As many founders do, you may think, “My startup is my life; why would I ever want to think about an exit strategy?” Here’s the thing, business owners overlook strategic exit planning. Some even view it as a negative thing. But the truth is that many founders successfully bring their companies to a crossroads where they must decide how best to move forward for themselves and the business — and allow any investors to collect their returns. So, here’s an A–Z on top exit strategies and how to prepare to hand over the reins.
What Is an Exit Strategy of a Business?
Every business owner, at some stage, will leave their company because of new career choices or ventures, retirement, health or family issues, lifestyle changes, or a sudden need for cash. However, many business owners fail to plan for a strategic exit due to the daily grind — attracting new clients, meeting sales targets, supervising management, and jumping into investment rounds.
Exit strategies are comprehensive roadmaps for selling a business — and they should be included when you write the original business plan. It may be hard for you to imagine leaving your company right now. Still, a good exit strategy of a business means founders can protect their investments, cash out with a substantial profit, plan retirement, and secure a future for the company — with or without them.
It also comes in handy when searching for financing. Investors and lenders use exit strategies to determine if they’d have enough protection if your business fails. Plus, they can understand how to get their investment back if you decide to leave your company. But don’t worry; you can tweak an exit strategy plan as your business expands or markets evolve.
Top 5 Exit Strategies for a Successful and Strategic Business Exit
When developing your original exit strategy, you should think: How much is my business worth today? What are my personal and financial goals for the future? These questions can help you weigh up the different ways to exit your business in style, including:
- Going public through an Initial Public Offering (IPO)
- Choosing mergers and acquisitions (M&A)
- Selling to a friend or relative
- Paying someone else to run your company
- Halting all operations
1. File for an IPO
Before an IPO, a company is private, and ownership is limited to a select group of individuals, like early investors, founders, and employees. After filing for an IPO, your company would issue shares of stock for public purchase, allowing anyone to have ownership.
Being publicly traded means increased visibility and credibility, leading to higher valuations. Also, having a more established company foundation attracts top talent, and founders can turn their hard work into a lucrative payout. IPOs are also another route for funding growth or paying off debt.
2022 was one of the most challenging years for investors, with the benchmark S&P 500 having its worst six-month return since 1970. But it is a great time to buy growth stocks weighed down by poor investor sentiment. So, this market downturn is a fantastic opportunity for IPO planning if your company thinks of going public and has growth projections.
However, filing for an IPO calls for the following:
- A clear idea of your company’s financials, management team, and future plans.
- Filing Securities and Exchange Commission (SEC) reports.
- Selling shares through an underwriting firm.
Going public is often an ideal exit strategy for late-stage companies; however, startups or small businesses might need to consider another plan. Fortunately, there are plenty more options.
2. Combine Forces in an M&A Transaction
M&A activity involves the consolidation of companies through financial transactions. A merger requires two firms to form a new legal entity under one corporate name, while an acquisition is when a company becomes the owner of another. M&As can provide a quick and efficient way for founders to exit their company, receive a return on investment, and take advantage of fresh resources. A company may also:
- Purchase and absorb another company
- Merge with another company
- Acquire some or all of a company’s major assets
- Make a tender offer for stock
- Plan a hostile takeover
However, post-acquisition litigation is on the rise, and there’s a hefty amount of risk: Company directors and officers can face scrutiny before, during, and after corporate transactions are complete. Therefore, Representations and Warranties (R&W) insurance is an excellent safeguard to protect buyers and sellers, covering the indemnification of breaches in transaction agreements. R&W policies can also improve the condition of an M&A deal and provide the seller with a cleaner exit.
3. Sell the Business to a Trusted Individual
If you can’t fathom giving up your business to a stranger, then the best route is to sell to someone you know and trust, like a long-time friend, wealthy relative, customer, co-owner, or employee. The advantage of selling the business to a singular, internal buyer is that the buyer can choose to pay gradually, giving you regular income and reducing their own risks.
This method has a few advantages. For example, the buyer could have the resources to scale your business, allowing you to pay investors, take some time off, and get ready to invest in another project.
However, it isn’t the simplest way out. Family disagreements can always arise, and be aware you still need records like tax returns, financial statements, and documents that prove income and expenses.
Many business owners don’t consider that a potential buyer could be an existing employee. But it is an efficient way to preserve your business’s legacy, avoid searching for external buyers, and ensure a smooth transition with fewer disruptions.
4. Pay Someone Else to Run the Business
Ready to cut ties and take a break from managerial pressure? Paying someone else to take over means you can retain ownership and use the cash flow to build your next company. Although it takes time to build systems and train people, at some point, you will trust your team to run the business without you.
Many professionals don’t consider this option to be a genuine exit strategy. However, it allows founders to step away from the business while enjoying its benefits.
5. Close the Business and Liquidate
Want to call it quits and close up shop for good? Then, liquidation is for you. Under this business exit strategy, you halt all business operations and sell your assets, which you can use to pay creditors and investors.
This option is one of the most straightforward and quick exit strategies for a small business. But it often happens when a business owner has run into trouble and must liquidate business assets to generate cash and pay debts. It’s worth noting that you only make money on the assets you can sell, and creditors must be paid first.
At Founder Shield, we know that giving up control of your company is no small feat. But you would feel better about it knowing you had the best terms and insurance policies. Founder Shield specializes in understanding your industry’s risks and ensures you have adequate protection as you seek an exit plan for your business.
Want to know more about insurance for startups? Contact us at firstname.lastname@example.org or create an account here to get started on a quote.