An exit strategy for startups helps to ensure investors and entrepreneurs get a return on their investment. The facilitation happens by the transfer of ownership of the business to a third party.
Prevalent exit strategies include management or employee buyout, sale of equity, or acquisition by another company.
Who Is in Need?
If your startup has angel investment or venture capital funding, an exit strategy is crucial.
Even if the size of your business is small, planning for the days to come is always a good idea. You can think ahead of how the ownership of the business will transfer down the line. A critical aspect to note here is that it is never too early to plan.
The startup boom has led to the inclusion of new ideas and young enthusiasts from all walks of life. That has made the startup ecosystem favorable for the new entrants and attracting venture funds.
The new environment facilitates the availability of funds from venture capitalists or angel investors. This aspect makes it crucial to include the exit strategy in your pitch and business plan to woo these lots. If the numbers stack up well with the backing of a solid business plan, you can get funds to grow and scale.
Businesses with smaller scopes often do not think about this step as it does not align with their business goal.
How to Ascertain the Right Exit Strategy?
The exit strategy can vary Depending on the type of investment you seek for your startup, and the kind of investors on board. Investors evaluate the scope of a startup depending on various evaluation structures. The investment is broadly aided by
- The stage in which the startup is currently operating (for example it helps determine the seed, growth, or maturity funding)
- The assurance of returns on the investment for a stipulated period
The second point is vital as it should make sense to the investors, from whom you are planning to get funding. Having clarity from the beginning can help foster a healthy relationship between the startup and its investors.
Angel investors, venture capitalists, or any other type of investor look for an investment horizon of five to ten years. Therefore such guys can get fidgety and anxious if there is no liquidation plan in sight.
You can seek the help of valuation experts to chart the numbers for a projected period. But it more often happens that startup founders do not have the expertise to execute the sale of their business.
At this conjecture, you can seek help from experts like Website Closers. Such companies have the resources and the skill set needed to execute these transactions. It generally involves:
- The determination of the objective for selling the firm,
- The valuation of the firm, both current and projected,
- Formulation of strategy with the help of experts on board like serial entrepreneurs, attorneys, consultants, and accountants,
- The amalgamation of inputs, from the combined experience of such advisory teams, from various fields like Digital, Internet, Tech, etc.
The Exit Options
In a business, setting an objective behind the reason for the dissolution of stake can help identify the best possible exit option for you. You can start delving deeper by choosing the answers these questions:
- How do you see yourself after the sales of the business?
- Do you plan to pass the authority of the business to your friends or family?
- Is it important for you to keep the name afloat post-sales?
- What are your monetary goals?
One of the most sought-after strategies to exit the business is to sell the company to a larger entity for a profit. The deal can take place either by using cash or stock transfers.
The capital that the founders receive can then return to the investors (if the funding is by angel investors) or to limited partners (if the funding is by venture capitalists).
Floating in Stock Market
Going to the stock market via an IPO or ‘initial public offering’ can also prove to be a good exit strategy. In this process, the startup company dilutes a chunk of its shares to non-institutional and institutional investors. Venture capitalists adore such companies as they come with deep coffers.
An exit plan in place from day one can help you in the future and also attract investors for seed funding of the startup. Being clear of the objective for selling the business can aid in strategy formulation in your favor. While charting an exit plan, make sure that you include all the beneficiaries.