Startup exit strategy – Everything you need to know

In this article, we will address all aspects of exiting a company, from the initial decision to the actual process of exiting.

Starting a company is an exciting and thrilling venture with all those ups and downs, from struggling in the first few years to generating success. As exciting it sounds, most entrepreneurs plan on retiring at some point and exiting the company. The question is, what is the right time to exit? In this article, we will address all aspects of exiting a company, from the initial decision to the actual process of exiting.

Startup exit strategy

When many of us start a company, we do it to generate success and plan to exit at a later point. Creating an exit strategy for the business will help you decide the right time to move on. Although every startup has a slightly different set of challenges, there are a few key things that all startups need to consider in their strategy.

What is a startup exit strategy?

An exit strategy helps companies plan out their business’ future. It involves determining the timeline for the exit, incorporating it in a well-defined process, and ensuring that the company is structured to take advantage of any opportunities along the way.

In short, it is a detailed plan that a company has to execute to take maximum advantage of the available opportunities at any given point in time. Thus, if the company is planning to exit, it might need to incorporate certain elements in this strategy to help them leverage the right opportunities.

How does startup exit strategy work?

An exit strategy is generally structured in such a way that it enables the company to deal with all kinds of future situations and maintain its competitive edge, even as it transitions from one phase to another. A great strategy will help a startup to take advantage of new and existing opportunities that extend beyond the horizon of their current business.

The startup exit strategy works with the help of a comprehensive, long-term plan which includes strategic goals, short and long-term milestones, and a timeline. This plan will help the company to reach the exit point in a planned, structured, and organized fashion, taking full advantage of all opportunities.

Importance of startup exit strategy

The objective of an exit strategy is to help companies create and implement plans for growth within their business. This helps companies identify, prepare, and execute the tasks they need to perform to ensure maximum benefits. Following are the importance of a startup exit strategy:

Importance of startup exit strategy

  • It provides a clear and well-defined plan of action for the company, enabling it to make timely decisions in changing business environments.
  • It helps companies plan for new opportunities and develop strategies that will help them capitalize on them.
  • It helps in establishing linkages between different departments within the company and forming a coherent vision of the future growth of the business, ensuring that all initiatives and plans are heading in a single direction.
  • A strategy helps to keep the company in shape, keeping it strong and productive while also ensuring that all new opportunities are constantly pursued.
  • It provides a framework for growth within the business and ensures that the right measures are taken on a continual basis. This means that the company will be able to make the most of the opportunities it encounters in different situations.

Why do startups need to prepare an exit strategy?

A startup needs to know ‘how to prepare an exit strategy’ in order to remain competitive, viable, and sustainable over the long term. Following are some of the reasons why startups need to prepare an exit strategy;

  • For IPO and M&A – Initial Public Offerings (IPO) and mergers and acquisitions (M&A) are great ways to exit a company. IPO is a process where certain shares are listed on the stock market with the intention of raising funds. M&A refers to the process of acquiring control over another business/company. Therefore, the first step to planning an exit is to figure out the right time to go public or get acquired. This means that you will have to consider factors such as the health of the company, its growth rate, and market stability.
  • Market Fluctuations – It is important to keep in mind that market fluctuations can negatively affect your company. The first step in a strategy is to determine if you are looking to exit the business before or after a major crash. If so, you will need to plan out your exit strategy well ahead of time, as the market conditions will keep changing based on the overall economy.
  • Business Loss/Failure – If your startup has failed to gain traction after the initial years, it might probably be a good idea to think of planning an exit. You will have to decide if you want to close the business or raise funds from outside investors. Either way, you need to plan it out well in advance and make sure that your exit strategy is flexible enough to accommodate changes in the market.
  • Strict Routine – If you are someone who likes to stick to a routine, then you probably don’t want to deal with the uncertainty of market fluctuations and business failure. In such a case, you should make sure that you are prepared for an exit at any moment during your business’ growth phase.
  • Financial Uncertainty – Capital is not an easy thing to come by these days; as a startup business owner, you will have to spend money in order to generate profits. If the financial uncertainty becomes too much for you, then it may be a good idea to plan your strategy well in advance.
  • For Investment – If your business is gaining traction in the market, but you need some other resources to take it to the next level and beyond, then you need to plan your strategy. This means if you are looking for an investor who will help you grow your company, then make sure that you have a solid strategy in place.
  • Avoid Dilution – The founders of startups want to retain as much equity as possible in the business. However, if they give away too much equity to investors, they will experience dilution and less control over the business. Therefore, it is important to plan your exit strategy so that you are not forced to give away too much of the company’s equity.

