Can my startup benefit from an exit strategy?

Despite the fact that an exit strategy may seem inconvenient for a startup founder, it is one of the most critical things for them to develop.

It is inevitable that all founders will have to let their business go at some point - whether it is to retire, to make a profit, or even just to change careers.

In spite of the fact that you might not be looking to pass your business on anytime soon, it's vital to have an exit plan from the very beginning of the business development process.

Additionally, it shows investors that you have planned for any possible outcome, which helps steer your business in the right direction.

Our blog will cover everything start-ups need to know about planning their exit.

Types of exit strategy

The right exit strategy for you depends on the type of business you run, as well as your business goals. Once you decide what route you want to take, you can make business decisions with this in mind.

Here are just a few of the many exit strategies available:

Acquisitions

Acquisitions (often grouped with mergers) are the process of one company buying another and incorporating it into their business operations. It is one of the most commonly used exit strategies, with famous examples being Google acquiring Android and Disney acquiring Pixar.

Acquisitions are typically one-sided, with the dominant company buying out the smaller company through friendly or hostile means.

It can be a beneficial option for both companies, giving the founder of the smaller company a large sum. It can also help the larger company to reduce competition, expand their IP, and maybe even break into another market.

If this is your exit strategy, it is imperative to start building relationships with potential buyers early and work to drive up your business valuation. If you plan ahead, you’ll be ready when the time comes.

Deals involving mergers

Acquisitions and mergers are similar, but mergers typically involve equal-sized companies. A merger will result in two companies merging to form a new entity, often with a different name.

In addition to increasing market share, this process also reduces costs for both businesses.

When a company merges, its founder can step back with the assurance that the business will continue to grow.

Build positive relationships with companies that complement your business if joining forces is your ideal exit strategy.

Initial Public Offering (IPO)

The process of selling shares of your company to the public is called an Initial Public Offering. A public company is a business that has been transformed from a private one. Shareholders can profit from the company's growth by buying shares.

It isn't easy for startups to implement this strategy, despite its attractive qualities. It is common for investors to avoid investing in companies that lack credibility and pose a financial risk. To convince the public you're worth their investment, you need to improve your business growth to prepare for an IPO.

The liquidation process

When a business reaches the end of its life cycle, liquidation refers to the process of distributing its assets. When the company reaches its end - typically when it can't afford to operate anymore or when nobody can replace you - this occurs.

Whatever the reason, closing a business is a fast and easy process. If you have to pay off creditors first, this strategy may have low returns (especially if you must pay them off first).

Management buyouts (MBOs)

A management buyout occurs when existing management or employees buy the majority (if not all) of the business.

Taking the business to people who understand the business goals and have extensive experience and knowledge of the business's operations is a quick and reliable way to pass the business along.

Having your business in safe hands makes exiting the business easier with less due diligence required.

An exit may seem far away for a startup, but entrepreneurship is a volatile process, and circumstances can change at any time. Your exit plan might change as your business progresses, but planning ahead is still crucial!

In addition to maximising capital, a solid exit plan ensures the business is passed on/closed in the most desirable way.

By not planning ahead, you may not be directing your business in the right direction. When you don't plan ahead and drive up your business valuation, you may sell unexpectedly for significantly less than you planned.

Having a strong exit strategy has benefits beyond the future. Your business plan's exit strategy shows investors that you are serious about your business goals and gives them an idea of when their money will be repaid. Therefore, planning ahead will increase your chances of impressing investors and raising funds at an early stage.

Reach out to our team at Zyla Accountants if you have any questions about exit strategies for startups!