10 Factors to Consider in Your Startup’s Exit Strategy
Before pursuing an exit strategy for a startup, it’s important that business owners have a good understanding of the value of their business. This allows them to be able to effectively communicate this value to potential buyers. Startup exit planning should also give consideration to how the sale price applies to the founders personal needs following a sale.
Ensuring that effective planning is done well ahead of a potential sale can provide huge savings in the long term. Neglecting this can, and often does, result in expensive professional fees on lawyers, accountants and consultants.
In this article we cover ten things to consider when going through a startup exit planning process.
10 things to consider in your startup's exit strategy
What is an exit strategy? An exit strategy for startups allows founders and entrepreneurs to plan for a smooth transition of ownership at a time and price that achieves the investment goals of all the stakeholders. Here we consider ten things that can help when considering a strategy.
1. What type of exit do you want?
Depending on the type of startup, the market it operates in and the current ownership structure, an exit can come in different forms.
Acquisition: This is when a company purchases enough of another company’s shares to gain control of it. In practice this usually means acquiring over 50% of the stock/assets of the target company. Acquisitions can proceed with, or without, the approval of the target firm. A company might acquire another for a variety of reasons, such as benefiting from greater economies of scale, capturing market share, and reducing costs.
Initial Public Offering (IPO): This is where shares in a private company (the startup) are offered to the public in a new issuance of stock. Before undergoing the IPO, a company is considered to be private. Shareholders in private companies might include the founders, family and friends, venture capitalists and any other early stage investors.
Committing to an IPO is a big step for a private company to make. Ultimately it can provide a company with a lot of new capital, but there also comes with it regulation and transparency requirements that need to be adhered to. Going public provides credibility and prestige that can help with such things as negotiating terms of new funding.
Management buyout: This is a transaction where an incumbent management team purchases the assets of a business they already manage. This is appealing as the mangers will have greater potential rewards and control compared to being employees.
There are also different possible exits not covered here, such as going into liquidation or family succession. Knowing what the possible outcomes are can help you formulate a startup exit strategy that best meets your needs.
Thinking about an IPO? Need some advice?
2. Expect the unexpected
Having a firm exit strategy may seem counterintuitive for a business that’s successful. A founder of a growing business may be perfectly happy with the progress so far, so why would they want to exit the company?
Well, there are many reasons. It’s important to consider and formulate an exit plan for a startup even if there’s no current intention to sell. If the last decade has taught us anything, it’s to expect the unexpected.
Good reasons to carry out startup exit planning are:
Personal health: At any point, any one of us could be affected by personal health issues. Such issues, or those impacting the people close to us, can remove the capacity of a business leader to be able to carry out meaningful work. At such times, it might be advantageous to look to exit a startup.
Recession: The impact of an economic recession can be devastating for companies. If recession hits, an exit strategy might allow you to avoid assuming its impact.
Opportunity: Larger companies and more established competitors may look to acquire your company. If an opportunity like this presents itself, it would be smart to have an idea of how you might proceed. Even if the only outcome is a conversation with the prospective buyers.
A clear exit goal: By having a well-defined exit strategy, business leaders can also have a well-defined goal. Having a clear goal to work towards ensures that as the business is growing, the end goal is kept in sight. In practice this means that processes and reporting functions can be developed from early on, ensuring that when the time is right to transition, it’s as frictionless as possible.
3. The time is right. Or is it?
When should you sell your startup? The truth is, there’s no ‘one size fits all’ answer. All startups will want to sell after creating as much value as possible, while buyers will want to acquire this value for as small a price as possible.
For a founder to get the best valuation, exiting might be more beneficial during a period of high growth, rather than waiting for the startup to become profitable. The timing of the exit then will be different for each startup. For one, it may follow series C fundraising, for others, it might be after a seed round.
What is certain though, is by performing startup exit planning early, you will recognise when the time is right, when you see it.
4. Decide on your buyer
Deciding early on who you plan to sell to can help you determine the structure of your exit strategy. If you know you want a quick sale then you might want to line up potential buyers beforehand, keeping them up to date with growth and business milestones. Then when you’re ready to sell, it might be a simple transition.
