Exits are not bad. If you have worked hard enough on an idea & built a 'workable' business around it, you should get rewarded for your efforts. Having a good exit strategy takes care of it.
There can arise various scenarios at some point in time in the near future when exiting your startup shall be the only best way to keep things moving forward.
The reasons to exit your startup can be -
- You may have a new mission in your life.
- You may get a good financial offer for the exit.
- You may go bankrupt.
- You may see a bigger opportunity.
- You may run out of motivation to run the same company for too long.
- You may burn out on cash.
So as you can see the above scenarios are quite common in the life of an entrepreneur and they may come in your life as well.
And the only difference between a successful exit and a failed exit is that the founders who experienced a failed exit lacked a plan.
Why Do You Need An Exit Strategy?
If one is prepared and has a strategy in place, the business exits can turn glorious instead of disastrous. There are many reasons why you need to have a business strategy way before you start running your business.
The reasons are -
- To decide whether to go with the short-term or long-term income plan.
- To limit the losses that the company faced.
- To encash the investment that founders did for a long.
- To safeguard your and your company's reputation in the market.
So now that you know how important it is for you as a founder to have an exit strategy, in this article, let's take a look at what are the 10 different types of business exits and what is the upside & downside of each of them.
By going through all of them, you will get a clear idea of what your way can be and prepare for the part.
Also, if you be with us, you will get an opportunity to witness the case study of one of the glorious tech startup exits that happened recently which may inspire you and answer some of your million dollar questions.
So without a further due, let's dive straight into the 10 ways of exiting from your startup.
1- Initial Public Offering (IPO)
In IPO you cash out your shares as stocks for the public to invest in. Listing your company in the public through IPO as an exit strategy is one of the most challenging things one can do.
There are a lot of regulations and compliances one becomes responsible for once a company goes IPO. But all things said and done, it can be one of the most lucrative exits as well. Your reputation is not affected, and you may expect a good deal as well.
Why Go With IPO?
- You can expect the highest profit with IPO than any other exit strategy.
- The company's reputation is not affected by this type of exit.
- Instead, you may receive some good publicity as well.
Down Sides of IPO
- There are higher compliances and your company goes under extensive scrutiny.
- Your business has to go in the progressive direction or else it might not work very well.
- IPO is a costly process and has several risks & responsibilities associated with it.
2- Merger & Acquisition
When you want to sell your business, Merger & Acquisition is probably the best strategy to do. Most of the glorious and successful exits that founders went through in the past were made through mergers or acquisitions.
In this type of exit, your company is merged with or is acquired by (in short, is sold to) another company that can be either your competitor or a large company who is wanting to expand in your territory.
Why Go With Merger & Acquisition?
- You can negotiate on the pricing.
- You and your investors stay in profit.
- You have control over your terms.
- The company stays in place & gets a new direction ahead.
Down Sides of Merger & Acquisition
- Lawsuits can happen if the deals aren't conducted carefully.
- The Merger & Acquisition takes the longest time to execute.
- The process is a bit tedious and costly.
- If the founders are not prepared enough, the deals are bound to fail.
If you are a founder and looking for the most ideal strategy for your glorious exit, this is the one!
And, if you want to learn more about how you can plan the merger or acquisition for your own startup in the future, we have an inspiring case study for you.
Recently, we at Foundership were able to bring in Ravi Trivedi on the board, a man who was able to successfully sell his startup PushEngage for millions.
Take a look at the case study where you will be able to learn and gain insights about how to plan your exit strategy, what all can go wrong, and much more - directly from the man himself.
3- Finding a Private Equity Firm
In this case, your company doesn't face any merger or change. It will still be in its original form.
All you need to do is to find a private equity firm that is interested in your business and you can cash out all your shares to them. All the operations and company liabilities are then carried forward to the private equity firm.
Why Find a Private Equity Firm?
- Private equity firms are already experts in operating businesses.
- You may expect some good returns from them.
- Private equity firms work with the management team which opens up the possibility of a newer better vision for the company.
- The process is quick and fast.
Down Sides of Finding a Private Equity Firm
- The way private equity firms function is sometimes notorious
- The functioning of your business can hugely suffer once such firms step in.
- They may misuse the debts to make financial deals.
- There are very few regulations applied on such deals & thus, transparency is at stake.
4- Family Succession
This is the most natural exit that can happen in any business. When one generation is done performing their duties and taking a business to a certain level, there is time to retire from the active operations.
This is where they can transfer the ownership of the company to the next generation, mostly their kids or relatives.
Benefits of Family Succession
- Familiarity of business will be good enough within the family members.
- You can still be a part of the business as an advisor or a consultant.
- The person taking over the business in succession can stay well connected with your current network and allies.
- It is a less complicated & quicker process.
Down Sides of Family Succession
- The successor taking over your position may not be capable enough to handle things in the same way you did.
- Competence is never the criterion when deals happen within the family.
- Company function may affect for a while.
- Unfair deals and offers can lead to stress within your family life.
