You’ve likely spent many years as a startup founder building your company from scratch. It’s easy for entrepreneurs to get caught up in the day-to-day operations and development, but it’s also important to consider your exit strategy as early as possible.
Exit planning is often overlooked or misunderstood by business owners. Only 20-30% are successful in selling their companies.
A well-designed exit strategy can help you achieve your goals and maximize the value of your startup. This guide will help you learn how to identify the best startup exit strategy that aligns with both your long-term and short-term goals and makes financial sense.
Seven Startup Exit Strategies To Consider
The strategy you choose can have a significant impact on the financial future of your startup. Here are the most common exit strategy options and their implications.
1. Initial Public Offering (IPO)
Publicizing your company is the best strategy for fast-growing companies. By choosing an IPO as your exit strategy, you can raise capital through the sale of your company’s stock on the stock exchange.
A major financial upside of an IPO exit is you get to maintain a portion of ownership, which lets you benefit from your company’s future growth while cashing out.
There’s one catch, It can be an expensive process. It can be stressful to meet quarterly earnings, which is why some people prefer to keep the details of their exit private.
Bottom line, an IPO can be a profitable choice. It requires a stable market and strong financial standing. Consider an IPO if your company has the revenue and growth to support one.
2. Merger and acquisitions (M&A)
M&A is a popular and effective exit strategy for startups that are looking to sell their startup company. This plan can be used to exit quickly depending on whether the buyer offers you cash, stocks, or both. A Merger and Acquisitions agreement allows you to capitalize on the strategic buyer’s interest for your startup’s technology, assets or market position.
M&As tend to be more direct than IPOs and have fewer restrictions. The financial success of the strategy depends on the structure of the deal.
Negotiate terms that are specific, as they will determine how much control and money you will receive from the acquiring company, and how your team will be affected after the acquisition.
3. Private equity buyout
This exit strategy will ensure that your startup continues to grow. A private equity company will buy your entire business or most of it to restructure and increase profitability.
The downside of a private equity purchase is that you may lose control over your daily operations.
The company must have a solid foundation to be able to take this exit. This can be a good option if you want to secure a financial return while taking a step back.
4. Strategic alliances and partnerships
This exit strategy involves selling a portion of your company or partnering with another firm in order to share technology, resources or markets. You can maintain your ownership and benefit from the strengths of the partner by forming a strategic alliance or partnership.
This may not offer the financial benefits of an IPO, but it can result in a more gradual and sustainable growth. Financial considerations are crucial to ensuring that the partnership will lead to long-term profit and synergy.
5. Management buyout (MBO)
A Management buyout is when your existing management team buys the company from you in order to continue operations. The new management, with its experience and exposure in the business, can fill the gaps in day-to-day operations.
This exit plan will help you to increase your capital, and is best suited for startups that have a steady cash flow, as the new management will often finance the buyout with loans and deferred payment.
Management buyouts offer a smooth transition, which makes them an attractive option. It’s important to ensure that the new manager or leader will be genuinely interested in taking on the role. Negotiate terms that will ensure you receive adequate compensation for all your hard work.
6. Liquidation
Liquidation is the simplest, but often least appealing exit strategy. It is a common exit strategy for startups that fail. This involves liquidating the assets of the company and shutting down. All profits are used to pay off debts of the company and obligations to shareholders.
This is a fast option but it typically results in lower returns. If the startup is not profitable, or if market conditions are unfavourable and a buyer cannot be found, liquidation may be necessary.
Liquidation may not be a high-value or ideal exit strategy, but it is simpler to implement than other strategies such as acquisition. You can also walk away with a little bit of money, even if it’s less than you would earn from a sale or IPO.
7. Secondary market sale
A secondary market sale can be a good alternative if you are not yet ready to exit your company completely. This strategy involves selling shares to investors or companies while the company is still private.
You can choose to exit all or part of your positions depending on the market conditions. It offers liquidity without the pressure of going public or selling to a strategic purchaser.
Secondary market sales can be subject to contractual and regulatory restrictions. Consult a financial adviser to determine if the strategy is right for you.
What is the best exit strategy for you?
Each entrepreneur dreams of a successful exit that will validate their efforts and ensure the financial future of their startup. You can choose from an IPO or a buyout to an acquisition. Each path has its own rewards and risks. It’s important to understand what each strategy can offer.
Ideal is to align your exit plan with your long-term business goals, market conditions and financial health. Expert guidance is essential when making the right decision.
Parr & Ibarra offers tailored advice that will help you make the best financial decision possible for your startup. We can help you with growth, stability or a practical business exit.
