Startup Exit Strategy 2024: Why They are Important

CEOs and founders of startups should think about their startup exit strategies while creating a company plan. Having a startup exit strategy in place is important, regardless of whether business is booming or the company is among the 90% of startups that fail.

This is because it can assist owners or investors gain more profit when the business succeeds or prevent the worst-case losses if the company is failing.

However, what exactly is an exit plan, and why does it matter to investors and companies alike? Here’s what you should know about startup exit plans, including buyouts, bankruptcy, and initial public offerings.

What Is a Startup Exit Strategy?

When a startup company’s owner (and investors) sell their ownership or stock for a profit or a loss, it’s known as a startup exit. An all-encompassing plan used by the owner(s) to steer the business toward a successful stock sale is known as a startup exit strategy.

To prepare the company for future events, such as an investor wanting to sell and invest elsewhere, a competitor interested in buying out the company, or an owner planning to leave the company for retirement or to work on something else, the startup business plan should include an exit strategy.

Startup Exit Strategy Examples

Entrepreneurs and investors can arrange their exit in a variety of ways. One of the most well-liked and sought-after exit methods, initial public offerings (IPOs) are usually viewed as successful for businesses. Acquisitions and buyouts can also be advantageous to startups, as they can result in a profitable outcome for the founders and their investors.

Conversely, unsuccessful startups could have to file for bankruptcy or liquidate in order to close, although doing so frequently results in financial losses and may make it more difficult for the owners to launch new businesses in the future.

Importance of Having an Exit Strategy

There are two paths are available to a startup. Very few startups will go on to succeed; the great majority will fail. Because of this, firm founders need to have a plan in place for how they will either profit from a successful venture by leaving to join or launch another business or eventually retire, or they can reduce losses by selling the company and its assets to settle debt.

Having an exit strategy is crucial for investors who want to maximize their return on investment or minimize their losses.”

Prepares Businesses and Investors for the Future

Over time, startups must prepare for numerous changes. A competitor may make a sizable buyout or takeover offer, there may be a slump in the economy, or the company may run out of funding. Business executives may decide to retire or may have personal issues that need them to leave the organization.

The business will have a clear plan to follow when changes occur if it has a stated startup exit strategy for both positive and bad situations. This can support the company’s continued operations amid uncertain times.

Minimizes Losses

If the startup fails to make money or doesn’t perform as well as anticipated, having an exit strategy will be beneficial. Instead of filing for bankruptcy, the startup exit plan can assist the company recover money that can be utilized to settle obligations or return to stakeholders.

Helps Determine Long-Term Goals

The exit plan may function as a long-term objective for the business, similar to an IPO or going public. The exit plan can assist founders who wish to leave the company in deciding when and at what price to explore a future buyout or acquisition. A startup may take into account mergers and acquisitions as a component of their exit strategy and long-term objectives if they are willing to combine with other businesses.

Exit Strategy Types for Startups

A new business may wish to prepare for a variety of positive and negative outcomes using different exit strategies, as there are numerous startup exit strategies available.

An IPO could be a suitable option, for instance, if the business is growing and needs additional money to continue growing. The startup may develop plans for a buyout, acquisition, or liquidation if they wish to be ready for future losses.

Buyout

A buyout occurs when the owner of the business is bought out by business executives, outside investors, or even close friends or family members. Takeovers by firm executives are referred to as management buyouts, or MBOs. A friendly buyout occurs when the owner’s relatives or friends take over. If the startup owners pass away, retire, or for some other reason abandon the company, these tactics might still be effective.

Entrepreneurs may also choose to search for outside purchasers who are able to acquire the business. If the startup is losing money, the talks may result in less-than-ideal buyout proposals, but this could be advantageous for owners who wish to profit from the sale and move on to another career or retirement.

Initial Public Offering

An initial public offering (IPO) occurs when a business chooses to cease operations as a privately held enterprise and offers stock on any public market in the globe (NASDAQ is a prominent exchange for tech IPOs). Due to the potential for increased revenue, this is typically a desirable choice for new businesses.

There are drawbacks to this procedure, though. Following the IPO, the founders no longer have direct control over the business; instead, executives must act in a way that pleases shareholders.

A competitive acquisition or merger

Acquisitions and mergers (M&A) are yet another well-liked exit strategy for startups. When a startup and a rival combine to form a single new business, this is known as a merger. An acquisition occurs when a rival company buys the startup and assumes total control over it. Larger, more established businesses as well as startups may find success with mergers and acquisitions. Startups are really starting to make acquisitions more frequently; from 2020 to 2021, the number of tech-related M&A deals increased by 30%.

The startup founders may or may not remain involved in the company following a merger or acquisition, and both strategies have the potential to increase the founders’ financial benefit from the sale. However, it can also imply that the entrepreneur has little to no authority over the company that they once founded.

Disposition of Assets

Usually, liquidation happens when a startup is losing money. The startup then utilizes the proceeds from the sale of its assets to settle its obligations. The proprietors or individuals who possess stock in the company receive any remaining funds. While liquidation is typically linked to unfavorable experiences for a company, it is generally regarded as a better option than bankruptcy.

A Bankruptcy

It may be necessary for a startup to file for bankruptcy, which is a legal procedure that entails giving up assets in return for debt relief. The founders’ credit may be harmed by filing for bankruptcy, which may make it more difficult for them to obtain financing for other business endeavors.

Types of Exit Strategy for Investors

Investors in startups should also have exit plans ready, especially if the business is struggling to reach its objectives. Investors that have an exit strategy in place can avoid suffering larger losses.

Sale of Equity Stake

Selling their ownership shares to buyers is one way for investors to exit the market. The investor might leave the firm in return for payment for their ownership interest. Investors in successful or unsuccessful businesses may benefit from this since they can negotiate a sale to reduce losses or cash out when the equity stake is worth more to increase their profits.

Time-based Exit Strategy

Investors can prevent their losses from getting worse by using a time-based exit plan. The investor chooses how long they are willing to hold onto investments that are increasing or decreasing. The investor may sell their shares if they don’t perform well after the predetermined period of time.

The Exit Strategy Based on Percentage

while assets are peaking, a percentage-based exit plan might help investors lock in a big return or reduce losses while valuations are falling. An investor may decide to sell their shares when the company’s valuation increases or decreases by a specific percentage.

Setting a percentage-based exit plan has the disadvantage that the value may fluctuate even after the investor leaves. When the valuation has increased by 100%, for instance, the investor can choose to sell. They will generate a profit, but they will lose out on potential future gains if the valuation keeps rising.

Make Future Plans Using a Startup Exit Strategy

Executives and owners can leave at any time, therefore the company may find it difficult to adjust if there isn’t a strategy in place for their departure. Additionally, startups should make plans for how to minimize losses in the event that the business fails or how to pay off debts when times are tough. An exit strategy will shield investors from the greatest losses that could result from taking on hazardous startup ventures.

Although founders may find it awkward to talk about an exit strategy, it’s a crucial and indispensable component of the business plan that shouldn’t be disregarded.

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