Exit Strategies for Startups And Investors
An exit strategy is a well-thought plan to end a business, move it to long-term goals and allow a smooth transition to the new phase. It involves altering the business strategy to overcome marketplace challenges. An exit strategy gives business owners a chance to liquidate or reduce their state in a company. This helps an entrepreneur make a profit if the business is successful or limit losses if the business fails.
A thoroughly planned exit strategy involves all stakeholders, operations, and finances into account. It captures all actions required to sell or close a business. An exit strategy varies depending on business size and type. But it always recognizes the value of the business and offers a foundation for a new direction and goals. Below, you can find an overview of possible exit strategies for startups.
1. Mergers and Acquisition
There are many advantages of mergers and acquisitions.
Reduces labor costs
Businesses can reduce labor costs by laying off employees who do the same job. For instance, a company may remain with the most talented individuals for a particular office and lay off the others.
Companies that merge put their resources together, increasing their financial capacity.
A merger or acquisition expands a company geographically, enhancing the ability to distribute products on a larger scale.
In case of an acquisition, a whole business is transferred to a different owner. A merger refers to a process where a business liquidates its shares partially and forms a new business. Both parties have mutual control over the new business.
A merger or acquisition usually means merging with a similar company, for instance, a competitor. Or selling to a more prominent company with more resources and a wider range of services and products.
The biggest advantage of a merger or acquisition is that both companies are fully operational, meaning the acquired service or product is available short term. Usually, both processes take a long time.
2. Initial Public Offering (IPO)
Initial Public Offering refers to the process where a private company offers shares to the public for the first time. IPOs allow a company to raise capital from the public. The switch from a private company to a public company helps investors realize gains from the shares in the company. The current private shareholders usually get a share premium.
A company is private before an IPO and usually has few investors. The investors usually consist of family members, friends, and the initial investors. Going public is a significant step for a company because it provides access to new capital. This allows the company to grow and expand.
The company will also be in good standing when they are looking for funding because public companies are transparent and credible.
3. Selling To a Third-Party
Selling a business to a third party is the most straightforward exit strategy.
The seller needs to prepare for the sale because the value will be low if you decide to sell immediately. The seller should look for a buyer, which is the biggest challenge. A business broker can help find a buyer at a fee. Also, a supplier can be interested in expanding their operations and may be ready to buy the business.
The next step after getting a buyer is to conduct due diligence. The buyer may request all the documents before negotiations begin. The negotiation process is complex and may stall several times. After negotiations, document review and asset transfer are completed. This is the final step of the sale.
4. Management and Employee Buyout (MEBO)
MEBO is a restructuring initiative where managerial and nonmanagerial employees buy out a company with the aim of concentrating operations on a small group of people. MEBOs are usually effective when privatizing public companies, although venture capital companies can use the strategy as an exit plan.
MEBOs improve efficiency in production because it motivates employees by providing job security. Funding for MEBOs comes from capital and personal savings, private equity, and seller financing.
The management and interested employees conduct this type of buyout. Usually, managerial employees need to adjust their mindset since they have to transition from being employees to being owners. This is why many MEBOs fall apart, since management and employees may have different interests.
5. Selling To a Family Member
Of course, this is not an ideal scenario, but sometimes selling the business to a daughter, son, or other family member is a way to stay involved in the business and offer some mentoring or leadership. Involve your children early and allow them to understand how the business works.
Make sure family members have experience in the business by giving them insight into the business activities. You may also need a business adviser to provide impartial guidance on succession.
There are times when a company can’t continue its operations because of excess liabilities. Such companies may be forced to sell their assets to raise cash to repay the liabilities. This process is called liquidation.
Note that a liquidation is an option only when the company is insolvent and can’t continue. A liquidator sells the company if it’s bankrupt. The liabilities are deducted from the sale revenue, and the remaining cash, if any, is then distributed to the shareholders.
Making the Right Choice: Factors in Exit Strategy Decision-Making
There are many factors to consider when selecting an exit strategy.
1. Know your exit strategy. As discussed above, there are many exit strategies, and you have to decide on one that best represents your business and your personal interests. Choose an exit strategy that will maximize what you get from the deal.
2. Plan ahead. You should know the actual time that you will leave the business. Plan three years before the exit date to start the process and prepare your business units and find a buyer if that’s your strategy.
3. Know your price. You should know the value of the business and have a plan on how to bridge any discrepancies between your price and the current value of the business.
4. Get the management team ready. Ensure that the management team is on the same page and is involved in the exit.