Startup school: Creating a startup exit strategy

Whether you’re a small business owner intent on holding your position, or an entrepreneur seeking to sell your startup to a larger company, creating a strong exit strategy is essential. Not only does it allow you to craft a business plan that ensures stability and long-term growth, but it also demonstrates a concrete transition plan to any potential buyer. It might seem counterintuitive to develop an exit strategy for a burgeoning startup business but doing so is critical in preparing the company for the inevitable transition in leadership. 

In this final article in our startup school series, we discuss what you need to know when planning your exit strategy.

Exiting your business

There is a common misconception that a business exit strategy is akin to a captain jumping ship as their company sinks, but this is rarely the case. Rather, exit strategies aim to smooth the transition between the founder and acquirers, while helping the business reach its long-term goals. 

A successful exit strategy will take all finances, operations, and stakeholders into account.

Preparing for the transition is also an excellent way for a founder to reduce or liquidate their stake in their business. They can even make a significant profit from selling their startup if it was successful. 

But how can business owners create an exit strategy that maximises personal profit while ensuring a bright future for their small business?

Key startup exit strategy considerations

Even if you aren’t planning on making an early exit, it’s essential to start preparing your strategy as soon as possible as it can provide you with an exit valuation — a critical component to any potential investor or acquirer. Without making these arrangements, it can be exceedingly difficult for early-stage companies to attract buyers and venture capital investors.

While you might not know when you intend on exiting your startup, recognising when the right time is, and what questions to ask yourself, is critical to your preparations.

When is the right time?

There is no right answer to this question, as each startup is unique. You may receive an exciting offer out of the blue one day, or you may be looking for an opportune time to leave. 

There certainly isn’t an absolute rule but setting a sell-by date can help your company build value and stay on target. After the five-year mark for example, you can always choose to stay or sell your startup to a bigger company.

Do you have a transition strategy?

It’s an unfortunate truth that selling your startup could mean giving up the culture you worked so hard to foster. New leadership might prioritise profits over tradition, as they’re less attached to the history and values of your company. To prevent such a disorienting shift, business owners must appoint a trusted successor to continue their vision.

How will the business maintain continuity?

A well-constructed exit strategy ensures all employees, stakeholders, and buyers are properly instructed and equipped with the necessary information to keep the business running as usual. This also means planning for the replacement of any positions left vacant by the transition.

How is the financial performance?

Obtaining an exit valuation is essential to attracting investors and buyers. Your exit strategy should cover the business’ current and future financial standing with an accurate estimate of its overall worth. That way, you can identify areas for improvement and address issues before it comes time to sell.

Common exit strategy examples

As a startup founder, there are numerous exit options available to you, each with its own benefits and drawbacks. To help you decide on the best exit strategy for your startup, here are four common examples that many entrepreneurs use.

1. Sell to an individual: In this exit plan, a startup founder chooses to sell their stake to a partner or investor. This works best for businesses with multiple owners. In these instances, the buyer is typically a well-known, trusted person.
2. Liquidate and close: Liquidating and closing is common practice for businesses that are failing. In this case, the business is closed, and every asset is sold off. The money earned during this process must go toward settling debts and paying off shareholders.
3. Merger & Acquisition (M&A): An M&A deal is a solid exit plan for any entrepreneur looking to sell their startup. In this scenario, you sell your business to a bigger company. Oftentimes, these buyers are looking to produce even more value with your company and grow it over time.
4. Initial Public Offering (IPO): IPO exits occur when an owner takes their business public, selling stocks to shareholders. While there is potential for significant personal profit, the company ultimately faces increased scrutiny from stakeholders and regulators.

Positioning your business for a favourable exit is no simple feat. You need to fully understand market conditions, how you can increase the value of your business, when the right time to sell is and much more. We recommend you take the time to plan out your journey properly, as this isn’t something to decide overnight.