When people who are working in your company and their talent is a bigger asset than any other resources, other companies can be interested in acqui-hiring your company.
What this means is that a company will acquire your startup only for the talent that is working within your startup.
Why Go With Acqui-hires?
- You have the power to negotiate the deal for a better price.
- In this case, the talent of your team is your asset which makes it irreplaceable.
- Your team can get well rewarded and they plan for a better future.
Down Sides of Acqui-hires
- Finding investors or buyers for such a deal is a tough task in itself.
- It is one of the most complex and challenging strategies to execute.
- The acqui-hire legal process can be costly.
6- Management Buyouts
As the name suggests, in the management buyouts, people working within your company agree to take over the company and get promoted to the higher or more senior level.
This way the company's leadership or management board is not affected in any way and you get to exit.
Buyouts can be done by either the management board members or even the employees of your company.
Why Go With Management Buyouts?
- The person taking over the business will already be familiar with the company function & norms.
- The process should be the easiest, quickest, and less challenging one compared to other ways.
- You get the satisfaction that the company is still belonging to someone from within the company and not the outside people.
Downsides of Management Buyouts
- It is often very difficult to convince someone from your managerial team to take over the company.
- There can be slight effects on your business as the leadership changes.
- Again you may not be too rigid about your offer and may need to compromise.
This is not an exit that you want to take. In bankruptcy, all the assets of your company get seized by the bank and your company is shut.
Such exits plans do not make it into the business plans, but if things go in the worst case and turn upside down, this can be the last path you can take.
Pros of Bankruptcy
- Your debt gets clear.
- You may be relieved from the responsibilities.
- You may see the burden of your entire company that was on you getting lighter all at once.
Cons of Bankruptcy
- The reputation of the company is at stake.
- Your personal reputation as a founder & your credit score also gets affected.
- You may not get or may find it difficult to get the funding for your next startup.
8- Corporate Spinoffs
Corporate spinoffs are nothing but when a specific section of your company becomes separated from the main company and functions as a spinoff. This results in focusing on the aspects of your company that may perform well.
But in order to do so, you need to forecast and explain to the investors that the particular area of your company still has the potential and can be profitable in the long run.
Why Go With Corporate Spinoffs?
- You can still maintain the ownership of a company.
- There is a razor-sharp focus on particular aspects of the business due to the division of business areas.
- The risk of both - parent and subsidiary companies can be reduced.
Downsides of Corporate Spinoffs
- You can see an effect on employees' comfort & productivity.
- The cost of company operation increases.
- There is a temporary fluctuation of share price as per the market volatility but which may lead to decreasing demand and a fall in price.
This is another type of exit that you should avoid. What do we mean by the exit through liquidation is when you sell out all the company assets and become free from all the liabilities.
Once you liquidate your company, the company is truly no more. Every trace of it ends.
While you may get a good price while cashing out on all the assets & the process too will be simplest, but this may affect your reputation as the founder in a big way.
Why Go With Liquidation?
- Liquidation ends a business once and for all. If this is what you are looking for, it's a benefit.
- This is the easiest way to execute the strategy and does not require a particular process like that for mergers or other ways.
- You become free from all the liabilities of this specific business.
Downsides of Liquidation
- This is the worst-case scenario and is not a very valued way to exit.
- Your reputation as a founder may get affected.
- The relationship between you and your team as well as the customers may get cut off.
10- Selling Your Stakes To Partner or Investor
In this exit type, you can sell your stake to your partner or any external investor. Here, the investor can be your friend, relative, or any known person.
The only situation in which such a deal can not take place is when you are the only sole owner of the company. Apart from that, such deals work well.
Pros of Selling Your Stakes
- There is low to no effect on the company and its income sources remain stable.
- Your partner is already familiar with the function thus the company keeps on running like before.
- If an investor comes in at this level, he definitely should have some interest or a plan that can have a positive impact on your company's growth.
Cons of Selling Your Stakes
- Finding an investor at this stage of a business is difficult.
- A partner may not be willing to pay a good price for the exit & there can be huge negotiations.
- If you look for a buyer who is a friend or a relative, then you may face even more negotiation & may get the lowest possible price.
Choose the Right Exit Strategy for Your Startup
By now you must have got a clear picture of how the different types of exit strategies look like, what are their pros and cons and why you need to have one.
As they say - "a goal without a plan is just a wish", you definitely don't want to keep on wishing that if anything goes wrong in your entrepreneurial journey, exiting will be easy. It won't.
But if you prepare yourself and have a strategic plan ready even before your startup goes on the floor, your startup exit will not only be easy but rewarding as well.
We at Foundership have taken the initiative to help founders get Merger & Acquisition ready and build an exit strategy that gets more offers.
Take a look at the PushEngage Merger & Acquisition case study from the Ex-Founder, Ravi Trivedi himself who sold the company for millions.
Also, if you have any other queries regarding merger & acquisition or entrepreneurship in general, feel free to shoot us an email here - email@example.com and we will make sure to answer them for you.