As an entrepreneur, your immediate priorities are growing your startup and acquiring new customers. The last thing on your mind is thinking about how your venture will end.
But there may come a time in the future when you decide to step away — another business may make an irresistible offer, or you might want to try something new.
Having an exit plan in place is important, as it helps to ensure a smooth transition if you decide to sell. This article will look at common types of business exit strategies along with how to develop one for your startup.
What Is a Business Exit Strategy?
A business exit strategy is a plan that outlines how you intend to sell and wrap up your involvement in your startup.
If your startup is making money, an exit strategy enables you to transfer ownership to a new owner while making a profit in the process. But, if your startup is struggling, an exit strategy lets you close your business and limit losses.
Either way, developing an exit strategy is smart. Some investors may even ask to see one before becoming involved in your venture. They’ll want to know how your potential decision to leave impacts their investment.
Types of Business Exit Strategies
Even if you’re not currently thinking of leaving your startup, it’s a good idea to know what your options are. Here are some common business exit strategies.
A merger occurs when two companies operate as a single entity. Depending on the terms of the deal, you can decide to stay or walk away. If you still want to be involved with your startup, you might consider a merger exit strategy.
An acquisition occurs when another company buys your startup. This can be a company in the same industry looking to expand its market share or a company looking to expand its portfolio.
An acquisition exit strategy typically involves giving up ownership of your business. The upside is that you can negotiate the terms of the acquisition, which means more profits for you and your investors.
Sell to a Partner or Investor
If you’re not the sole owner of your startup, another exit strategy you can consider is to sell your stake to your partner or an investor. The advantage here is that you’re negotiating with someone you already have a working relationship with, so the transaction should be easier to handle. It also means that you won’t have to search for a buyer.
However, this exit strategy means you’re completely giving up ownership of your startup. Only consider this option if you know for certain that you want to exit the business.
Many entrepreneurs dream of taking their business public with an initial public offering or IPO. If your startup is doing really well, you might consider going through with an IPO and selling stock to the general public.
However, taking a company public isn’t easy. There are certain conditions you must meet and the entire process can take between six and nine months, or even longer. If you’re looking for a quick exit, then going public may not be the best option.
Liquidation means that you’re closing your startup and selling off your assets. Just remember that any cash you get back will go toward paying off your creditors before anyone else (including investors).
If your startup is struggling, you might consider liquidating to limit your losses. But selling the business or parts of it isn’t the only option if you’re strapped for cash. For example, StuDocu is a startup that recently received funding in its Series B. Similarly, you can also consider reaching out to investors instead of liquidating.
On the other hand, liquidation services should be a last resort for startups as they often result in lower returns than selling the business as an ongoing concern. For liquidation services, it is also essential to note that they are only suitable when future profits are unlikely, as they aim to sell assets and pay off debts on a short-term basis.
7 Steps to Developing a Business Exit Strategy
Now that you’re familiar with the different types of business exit strategies, let’s look at developing one for your startup.
1. Get Your Finances in Order
The first order of business is to prepare your finances. Buyers will want to see accurate financial records before they decide to make the purchase. Nobody wants to hop in a business and realize that the first thing they need to do is to talk to credit repair companies because of unpaid debt.
Start by putting together a balance sheet, a financial statement that reports your startup’s assets and liabilities. Then, prepare a profit-and-loss statement, which summarizes revenues and expenses over a specified period.
Consider working with an accountant to put these financial records together.
2. Choose an Exit Strategy
The next step is to decide on an exit strategy. The strategy you decide on will ultimately depend on what your goals are.
For example, if you want to stay involved with your startup, you might consider an acquisition and negotiate terms to stay on as a consultant. But if you want to step away from your startup completely, you might consider selling your stake to a partner or liquidating entirely.
3. Record Every Process
Part of developing an exit strategy involves documenting your processes. This enables a new business owner to pick up where you left off and continue running the business.
Document every process and include details for each step. These documents will come in handy if you decide to sell.
4. Increase the Value of Your Startup
Making your startup more profitable will allow you to negotiate an even higher price when you decide to exit.
Ways to increase the value of your startup include establishing recurring revenue streams, increasing your cash flow position, making your operations more efficient, and negotiating better deals with vendors. By taking these steps, you can get top dollar when it comes time to sell.
5. Inform Your Investors
Selling your business will impact your investors in some shape or form.
Whether you’re considering an acquisition, merging with another company, or selling your stake to a partner, it’s important to involve your investors early on. If you decide to liquidate entirely, you should have a plan that advises investors on how you’ll repay them.
6. Inform Your Customers
Don’t forget about your clients, too. If your business will continue with a new owner or merge with another business, be sure to introduce your clients to them.
Likewise, if you’re closing your startup for good, then make sure to give your clients plenty of heads-up so they can make arrangements. You could even introduce them to alternative options for your products or services.
7. Hire a Business Broker
When it’s time to sell your business, you can either attempt to find a buyer and negotiate the sale yourself or work with a broker. If you’re selling to a partner, then handling the transaction yourself can help you save on brokerage fees.
However, if you’re merging with another company or searching for a new buyer, you’ll want to hire a business broker. While there are certainly extra fees involved, a broker can help you navigate the complex process of selling a business and even assist with negotiations.
Business brokers also work on commissions, meaning it’s also in their best interest to help you get the best value. A higher sale means more commission. Be sure to seek out experienced brokers with accreditation.
You might not have immediate plans to sell your startup. But it’s still important that you develop an exit strategy. It gives you options if you need to sell for personal reasons or decide to move on. A business exit strategy also reassures investors, as it details exactly how you’ll pay them back.
The best exit strategy will depend on different factors and may even change in the future. Follow the steps outlined here to put together an exit plan and make selling your business an easier and more fruitful venture.
Reid Burns has his roots in supply chain, handling global teams for private label companies. He has since transitioned to freelance work, providing thought leadership in the e-Commerce domain.
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