Building these relationships from the start can reap rewards. Even if they don’t end up being a serious buyer, the opportunity to gather buyer feedback and research will be valuable in the long run.
Or, if you know that you plan to hand over the reins of your startup to family or management, you may be able to be specific about timing years in advance. Alternatively, this arrangement might benefit from additional flexibility in the exit strategy of not being limited by the competing needs of another business.
5. Life’s a pitch
Being able to pitch properly is an important skill for any founder. It doesn’t just help to attract investors/buyers, it’s also a fantastic way to communicate the value and scale of opportunity that your startup represents.
An ideal pitch will be informative without being overwhelming. By the time you come to the end of your exit strategy, you should have everything in place to be able to construct the perfect pitch.
Having an exit strategy as part of a pitch in early fundraising rounds will also be beneficial. Not only will it help you develop and revise your strategy, it will also let investors know you’re serious about planning for the future and have one eye on investor returns.
A big part of this would be having hour market research in place. This should be relevant and complete, so that you can communicate to buyers the size of the market and the traction your startup has seen so far. If a buyer operates in and understands the market already, your pitch will concentrate on the value created through your unique team, and the problem your startup has solved.
By having all this information ready to go, your exit strategy can be deployed as and when you need it.
6. Drive up that valuation
This sounds obvious. All startups want to achieve the highest possible valuation, don’t they?
Generally speaking, all startups will be focussed on value creation, through pursuing growth targets and milestones, intrinsic value will be created. This is slightly different from driving up value with an exit specifically in mind.
Of course the best way to drive up startup value is through the ordinary course of business. Having a fundamentally successful startup, with growing revenues and development opportunities will create value. But when it comes to exiting, if your strategy has identified the exit you want, you can refine this and squeeze as much value as possible.
Even the timing of the exit can impact the valuation. Knowing that you want an exit allows you to heavily focus on areas of the startup that your prospective buyer will be most interested in, whether that’s growing revenues or acquiring a talented team. Putting this in place ready for an exit is best practice.
Remember, buyers will be looking to negotiate your price down, so you want to start from a position of strength.
7. Know your industry
Having a solid understanding of your market is key to a successful exit. Knowing your industry, its customers, your competitors and understanding how you differentiate yourself is a key success factor. Having this big picture view is just as valuable as the fine detail and allows you to take a step back and see how the industry might develop, giving you insights into how a successful exit might be achieved.
8. Be motivated to sell
One of the first questions a buyer may ask is, “why are you selling?”. And this is something you should come to terms with early on in your startup’s exit strategy development. Having clear motives that align with your business strategy is key to ensuring success. If your thinking and strategy aren’t coherent, this will bleed through to your business plan.
By the time you have these conversations with buyers you should know why and when you want to sell, have run the business accordingly to meet these goals and be able to clearly communicate this to the buyer.
9. Shop around
Looking at industry benchmarks and competitor transactions is a great way to build exit knowledge as you progress through your startups growth journey. If comparable startups around you are exiting, study them. You may not be ready to sell just yet, but their experiences could be vital to you being able to successfully navigate your exit when the time is right.
Knowing your competitors will also highlight possible merger candidates and companies that may look to acquire you in future. By studying them, you will know what they are looking for and how they might value you. This will help you get the best price.
10. Get help
It can be daunting at the best of times as a founder. Running a startup is all consuming and often there’s a decision to be made and not much time to make it. The right answer might not be obvious and no matter how many comparable or competitors you evaluate, it might not become clear. Asking for help from professional advisors is not a weakness. On the contrary, it can help you to position your startup in the very best way to get the very best exit possible.
Don’t be afraid to ask for help.
An exit strategy for startups is a key success factor. Starting your planning early and following it through as your startup grows will ensure that when you do come to sell, you get the best deal.
You’ve put in the hard work; you deserve to leave on your terms. That means achieving a financial return on that hard work.
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