Startup exit strategy vs liquidity event

As discussed above, a startup exit strategy is like a business plan that helps the company achieve its objectives in a structured, organized, and well-executed manner. On the other hand, a liquidity event is an acquisition, merger, an initial public offer (IPO), or other techniques that enable the founders and early investors in a company to withdraw a few or all of their ownership shares.

How does a startup exit strategy help in business valuation?

Business valuation is the process by which an institution with professional expertise determines the value of a company’s assets, liabilities, and company equity. A startup exit strategy can help in raising business valuation by getting potential investors to place a higher value on the company.

A successful business strategy can help in making the company more attractive to other potential investors. Moreover, it can help secure the company in the face of future uncertainties and help it achieve sustainable growth. Therefore, startup exit strategy and business valuation go hand in hand.

How do investors get benefits from startup exit strategy?

The fundamental aim of investors is to earn returns and maximize profit. A well-planned and ideal business exit strategy can help in maximizing the profits and returns of your investors by selling the ownership stakes of your company through either IPO or M&A. In addition, investors can expect to gain from this strategy by way of an expedient time to liquidity. Therefore, an exit strategy for investors can minimize the time taken for their investments to mature into profit-making ventures and also increase their overall investment value.

Types of exit strategies

This section discusses some of the most common exit strategies that are implemented by startups and the way they work. Here are some of the most common exit strategies that startups adopt:

Types of exit strategies

  • Merger and acquisition (M&A) deals – Merger and acquisition deals are major ways in which startups try to bundle up their services and sell them to their potential investors. M&A deals are mainly conducted in the form of business combinations to align the parties’ interests and achieve certain financial objectives. A merger (either vertical or horizontal) totally transforms two companies into one entity that targets a greater market share than before.
  • Initial Public Offering (IPO) – An IPO is a method of raising capital by means of selling shares to the public. The current trend within business success is that investors are looking for companies with a strong and healthy cash flow. In this process, startups aim at making their companies attractive for investors through their IPO plans or strategies.
  • Liquidation – A liquidation is an act of selling off all or part of one’s assets for whatever price and in whatever quantities that might be wanted at the given time; it happens when the company owner feels that the business has reached its end-stage or when extraneous circumstances shut the company down.
  • Bankruptcy – A bankruptcy is a legal status of a company in which it is forced to close down its business because it is unable to settle its debts. Bankruptcy can occur when the founder of the company dies, and the executor has not made provisions for an alternative exit strategy or when the founder and the management team disagree about how to manage the company’s finances. However, bankruptcy may also be triggered by financial conditions beyond management’s control.
  • Selling your stake – Selling your stake refers to letting go of a fraction of your ownership in exchange for some monetary consideration. You can choose to sell your shareholding any time you want, provided that you have done thorough research on how buyers see your business.
  • Acquihire – An acquihire is a type of transaction in which another company acquires a startup for the sake of either gaining a strategic advantage or because of a good fit between the two businesses. In an acquihire, the acquiring company acquires the startup’s management team members, specific products/services, and intellectual property.
  • MBOManagement and employee buyouts (MBO) is an alternative form of exit strategy in which employees of a company are given options to buy more equity in their employer so that they can hold the majority of ownership positions within the business structure before it is put up for sale or sold off to another party.

Which type of exit strategy is best for your startup?

The best exit strategy depends on various factors such as; the type of business you are involved in, the size of your business, financing the project, and so on. Most startup ventures consider this strategy to be a key factor in their business analysis and the evaluation of the foundations of their venture.

It is important to carefully evaluate which type of exit strategy would be most effective for your startup, as it can make or break your company. Thus, there is not one fit-all strategy for all startups, but you can make a comparison between the various exit strategies and see which one would be most effective for achieving your business goals.

When should a startup prepare an exit strategy?

Depending on the nature of your startup and the stage of your business, it would be ideal to have a strategy in place right from the beginning. Most startups enter into their venture with a pretty solid structure and set goals for their company, but there are many factors that can cause them to get off track, such as changing market conditions or the size of the competition.

It is crucial that you have an exit strategy in place so that you can continue operating your business and not worry about its future as these situations arise. Therefore, a company should start preparing the strategy during the initial phase of its business.

Why should you choose Eqvista to manage your Equity?

An exit strategy is one of the most important elements of your startup, as it can determine your success or failure. Your strategy could be your ticket to success and a long-term investor relationship with your client. A startup exit strategy example, IPO, or M&A is one of the most common types to be adopted. Get in touch with Eqvista to have your equity managed along the way. We have a team of experts to help you form a business plan for the valuation of your company.

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