As a startup founder, there will inevitably come a time when you're ready to leave the company you have worked so hard to build. This decision could be reached for a variety of reasons. It's not a sign of business failure, but rather a calculated move to guide the future of your company.
An exit strategy is often a requirement when looking for early stage investments. Venture capital firms need to understand your potential exit strategy so that they understand when they could get paid back and the potential return on their investment.
This blog will help you determine which strategy is best for your tech startup and what you should consider before implementing it.
5 Common Startup Exit Strategies
A startup exit strategy is an entrepreneur’s plan on how they will sell their ownership in a company as a way to reduce their stake in the business and ideally, make a substantial profit.
There are many types of exit strategies that businesses can have and follow. We have outlined the 6 best exit strategies for startups to consider.
1. Merge or Become Acquired (M&A)
Merger and Acquisitions (M&A) exit strategies involve having your startup purchased by or merged with another company that has similar or aligned goals to your business.
M&A strategies can offer a lot of flexibility in laying out terms for your continued level of involvement with the company, or lack thereof if you prefer to not have any further connection.
One of the pros of M&A is having the ability to negotiate the selling price, but one of the cons is the process can be lengthy, and sometimes, in the end, the selling company is not purchased or is not merged with.
2. Organize a Management or Employee Buyout
Another startup exit strategy is to have employees of your company, typically managers, buy your startup. A huge plus of this option is you’ll have confidence knowing that the company’s new owners are people who already know how your startup operates, creating a smoother transition.
Selling your startup to people who you know well can make the exit process more flexible and comfortable. Plus, if you wish to remain in the loop or involved with the business, they may want to keep you on as a mentor or advisor.
3. Go Public with an Initial Public Offering (IPO)
An Initial Public Offering (IPO) is when a private company’s shares are offered to the public and serious investors on a stock exchange for the first time, opening up potential opportunities to make great profits. Typically the company hires an underwriter like an investment bank to consult on the IPO and prepare key documents for investors.
An IPO is not a route every startup business will be prepared to take or feel comfortable with, especially since going public opens up companies to a lot of scrutiny and meeting strict regulatory requirements.
4. Sell to a Third Party Buyer
Selling your startup on the open market can be the ideal choice for many business owners. This can be a clean and clear process providing an instant successor who has a passion for your business and the qualifications to take it to the next level.
Selling to a third party can be beneficial due to receiving a lucrative selling price and optimal sale terms, however, in many cases it can take years to find a buyer who is fully interested or that you feel confident in selling to.
5. Liquidate
This exit strategy is definitely the most concrete and final. When you liquidate, you shut down your business and sell your assets. This option does not mean you have given up or are defeated, but sometimes this can be the right strategy depending on your circumstances.
Things to keep in mind are that debts need to be paid off, payouts to all shareholders need to be completed, and you need to consider how liquidation will affect your team and customers.
Factors Entrepreneurs Should Consider When Planning Their Startup Exit Strategy
It is important to note that the best exit strategy for your small business may be an unwise strategy for another. However, no matter which strategy you choose to take, you must carefully consider a wide range of factors.
Questions to consider when creating a startup exit strategy:
- Does your exit strategy reflect your goals and company values?
- How much does your startup’s legacy mean to you?
- Will your strategy make you money and what sale amount are you comfortable with?
- How will your exit strategy affect the short-term and long-term future of your business?
- What does the timeline look like for your exit strategy to complete?
- Do you have the proper support and knowledge to successfully form an exit strategy that will benefit you and your startup?
One of the best mentors for helping with the creation of an exit strategy as well as support while going through the exit process is a startup incubator. Becoming a client of a startup incubator can benefit you and your business tremendously by receiving 1-on-1 mentorship, knowledge, advice, support, skills training, networking opportunities, and more.
