When you first start a business, the last thing you’re thinking about is leaving it. But, life gets in the way of plans. That’s why you need an exit strategy along with starting your startup. Exit strategies help make sure you, your business, and your investors are protected.
Planning an exit strategy is the most commonly overlooked consideration of a business strategy, yet the exit strategy plays a key role in determining the strategic direction of your business. By not proactively planning an exit strategy, business owners, their heirs or their successors may find that future options are limited.
Some entrepreneurs think of their exit strategy as the means by which the business transitions to the next major stage. From this perspective, entrepreneurs don’t necessarily leave the business, but their role changes significantly. This is why it’s important for you to carefully evaluate your business plan, strategy, and vision and determine what a favorable exit strategy looks like for you and your business.
BENEFITS OF AN EXIT STRATEGY
Besides having peace of mind that you can exit the business profitably, other benefits of having an exit strategy in place include:
Protecting the value of the business you’ve built
Creating a smooth transition for your management team and other stakeholders
Generating a potential income for retirement or disability
Enhancing the future worth of your business
Reducing or deferring the potential tax impact on your estate, spouse or family
Creating a strategic direction for your business’s growth
There are a number of exit strategies for startups you might consider. The path you choose depends on a unique set of circumstances, like business size.
Types of exit strategies
1. M&A deals
In a merger, two businesses combine into one. Mergers increase your business’s value, which is why investors tend to like them.
To go through with a merger, you still need to be a part of the business. Through a merger, you will be an owner or manager of the new business. Your employees might be employed by the newly merged business. But if you want to sever your ties with your business, a merger is not the best exit strategy for you.
This is one of the strongest exit strategies for business owners, as they can maintain control over price negotiations and set their own terms.
If you are selling to a competitor or entertaining multiple bids, you may be able to drive the price up even further.
M&A processes can be time-consuming and costly and regularly fail.
to streamline processes and ensure a high valuation.
An acquisition is when a company buys another business. With an acquisition exit strategy, you give up ownership of your business to the company that buys it from you.
One of the positives of going with an acquisition is that you get to name your price. A business might be apt to pay a higher price than the actual value of your business, especially if they’re a competitor.
If someone is actively trying to acquire your talent, you’ll be able to negotiate stronger terms of the acquisition.
Your employees will enjoy a more certain and successful future.
You may struggle to find a buyer who is interested in an acquihire.
As with typical acquisitions, this can be a challenging and costly process.
3. Selling your stake to a partner or investor
As long as you are not the sole business owner, you can sell your stake to a partner or venture capital investor while the business runs as usual. The term ‘friendly buyer’ is often used in this type of exit strategy, as it’s likely that you would sell your stake to someone known and trusted.
The company can continue to run with minimal disruption to business as usual, keeping revenue streams steady.
It’s likely this person already has a vested interest in the business and is committed to its success in the long term.
Finding a buyer or investor for your share of the company can be difficult.
The sale may be less objective and therefore not as lucrative; you may lower the asking price if the buyer is someone close to you.
4. Initial Public Offering (IPO)
An initial public offering, or IPO, is the first sale of a business’s stocks to the public. This is also known as “going public.”
Unlike a private business, a public business gives up part of their ownership to stockholders from the general public. Public businesses tend to be larger. They also (generally) go through a high-growth period. By taking your business public, you can secure more funds to help pay off debt.
The potential to earn a substantial profit, more so than any other exit strategy.
Expect intense and ongoing scrutiny from stockholders, regulatory bodies and the public.
Additional requirements of an IPO include mandatory progress and performance reporting.
IPO due diligence is difficult, costly and labour-intensive.
to get complete oversight and control, and avoid the risks inherent in this process.
With liquidation, business operations end and your assets are sold. The liquidation value of your assets go to creditors and investors. However, your creditors—not your investors—get first dibs.
Liquidation is a clear-cut exit strategy because you don’t need to negotiate or merge your business. Your business stops and your assets go to the people you owe money to
If it’s a firm end you’re seeking, this is it. The business is well and truly gone after liquidation.
This method can be simpler and faster to execute than other methods, such as acquisition.
Liquidation is not likely to be a high-value exit.
You could be breaking ties between you and employees, partners and customers.
How to write an exit strategy business plan
Again, you must include your exit strategy at the end of your business plan. That way, you can reference it if your business starts going south. And, potential investors can determine if you have a strong plan in place to protect their money if you leave.
When coming up with your exit strategy, consider the following factors:
Your business structure
Your business size
Entrepreneurial family members or friends
Keep in mind that you will update your business plan and exit strategy as your company goals change.
For example, your original exit plan may have been to merge with another business. But after 24 years of owning your business, your daughter says she wants to buy it from you. If you decide to sell instead of merge, update your business plan to reflect your new exit strategy
At flyboat, we work with early-stage startups and always try to help and inform founders about the financial health of the business. our expertise lies in a pitch deck, financial modeling and consultation. click on connect to know more