What is a Startup Exit Strategy?
In the world of business, it pays to be prepared for everything, including failure. Coming up with a good startup exit strategy will help you negotiate your way into a good deal. Learn all about startup acquisitions and how to create a good business exit strategy.
In today’s volatile industry, business failure is a looming threat. There are many reasons why a startup fails and quite often, it’s almost inevitable. As harsh as it sounds, the reality is that 90% of startups fail, and your company faces that very risk.
But as a founder, you have to make the most out of every experience, including the negative ones. You have to come prepared to deal with both the great and ugly sides of the business. Hence, you need to come up with a solid startup exit strategy.
Purpose of a Startup Exit Strategy
We start off by understanding what a business exit strategy is for. There are several reasons why a company needs it. It goes hand in hand with your goals for the business.
Some entrepreneurs kick start their company with the goal of selling it. Others, however, decide to pull out of the venture midway and move on to pursue other things. An exit strategy will make the process of ending the operations and the transfer of ownership easier.
Additionally, an exit strategy is also a useful pitch for future investors. You can include it in your business plan to add more value to your pitch. It will give them the assurance that they will still gain returns even when things don’t work out or if you change your plans for the company.
So, whether you plan on selling a startup, scaling it, or having it acquired, an exit strategy is a must.
Creating your Business Exit Strategy
Now that we know what it’s for, let’s move on to the process of actually planning it. What should you include in your startup exit strategy?
There are several types of exit strategies you can adopt. It will primarily depend on what type of startup you are, your financial state, and your strategic goals. So, here are the common startup exit strategies:
Merger and Acquisition
Merger and acquisition is the process of a company selling itself to another company. The buying company will typically merge the offering company’s product and services with its own.
One great example is the Google and Youtube acquisition. Google bought Youtube in 2006 and today, it operates as one of its subsidiaries. The merger integrated Youtube’s video platform in the search engine, hence, its video category.
Smaller companies also do the same with affiliated businesses. A coffee shop can buy out a bakery so they can add a line of pastries to their menu. The merger and acquisition strategy can apply to all sizes of businesses, even with startups.
This exit strategy is great if you want to gain a competitive edge in the industry. Negotiating a deal with a bigger company will give you that extra boost you need to break into the market.
In other situations, competitors may offer to buy you out completely to eliminate you as a competitor in the market. Either way, you can still gain the upper hand by selling your company at a higher price, especially if there are other bidders for it.
Want to learn more about startup acquisition? We’ve talked more about it in the Startup Hustle podcast.
Initial Public Offering (IPO)
Initial Public Offering (IPO) is the process of selling shares to the general public in a new stock issuance. A corporation can raise cash from the investors by issuing public shares.
This exit strategy is usually ideal for businesses that have already gained traction or large corporations. It involves putting your business up for sale and offering it to investors and Wall Street analysts.
If you’re a growing startup, an IPO will help recoup the money spent on your expansions. You can get listed on the stock exchange by seeking the help of experienced investors.
One of the main challenges of IPO is winning over the Wall Street analysts. You’ll have to convince them that your company is worth investing in.
All the while, you need to meet the Sarbanes–Oxley Act standards, pay the underwriting fees, adhere to the lock-up period, and deal with the risk of a stock market crash.
With its complex process and high risks, IPO is best suited for larger and more established companies. So, you have to carefully assess whether your startup can already afford this type of exit strategy.
When it comes to passing on your business, the family would normally be the first candidate. However, a management buyout does have its appeal.
For one, turning over your company to employees would be a more convenient process. They already know the company’s corporate goals, plans, issues, and culture.
You won’t have to spend too much time briefing them on your vision. On top of that, there’ll be less hassle in practicing due diligence. Legalities in turning over everything to your successor will fair smoothly.
So, if you want your legacy to be upheld, consider offering your shares to employees instead. With careful assessment and consideration, you may just find your business prospering in the hands of future successors.
With all that said, family is not out of the question when it comes to passing on your company. If they happen to have in-depth knowledge and understanding of your operations, they may be good candidates as successors.
Keep in mind that you have to take a lot of things into careful consideration. Family is a sensitive matter and you don’t want to spark conflict and rivalry.
You have to ensure that the successors have the relevant skills and the right attitude to take over the business. Your legacy is as good as how they will maintain it.
Although family succession may seem like a complicated endeavor, it’s worth it in the end. In fact, there had been several successful family businesses over the years. Companies such as Walmart and BMW have been passed down from one generation to the next.
Liquidation is an ideal exit strategy for small businesses. It’s a speedy way to close business, and in some cases, may just be the only option.
Oftentimes when a company is close to declaring bankruptcy, liquidation is the best course of action. However, profits made from the assets would automatically go to creditors first.
To gain profit from liquidation, you’ll have to sell the most valuable assets such as property and equipment. You can also try to sell your assets to the public if it’s attractive enough. Overall, liquidation is your best bet to prevent losing more money.
The above-mentioned items are only a few of the exit strategies you can take. You have to look deeper into your business goals to choose which strategy to take.
Work with Full Scale
Selling a startup is no walk in the park. You’ll need to plan out every step to get the best outcome for your deal. It can be intimidating if you’re doing it for the first time. Luckily, there’s help available!
Full Scale specializes in helping entrepreneurs in all their business endeavors. Our founders Matt DeCoursey and Matt Watson are veteran entrepreneurs who’ve had their fair share of experience in startup acquisition.
They’re passionate about entrepreneurial success. Hence, they’ve founded Full Scale for startup owners.
Full Scale offers a wide array of business services to assist you in scaling your startup. We can guide you through the planning stages of your project and provide you with the resources to implement it.
Ready to scale your startup? Talk to us today!