What Are Startup Exit Strategies and Why Are They Important?

Establishing a startup is an

exciting endeavour, based on notions of innovation and a wide range of possibilities for the future. It’s all about creating a product that offers users new or improved experiences, providing value where it did not exist before.

Startups enter their respective markets as industry newcomers, full of wonderful hopes, dreams and ambitions, along with strategies for achieving their goals. It’s all about the company’s vision, mission and core values, along with strategies for investment, growth and scalability.

However, another really important component of any successful startup, regardless of the specific industry, is its exit strategy.

The notion may seem counter-intuitive at first glance – surely founders ought to be focusing on making their new business succeed and grow rather than creating plans for how to get out?

Well, the simple answer is that they ought to be doing both, and the latter is a lot more complicated – and important – than it may seem.

Indeed, a good startup exit strategy serves more purpose than just providing the owner and founders with relative financial security. It also makes the business, as a whole, appear attractive to current and potential investors.

With this in mind, we’re going to explore everything to do with startup exit strategies – a comprehensive explanation of what they are and why they’re essential, factors to consider when considering startup exit strategies and some of the key exit strategies used by startups, along with how they work and their efficacy/reliability.

 

What is a Startup Exit Strategy?

 

In the most basic sense, a startup exit strategy is a well-thought-out plan that is intended to allow founders and business owners to sell or transfer ownership of the business once it’s reached a specific milestone or target. This allows owners and investors alike to realise a return on investment.

A startup exit strategy, however, isn’t necessarily a specific plan that will definitely been enacted step by step.

Rather, it’s a term that refers to the preparedness of owners to exit the business successfully, and this preparedness is all about things like the structure of the company, financial standing, location of registration, and more – we’ll touch on that a bit later.

Thus, having all these things organised in a way that allows for a smooth and successful departure from the startup in question would be considered a good exit strategy.

And, in the eyes of the business owner and investors, it’ll be considered even more successful if it allows them to see a fair return on their investment.

 

Importance of Having a Startup Exit Strategy

 

Having an exit strategy, or at least bearing your potential exit in mind while structuring and establishing your startup, is an essential part of what will eventually determine an owner’s ROP, as well as that of investors. But, it’s about more than just how much money can be made when all is said and done.

Establishing a well-thought-out startup exit strategy can and will contribute significantly to a startup’s chances of making it through the initial stage of establishment and becoming successful later on.

Here are a few key reasons why startup exit strategies are essential:

 

• Attracts Investors: If potential investors can see that the company is set up in such a way that allows for good exit options in the future, they’re more likely to trust you with their money.

 

• Helps Businesses Prepare for the Future: Invariably, businesses go through ups and downs, and having exit strategies can give owners and investors guidance on how to proceed when and if times are tough, which may end up being the difference between the business surviving or folding.

 

• Determining Long-Term Goals: Sometimes, a startup exit strategy can serve as a valuable part of a company’s long-term goal. This may be in terms of going public with an IPO or, perhaps, if there’s a specific company that they’d like to merge with or be acquired by.

 

• Reduce Losses: Establishing a solid exit strategy can help minimise losses for owners, investors and even employees, helping the business get money back to pay off debts or redistribute funds to stakeholders.

 

Clearly, having an exit strategy is really important for startups, but how would one go about establishing an exit strategy and what are the factors that need to be considered?

 

 

Factors to Consider in Startup Exit Strategies

 

There are plenty of things that will influence startup exit strategies, including where your startup is registered, what your company goals are and more.

Why does the location of registration matter? Well, there are plenty of reasons to seriously consider where you’re going to register and efficiently establish your startup, including financial considerations, legal issues and more. Here are a few things that are affected by the country of registration:

 

• Tax requirements and implications
• Labour and employment law
• Legalities regarding acquisitions
• AntiTrust laws

 

…and more. These issues are all affected by where a business is registered, and these things will all influence not only what an owner can and can’t do with regards to exiting a business, but the difficulty of doing these things too.

For instance, different countries have varying laws regarding how business acquisitions and mergers can take place – in some places, it’s fairly easy, but in others, it’s next to impossible to do while simultaneously ensuring owners and founders get a fair amount of money back.

