselves into each other, they named both the companies one name “DaimlerChrysler,” and stopped claiming them as individual firms. Both companies’ stocks were surrendered, and new company stock was issued in its place.

Family succession

Family succession is also a very common and popular business exit strategy in India, particularly for family-owned businesses. In this strategy, the business inherits from generation to generation, enabling the business to stay within the family. In this way, the company’s values and principles are kept to a continuation. Before handing over the business to the new generation, it is necessary to ensure whether the generation to which the business has been handed over can preserve and grow it. Moreover, it is essential to properly guide and train the upcoming new leader of the company to avoid any kind of dispute.

Liquidity

Closing out a business and selling the business’s assets to pay off the debts is referred to as liquidity. The business owners who don’t get profit or interest from their business decide to sell it. The liquidity may be voluntary or involuntary. It means sometimes the owner decides to sell his business, or sometimes he is forced to do so by creditors. This strategy does not provide a good financial return. In India, the liquidation process is more straightforward and well-organized, which makes it easier for businesses to close.

 Best Types of Exit Strategies for Different Indian Business Scenarios

For startups and high-growth companies:

1. For startups and high-growth companies

Initial Public Offering

IPO can be a very beneficial strategy for the founders and investors. It’s not as hard to get into an IPO as people believe. For example, according to an article by Karthik Reddy, Firms such as Tracxn and Unicommerce (which are listed for about INR 1000cr / INR 10B; $120M) have shown that the public market is very responsive to reputable or almost profitable technology businesses, even with sales as little as $10 to $20M.

Mergers and Acquisitions (M&A):

Selling out a large or high-growth company or merging it with another company can also offer a sudden and quick business exit and great revenue.

2. For Family-Owned Businesses:

Business Succession: For a family-owned business, passing the business on to the next generation is a good strategy.

Liquidation: Selling the company to a potential buyer also has a higher chance of getting a great valuation for your company. This is also a beneficial way of exit, according to the article: Entry and exit strategies for businesses

3. For Multinational Organizations operating in India:

Splitting: Selling out a certain company asset to concentrate on essential operations.

Shared Businesses: Assigning risks and benefits to a local enterprise.

Outgrowths: splitting off a portion of an established business to form a new, independent firm, referred to as outgrowth, can be beneficial for a multinational organization running in India.

Although all the exit strategies are quite beneficial for entrepreneurs, it depends upon the scenario to choose a suitable strategy.

Case Studies and Examples of Business Exits in India

“Infosys” is one of the most popular and profitable Information technology (IT) companies, founded in 1981 by Narayana Murthy and six other engineers. Infosys has become a significant player in the world markets for outsourcing, technology, and consulting services. The company went public in 1993, and since then, the company has grown so much and has been representing India’s IT strength. The success of Infosys may be due to its priority for quality, innovation, and client satisfaction.

On the other hand, an airline company named “Kingfisher Airlines “was launched by Vijay Mallya in 2005. It was once a very profitable and successful company in the aviation field. However, it faced severe financial losses after some time due to operational costs, debts, and bad management plans. According to the Failory article, the company had to cease its operations in 2012, greatly impacting the Indian aviation sector.

Legal and Regulatory Considerations

Companies Act, 2013: In India, this law regulates the establishment, administration, and dissolution of business organizations. It describes the processes for company wind-ups, acquisitions, and mergers.

Bankruptcy and Insolvency Code (IBC), 2016: This legislation guarantees that failing businesses can easily exit by offering a time-bound procedure for handling the bankruptcy and insolvency proceedings.

Capital Gains Tax: There may be capital gains tax from selling company shares or assets. The rate depends upon the holding period and the type of asset.

Gains on short-term capital are taxable by income tax at that specific rate.

Long-term capital gains are usually taxed at a lower rate of 20% with the advantage of indexation.

Steps to prepare for an exit:

Before taking an exit, there are some precautions and initial steps a person should take:

Financial Evaluation: Verify that your financial information is correct and up to date by doing a thorough check.

Legal Regulation: Ensure that your company meets every applicable regulation and law.

Business Optimization: Boost the value of your company by optimizing procedures.

Expert Advice: To ensure a seamless exit, get assistance from consultants and financial advisors

Should you consider a business exit? If so, when

Now, there comes a question in most entrepreneurs’ minds: whether it has to be considered or not. Well, it depends on the scenarios.

For example,

1. If the entrepreneur has already met or exceeded his initial business target and objectives, he can consider a business exit.
2. The business owner should also look upon the market condition of his business at that time, such as a high valuation and a strong demand for their business, which can offer them more advantages and make it a fortunate time to sell.
3. In case of a personal issue like financial or health issues, or if the person wants to start up another profitable business, he can consider an exit.
4. If the current business is not performing well and generating great revenues, then the owner may also consider exiting.
5. Sometimes, government laws and regulations change for a particular type of business. So, if the regulations negatively impact the business, then the owner can consider selling it.

Conclusion

In conclusion, exit plans should be tailored to each company’s particular requirements and conditions to maximize value and ensure an effortless transition. Various business models, including startups, family-owned firms, small and medium-sized organizations, and international corporations, also present distinct opportunities and problems. These elements should be considered in a well-designed exit plan, which also considers the market, regulatory environment, and the company’s objectives.