No matter how emotionally attached you feel to your business, it is essential to start considering an exit strategy as soon as you open your doors. An effective exit strategy will allow your company to take advantage of timely opportunities, such as an acquisition, an IPO, or a lucrative partnership. Planning for future changes by using these types of strategies will also give you the flexibility to set aggressive goals and pivot accordingly as you reach them.
Benefits of an exit strategy:
- Your family: Like estate planning, devising a strategic exit ensures you’ll protect your spouse or heirs from engaging in unnecessary decision-making and taking on overwhelming tax burdens by handling these things before they have to.
- Your retirement: Practically speaking, you want to maximize the value of the wealth your business can afford you, beyond your annual salary. Maybe the goal is acquiring a lump sum of cash to use on a vacation home in Palm Springs; perhaps it’s a yearly dividend that simply allows you to live without worry. Either way, it’s important to consider your own financial goals here — after all, you’re the one who built the business.
- Transition planning: Your employees and board will likely work hard to help you achieve your exit goals, so you owe it to them to facilitate a smooth transition. If you plan thoughtfully, you can build their trust, rather than lose it, during what can be a time of considerable uncertainty.
- Maximizing value and growth potential: Whether you’re eyeing a $20M acquisition or just looking to grow aggressively, you won’t achieve those lofty goals without planning the tangible steps you need to take to get there and ensuring your financials are sound.
Okay, so you’re probably convinced that you need an exit plan. Now, it’s time to set your sights on the type of exit you want to target.
Common exit strategies include:
- Merger & Acquisition (M&A): This is the most common exit strategy for startups. M&A benefits investors, founders, and equity-holding employees by offering a direct return on investment in a lump sum. Sometimes this can mean a new, exciting venture for you and the team that helped you get there, but it may also mean a change of course for you and your employees.
- Initial Public Offering (IPO): An IPO means transitioning from a privately-held company to a publicly-traded one. You’ll work with a bank to set the value of your company’s shares and then hope that the market drives the value up even further. IPO’s have become much less common than M&A in recent years due to the high level of risk involved.
- Lifestyle Business: A lifestyle business can be an excellent option for a founder who wants to continue to be involved in perpetuity, especially if you bootstrapped the company. However, for startups that have taken venture or seed capital, investors will not be satisfied with this option, as the return on their initial investment likely won’t be high enough.
- Aggressive Growth Target: Although less common, an ‘exit strategy,’ can sometimes mean an exit from the current business model and an entrance into a new one. This type of exit can look like a goal of doubling your sales, or introducing a new product or service; really, it can be anything that will require a foundational shift and is likely to accelerate business growth.
- Liquidation: Typically, liquidation isn’t ideal. It’s often the result when there’s a lack of strategic exit planning, and trouble is afoot. However, it’s an option, if, for some reason, you must walk away.
No matter which option is right for your company, having a plan is key — whether you plan to exit in one year, five years, or 20 years. And, if you’re targeting an acquisition, make sure you know what strategic buyers will be looking for when they examine your financials.
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