Therefore, some countries are preferable in terms of starting businesses compared to others.

Some other factors to consider include:

 

• Neccessary and plausible liquidity
• Financial standing and financial records
• Tax compliance
• Employment structure
• Desired control (if any)

 

These are some of the main issues to consider when contemplating exit strategies, and they all depend on the kind of business in question, how far along the business is and more.

Thus, it goes without saying that to go along with the plethora of considerations to bear in mind, there are different options in terms of how owners and investors can choose to exit startups.

 

Types of Startup Exit Strategies

 

In reality, there are many different ways that business owners and investors can choose to leave startups, depending on what they want out of the situation, how well the business is doing, outside interest in more.

That being said, the two most common and popular options are an Initial Public Offering (IPO) or mergers and acquisitions. What are they?

 

Mergers and Acquisitions

 

Overall, both mergers and acquisitions (M&A) involve an outsider company coming in and getting involved in the startup in question. With regards to the former, the outside company merges with the startup, forming one entity. In the case of the latter, the outside company will acquire the company by means of purchase.

Now, in both cases, there are plenty of different ways this can take place and there are many reasons it may happen, including if:

 

• The Startup is Considered Valuable: The outside company may see great value in the startup and decide to either merge with it or buy it out. This value may be in terms of industry success, innovation, finances, growth or any other variety of reasons.

 

• The Startup is Struggling: Sometimes, when a startup is struggling, it’s a good opportunity for an outside company to sweep in and buy it out while the price is low. This may be beneficial in terms of acquiring the startup’s assets, employees, market share, patents and more.

 

The details of how mergers and acquisitions work depend on the particular businesses and situations, but essentially, these strategies allow investors and owners to see a return on their investments and bow out, to a certain extent.

 

Initial Public Offering (IPO)

 

An IPO refers to the decision to transform a previously privately owned company to a public enterprise, which means that company stocks will become available on any of the world’s public exchanges.

For all intents and purposes, this means that the owners’ and investors’ interests will be diluted and a significant amount of capital will flow into the startup.

Now, the terms of control and other important details will differ from one company to the next.

Normally, however, opting for an IPO as an exit strategy means that startup owners and founders will have reduced control and company executives will need to operate in a way that is sanctioned by shareholders.

Location is an important factor to consider, however, for companies who would like an IPO to at least be an option in the future.

This is because different countries have varying rules, restrictions and laws regarding what makes companies eligible for an IPO, including a certain amount of success, for instance.

Both M&A and IPO strategies can be good options for startup owners and investors when considering exit strategies, but there are other ways to exit companies too – some of them positive, others less so. They include:

 

• Management and Employee Buyout (MBO): Employees, normally from the ranks of senior management, buy out the company.

 

• Family Succession: Somebody within the family of the owner takes over the reins of the startup, allowing the owner to step back without affecting the company or investors too much.

 

• Selling Your Stake: Owners can sell their stake to either an investor or business partner, but this is only viable for co-owners – sole traders are excluded. This can be one of the easiest exit strategies, but it’s not normally as lucrative as M&A or an IPO.

 

• Liquidation: Generally considered the most final of exit strategies (other than bankruptcy), liquidation normally occurs as a result of unavoidable external factors or when owners and investors believe the business has run its course and has a limited future. It involves selling off all the company’s assets, so while owners and investors ought to get some money back, it’s not normally the most lucrative strategy as they’re not operating from a position of power.

 

• Bankruptcy: Bankruptcy is a last resort option as a business strategy as it results in financial losses and other potential negative consequences too, including founders’ credit being damaged. Declaring bankruptcy involves legally surrendering the business’s assets in exchange for the elimination of debt.

 

How to Tackle Exiting a Startup

 

As we’ve discussed, there are plenty of moving parts in terms of the best ways to exit a startup. It depends on the type of business; the interests of owners, founders and investors; the location of registration; the financial standing of the business; and so much more.

Of course, in addition to all the many things that influence startup exit strategies is the choice between different exit strategies.

With so many variables and options at play, the best way going about preparing for a startup exit – even if it’s at the very establishment of the business – is to bear in mind things that’ll broaden and restrict your options in the future and try your best to structure you business in such a way that you aren’t too limited when the time comes.