14 Jan 2016

The sooner you start planning your exit, the more rewarding it will be. Exits require considerable planning. In this article, we will discuss the exits strategies available to you.

Initial Public Offering (IPO)

In an IPO, you sell a portion of your company in the public markets. You and your management team typically remain in place for a period of years, your investors and managers may be able to sell some stock, and your company continues to operate largely as it has in the past. However, your company will be subject to additional regulations, and institutional investors will scrutinize your quarterly performance.

Merger & Acquisition (M&A)

This means merging with a similar company, or being bought (acquired) by a larger company. This is a win-win situation when bordering companies have complementary skills, and can save and capitalize on each other’s resources by combining. For bigger companies, it’s a more efficient and quicker way to grow their revenue.

A strategic acquisition

In a strategic acquisition, another company purchases your business, either with cash or stock in the acquiring company or with some combination of stock and cash. The acquirer may or may not retain you and your management team, and may or may not make substantial changes in your company’s operations, staff, and business lines. The benefit is typically liquidity because if you sell the company to a strategic acquirer you might be able to sell most or all of your stock. The disadvantage of this exit strategy is that you will lose operating control.

Sell to a friendly individual.

This is different from an M&A. You are seeking to “cash out”. This way, you can pay our investors back. The ideal buyer here is someone who has more skills and interest on the operational side of the business, and can scale it. 

Cash cow.

In a stable, secure marketplace if your business has a steady revenue stream you can pay off your investors, and then get someone to run it. Usually, entrepreneurs who do this, have the next great idea to work on. However, you will still retain ownership via a certain percentage of the company.

Liquidation and close

You might reach a stage in your startup journey that you decide to shut down the business and liquidate. This could be because of natural disasters or a collapsed market.

How to Choose an Exit Strategy: Considerations in Choosing an Exit
Different people start companies for different reasons, and that can influence their exit strategy. The right exit strategy depends a lot on the objectives of the people who own the business. Initially, the founder(s) own 100 percent of the business. If they take on investment over time from venture capitalists, angel investors, equity investors, or individuals, they usually give up a portion of the company, or shares, and those shareholders will have a say in any potential exit strategy.

The following are some of the things to consider when choosing an exit strategy:

1. Do you want to continue in the business? In an IPO or a management buyout, you and your team will play much the same roles before and after the transaction. In a strategic acquisition, the acquirer may replace you and your team with its own people.

2. What are your liquidity needs? Many business owners view their exit strategy as a chance to increase their personal liquidity. In an IPO, for instance, your shares likely will be subject to a share lock-up agreement, and you will not be able to sell your shares — even after the IPO for a certain period of time. A strategic acquisition will often generate an immediate cash payment, thereby increasing owner liquidity. In a management buyout, the original owners will receive liquidity over a period of time.

3. What are the current market conditions? Demand in the market for your company’s products or services, the IPO scenario etc. and other market conditions will impact your exit strategy.

The purpose of an exit strategy is planning how to optimize for the future, rather than get out of a bad one. This will allow you to focus on building a startup that will be more attractive to acquirers or buyers in the long run. Think of an exit strategy as a successful transition.

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