When should you start thinking about exit planning? When you start your business! But have you thought about your endgame? That’s right, I’m talking about your startup exit strategy.
If you’ve got big plans like going public through an IPO or catching the eye of someone looking to buy, remember this – laying down a solid startup exit strategy isn’t just helpful; it’s vital. This way, your chances of success may increase.
Understanding Startup Exit Strategies
When you’re building your startup in the trenches, the last thing you think about is how you will exit. You’re laser-focused on marketing your product, finding product-market fit, and scaling your business. But here’s the thing – business exit planning is crucial, even in the early stages.
Types of Exit Strategies
There are a few different exit strategies that startups can consider:
- Initial Public Offering (IPO)
- Mergers and Acquisitions (M&A)
- Selling to a Strategic Buyer
- Management Buyout
- Liquidation
Each has pros and cons, and the right choice depends on your business and goals.
Importance of Having an Exit Strategy
So why bother with an exit strategy? A few reasons:
- It aligns your team around a common goal
- It helps you make strategic decisions
- It makes your startup more attractive to investors.
Investors want to know how they’ll get a return on their investment. Having a clear exit plan shows them you’ve thought it through.
Factors to Consider When Choosing an Exit Strategy
When deciding on an exit strategy, consider:
- Your personal goals
- The market conditions
- Your company’s valuation
- The preferences of your investors
It’s not a one-size-fits-all decision. What worked for one startup may not be the best choice for yours. I’ve seen startups succeed with all types of exits. The key is to have a plan and stay flexible. Keep your options open and be ready to pivot if needed.
Top 5 Startup Exit Strategies
Let’s dive into what I believe are the most common startup exit strategies.
1. IPO (Initial Public Offering)
An IPO is when a company goes public and sells shares on a stock exchange. It’s the holy grail for many startups, but it’s not for everyone. IPOs can raise a lot of capital but face much scrutiny and pressure to perform. Plus, the process is lengthy and expensive.
2. Mergers and Acquisitions
In an M&A deal, your startup is acquired by or merges with another company. In my experience, this is a popular exit path, especially for tech startups. The bigger company often wants access to your team, technology, or customer base. An acquisition can be a great win for all involved if it’s a good fit.
3. Selling to a Strategic Buyer
Similar to an acquisition, this involves selling your startup to an outside buyer, like a competitor or a company in a related industry. The key here is to find the right buyer who sees the value in what you’ve built. It takes some matchmaking, but it can be a smooth exit if you find the right fit.
4. Management and Employee Buyout (MEBO)
In a MEBO, the startup’s management team and/or employees buy the company from the founders and investors through a combination of debt and equity financing. MEBOs can be a good option if your team is bought into the long-term vision and has the resources to make it happen.
5. Selling to a Family Member
For some family-run startups, keeping it in the family is the preferred exit. This can work well if you have a clear succession plan and the financial means to buy out other shareholders. It’s not the right fit for every startup, but it’s an option worth considering if you want to keep the business in the family.
Preparing Your Startup for a Successful Exit
Whichever exit strategy you choose, the key is to work to prepare your startup for success. Here are a few tips:
Creating a Strong Business Plan
Your class=”s1″>business plan can be your roadmap to a successful exit. It should outline your goals, strategies, and financial projections. Investors will want to see a well-thought-out plan that shows you have a clear path to intended profitability and growth. Your startup needs a business model that can scale to be attractive to buyers or investors. A book we recommend to learn more about creating a business plan is Walking to Destiny by Christopher Snider and Scott Snyder.
This means having a clear value proposition, a large addressable market, and a growth plan. Think about how your business can expand beyond its current state. Can you enter new markets, launch new products, or increase your customer base?
Hiring a Strong Management Team
Your team is your most valuable asset. Surround yourself with talented people who share your vision and can execute your plan. In my experience, many acquirers place a high value on the strength of the management team.
