As an entrepreneur, there is always plenty to be thinking about: where is the next round of investment coming from, what is the best way to scale during the next phase, is the marketing strategy working, what is our main competitor’s next move? Running parallel to these more day-to-day factors is another major consideration, one that ultimately decides the fate of the business: what is our exit strategy?
Whether you’re an entrepreneur with a newly launched start-up, or a seasoned CEO at the helm of an established, global enterprise, planning your business exit strategy is well worth your time, effort, and focus.
What is an exit strategy – and why do start-ups need one?
An exit strategy is a plan executed by business owners, investors, traders, or venture capitalists to liquidate their position in a financial asset upon meeting certain criteria. It’s how an investor plans to get out of an investment.
There are a whole host of benefits to planning and implementing startup exit strategies:
- It offers a roadmap of realistic outcomes and growth milestones
- It enables you to calculate return on investment (ROI) – which is crucial for attracting investment and buy-in
- It can help to mitigate risk in the event that the business doesn’t go to plan
- It enables informed decision-making – related to, for example, resource allocation, recruitment, and scaling
- It makes it possible to capitalise on favourable market conditions.
However, despite their obvious and inherent value, only 24% of UK business leaders have an exit strategy in place.
What are the different types of exit strategy?
The best exit strategy to choose as a start-up founder will depend on your individual financial, personal, and business goals. And while there are several common exit strategies, each comes with its own advantages and disadvantages and so you’ll need to do your due diligence.
The different types of exit strategies that are particularly relevant to start-ups include:
- Initial Public Offering (IPO). Often referred to as ‘going public, an IPO refers to listing your business on the stock exchange and selling shares as stock to shareholders. While it can earn you a huge amount of profit – over and above the ROI of other strategies – it can be challenging. For example, high regulatory costs, shareholder scrutiny and pressure, poor reception from wider industry, and the highly labour-intensive process are all factors to consider.
- Merger and acquisition (M&A) deals. M&A deals involve selling your business to another who stands to gain a competitive advantage, such as acquiring products, talent, intellectual property (IP), and infrastructure, increasing their market share, or reducing competition. As an entrepreneur, you’ll have control over price negotiations, can set your own terms, and entertain multiple bids. However, they often break down, and can be expensive and time-consuming.
- Management and employee buyouts (MBO). A management buyout or employee buyout involves existing team members transitioning into senior positions to plug leadership gaps. As an owner, you’ll have peace of mind that the business is in capable, experienced hands, and it represents a relatively straightforward handover process. However, it relies on someone being interested and ready to step up, and can affect business continuity.
There are also many other forms of exit strategy:
- Family succession. Keeping the business in the family – also known as a legacy exit – is an attractive option for many business owners. Advantages include plenty of time to train family members up, the existing knowledge and commitment to the business’ success they are likely to have, and the possibility of retaining a close connection and offering advice or support. Disadvantages can include emotional or financial stress for the family unit, or a lack of family members being willing, or able, to step up.
- Liquidation. A liquidity event is most often the territory of failing businesses. It involves the business closing down and selling off its assets, with any profits used to pay off debts and/or shareholders. It can be a straightforward, quick way to wind down a business, but is it unlikely to cash out much (if anything) and could lead to bad relationships with team members, business partners, and customers.
- Selling stakes to partners or investors. If you share ownership of the business, selling your stake in it – usually to someone you know and trust – can be achieved while the business continues to operate, causing minimal disruption. However, you may sell your stake for lower than you otherwise would (due to your personal connection with the buyer) and finding a buyer can also present challenges.
- Acquihires. This exit strategy is solely focused on talent acquisition, and is highly beneficial to experienced, skilled employees as they will be required once the business has changed ownership. Pros include an ability to negotiate good terms and ensuring your workforce is well looked after; cons include finding the right buyer and an often lengthy, expensive, and fraught process.
- Bankruptcy. There is no real business plan involved in filing for bankruptcy. It involves all business assets being seized and, while financial responsibilities and debts are relieved, your future credit can be affected.
How do I choose the right exit strategy for my business?
To narrow down your options and find the right exit strategy, you’ll need to evaluate your options and seek professional advice. This is particularly important if it’s your first time managing a new business through a sale, restructuring, or takeover.
As well as understanding the pros and cons of each, determining factors such as company valuation, legal matters, deal structure, and terms of negotiation will need to be clarified. It’s worth ensuring that your start-up business is in the best possible condition before you sell or transfer it; this will mean focusing on streamlining operations, increasing financial performance, documenting your model, processes, and systems, and protecting IP.
With any exit strategy, clearly communicating with key stakeholders – potential buyers and investors, customers, employees, suppliers – is crucial.
Take time to formulate your exit plan and give your business the best chance of success
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