Exit Strategies for Startups and Small Business

It might seem a little strange at first but figuring out how you plan to exit your business is one of the important steps of starting it. That’s especially true if you are looking for funding, and more so if you want to seek venture capital.

Investors want to know how they are going to get their money back out if they invest.

But even if you’re not hoping to get VC funding, an exit strategy gives you a road map for the future. Things might change along the way, but startup exit strategies can help to get your business plan off the ground. Here’s what you need to know.

Management Buyout

If you plan to get outside funding for your business, your exit strategy might not be a strategy at all. Instead, you might be hoping for a management buyout.

In this scenario, the management team will have accrued sufficient wealth (and credit worthiness) during the startup and growth phase to afford to buy their investors out. This buyout would include a substantial profit on their principal investment.

While this kind of exit might be desirable for the people who started the company (since they get to keep it after leveraging outside capital) it’s not always attractive to investors.

A common problem with this exit strategy is when the management team either doesn’t want to or can’t find the funds to buy out the business. Or some or all of the original team might have left along the way, and their replacements might not want to become owners instead of employees.

Acquisition

Acquisition as an exit strategy is an option where a much larger, more established company with very deep pockets buys your company. Sometimes, they do so to grow it further, but sometimes, they just want to get rid of their competition.

When Snap Chat was acquired, it made Evan Spiegel a billionaire. That’s not always the kind of numbers we’re talking when we talk about acquisitions, but this can be a very lucrative exit strategy.

Acquisitions aren’t always billion-dollar deals for tech unicorns though. Often, larger, more established local businesses will buy out smaller competitors to solidify their position in the marketplace.

IPO

An IPO (or Initial Public Offering) is the term that describes when your company first lists on the stock exchange and starts selling shares of your company. This is a very good way to get back any money you have personally put into your business (and then some!)

Usually, if you plan to have an IPO as your exit strategy, you need to have a unique idea that’s hard to copy, and rapid, sustained growth.

IPOs can make the right companies a lot of money fast, but it’s not a guaranteed windfall. If people aren’t interested in buying your shares, you might get a lot less than you were hoping for.

Liquidation

Liquidation might not be what you think of when you think of exit strategies, but it is a common one.

Liquidation isn’t only something you do when you go bankrupt. Sometimes, if you want to get out of your business and no one wants to buy it out or take it over, liquidating is the only other option.

This exit strategy is called liquidation because it turns the assets of the business into “liquid” or cash assets. Once that happens, you would first pay off any creditors that you owe money to, and whatever is left is yours to keep.

Family Succession

Finally, if you run a small, local, family business, your exit strategy might be to have a family member take over when you want to retire. In this case, your exit would happen when you want to stop working in your business and enjoy the fruits of your labor. You might retain some form of ownership in the company, but you would exit day to day operations.

The problem with this type of strategy is that the person you want to take over from you might not always feel the same way. If your successor decides not to succeed, you would either need to find or hire someone else or find a new way to exit your business.

Choosing the Right Exit Strategy

As you can see, there are very diverse exit strategies that you could choose for a small business or startup. They’re very different, so it could be a little tricky to work out which one you should be focused on.

Usually, if you are seeking outside funding, investors will be hoping for an IPO or an acquisition, since they would get a share of the profit based on their equity, and that’s likely to be the biggest possible pie.

If you have self-funded your business and it’s a family business that has kept your family going for years, you might want to consider family succession or an acquisition by a local competitor. If all else fails, and you need to step away from your business, liquidation is another option.

Your exit strategy doesn’t have to be written in stone, and it’s not uncommon for it to change over time. Many startup founders discover that they make such good money from their business that it makes sense to keep it rather than exit. They might still hire people to take over day to day running, but they don’t have to be hands on anymore.

This is a very personal choice, and it should be driven by your needs now, and in the future. So, weigh all the options before you write anything into your business plan!

When to Review Your Exit Strategy

Usually, when you create an exit strategy, you will set a deadline or goal. So, you might decide to give your business you’re all for five or ten years, and then try to list or be acquired. Whatever the interval is, it’s important to review from time to time, to make sure everything is on track. You can also adjust your exit plan if you find it no longer fits your corporate vision.

So, while it may certainly seem strange to plan your exit when you’re starting out, hopefully you can see that this is an important goal post. They may move, but at least you’ll always know what you’re aiming for.

Originally published at https://forevermogul.com on July 24, 2021.