They want a group to lead the company to even greater success post-acquisition. To scale efficiently, you need repeatable processes in place.
This includes everything from your sales and marketing funnel to your product development cycle. Documenting and working to optimize these processes will make your startup more valuable and easier to integrate into an acquiring company.
Getting Your Finances in Order
Start building your team of professionals to represent you on your entrepreneurial journey. These may include a tax and legal attorney, a CPA, and a certified financial planner.
Building Connections and Relationships
Finally, don’t underestimate the power of networking. Building relationships with potential buyers, investors, and advisors can open up new opportunities for your startup.
Attend industry events, join relevant organizations, and always be on the lookout for strategic partnerships. You never know where your next exit opportunity will come from.
Navigating the Exit Process
The exit process can be a rollercoaster ride, but with the right strategy, mindset, and team behind you, you can increase your chances of success. I’ve been through my fair share of exits, and let me tell you, it’s not for the faint of heart. But if you’re prepared and have a solid plan, you can confidently navigate the twists and turns.
Identifying Your Exit Planning Team
Professionals you should consider having on your exit planning team include are:
- Tax attorney: they can help you structure legal entities that could help you mitigate taxes.
- Certified Public Accountant, CPA®: Tax preparation and work to reduce taxes during ownership and business sale
- Certified Financial Planner, CFP®/Certified Exit Planning Advisor, CEPA®: wealth management emphasizing holistic planning and exit planning as a fiduciary.
- Mergers and Acquisitions/Investment banking firm: Identify your exit planning goals, market prices, and possible buyers for your company.
Life After the Exit
So, you’ve made it through the exit process and come out the other side. Congratulations. But now what?
For many entrepreneurs, life after exit is not what they expect. Many regret selling. The reason is after a few months of time off, they miss the excitement and challenge. Working with a CFP® can help you think through your options.
Pursuing Personal Goals
Of course, not everyone wants to return to the startup game. And that’s okay, too. Maybe you want to take some time off to travel the world or pursue a personal passion project. Whatever your goals, a successful exit can give you the financial freedom to make them a reality. So don’t be afraid to dream big and go after what you want.
Giving Back to the Community
Finally, don’t forget to give back to the community that supported you. Whether mentoring young entrepreneurs or donating to a cause you believe in, there are plenty of ways to pay it forward. After all, no one achieves success alone.
Startup Exit Strategy: Final Thoughts
Building and exiting your business can be one of life’s most rewarding and frustrating aspects. You do not have to navigate all of the options alone. Build a qualified team to help you throughout your journey.
For more information or to work with experienced exit strategy professionals, contact Riverbend Wealth Management today!
Common Questions on Startup Exit Strategies
What is the best exit strategy for a startup?
While no single strategy works for all businesses, many owners find mergers and acquisitions offer a practical path forward. The choice depends on factors like your:
- business value
- market conditions
- personal goals.
Some owners prefer family succession, while others look toward management buyouts or public offerings. Working with financial professionals could help determine which approach fits your circumstances.
How do most startups exit?
Statistical data suggests that mergers and acquisitions represent a common exit path for many businesses. When companies reach a stage where they show strong financial performance and stable operations, larger organizations may see value in acquiring them. This could include purchasing the company’s assets, technology, client base, or talent pool.
What is an example of a startup exit?
Consider this local example:
A Chattanooga business owner built a successful manufacturing company over 20 years. After working with financial advisors and determining the company’s value, they sold to a larger corporation.
The process involved coordinating with CPAs on valuation, working with attorneys on deal structure, and planning for retirement income. The owner now continues as an advisor while pursuing personal interests.
What is the exit stage of a startup?
The exit stage typically occurs when a business demonstrates stable revenue, strong market position, and clear operational processes. This phase often involves preparing financial documentation, addressing tax considerations, and potentially restructuring for sale or transition. Many business owners find value in beginning exit planning years before their intended transition date, allowing time to strengthen the company’s position and explore various options.
