For business owners, an exit plan is quite important, however it is usually neglected until conditions call for dramatic changes. Ignoring to create a well-considered exit plan that directs the direction of your company might so limit your future expansion in business. Long before the time comes, you should actively create your exit strategy to protect the future of your company and guarantee the greatest potential result.
We will walk you through the process of determining the exit plan best fit for your investor expectations and corporate objectives in this post. We will also discuss real-world company departure cases and the key factors you should keep in mind when using your selected exit plan.
How to secure startup funding and plan an exit strategy
Once a startup reaches a particular milestone or value, an exit strategy is a calculated technique for selling or passing control of it. This important feature of a business plan shows how investors and business owners could recover their money and benefit from the taken risks. Early in the exit plan, including factors like employee stock options or equity guarantees that the interests of important stakeholders are properly taken into account, therefore fostering a fair transition.
Each of mergers and acquisitions (M&A), selling to a strategic buyer, or initial public offerings (IPOs) offers a clear road map for the future and guarantees financial certainty.
A well-considered exit plan may greatly improve the appeal of a firm to investors, who sometimes search for a clear road to a return on their money. Planning an exit helps startups negotiate the corporate terrain, therefore guaranteeing consistent development and a smooth transfer when the time is right. This methodical technique helps to create a good organizational culture and opens the path for a seamless change, therefore benefiting the owners and investors as well as the whole company.
Read also: How To Secure Funding For Your Startup
Recognizing exit plans
An exit strategy is a well-organized plan that helps a business to maintain its competitive advantage during phase transitions and negotiate a range of future events. This strategy acts as a road map, allowing the business to maximize all the potential by carefully and steadily moving toward its exit point.
Raising venture capital money or looking for angel financing usually requires an exit plan. Usually, angel investors want a thorough knowledge of your possible exit strategy in order to estimate when they may expect a return on their investment and what that return would possibly include.
How common are successful exits
Although about 90% of firms eventually fail, studies by Startup Genome expose a startling fact: just 1.5% of startups—that is, around 15% of those that manage to survive—achieve a successful exit valued at $50 million or more. Not only is this phenomena seen in the top eight startup environments in the US.
Fascinatingly, based on a CBinsights 2023 research, Europe leads the way with 38% of the worldwide startup exit scene. At a 35% stake, the United States comes in second closely. Asia witnessed sixteen percent of departures in meanwhile.
Though the total number of departures has been steadily declining following the epidemic, suggesting continuous market difficulties particularly for investors looking for liquidity, This underlines the need of having a good exit plan as it not only helps the entrepreneur but also is rather important for investor relations and the general startup performance.
Read also: Creating A Venture Capital Fund: Building a Strong Portfolio
Why does your startup need an exit strategy?
The main goal of an exit strategy is to enable businesses to create and carry out exact development plans. This calculated method helps companies to spot, ready for, and carry out activities that will maximize benefits. A well-crafted exit strategy has certain advantages including:
- Direction and clarity. A startup exit strategy offers the company a well-defined, unambiguous road map of action that helps it to make timely decisions in a corporate environment undergoing changes.
- Opportunity development. An exit strategy guides businesses in developing plans to seize fresh prospects and organizing their operations around them.
- Internal correspondence. An exit strategy guarantees that all projects and plans are pointing in the same direction and helps create links across several divisions so forming a cohesive picture of future development.
- commercial fitness. An exit plan guarantees that fresh chances are always sought for and helps the business to remain strong and efficient.
Constant expansion. An exit plan guarantees that the correct actions are done constantly and provide a structure for corporate development. This implies that the business will be able to maximize the chances it comes across in several contexts.
A startup should create an exit plan when
From its founding, a business should start developing an exit plan as investors usually see a well-defined exit plan favorably and can help to draw first capital. The business plan of the firm should include the exit strategy, which shows a clear road map of how founders and investors may recover their money and maybe get a profit.
Early preparation demonstrates forethought and preparedness, which are vital for negotiating the unknown seas of entrepreneurship; it does not entail early departure.
Being flexible is particularly important since the exit strategy may alter depending on the firm's success, market conditions, and other factors. Early exit plan formulation improves decision-making, aligns founders and investors, and creates a clear future vision that may assist the business achieve its long-term goals.
Several forms of exit strategies
Start-up founders and investors looking for a successful change-of direction must learn to negotiate the many paths of departure. This part explores several exit alternatives and clarifies how each fits distinct company models and long-term goals, therefore offering a road map for a good departure.
acquisitions and mergers (M&A)
M&A deals—that is, when one firm purchases another company—or when two or more companies join to create a new company. Startups could find a terrific opportunity to access fresh markets, resources, and knowledge by means of M&A agreements. A new CB Insights analysis, however, shows that M&A deals in the worldwide startup ecosystem kept declining by 8%.
Read also: What Is A Venture Capital Firm
IPOs, or first public offerings
An IPO, or initial public offering, is the first-time public sale of business stocks. Start-ups may generate money and boost their profile rather effectively with IPOs. A research indicates that the worldwide IPO market is displaying a persistent comeback with a notable 24% rise in the count of IPOs. IPOs are not fit for every firm, though, and they may be costly and complicated.
Exit by family succession
Family succession is the passing on of a business to the following generation. For entrepreneurs who wish to keep their company in the family, this might be a great choice. Still, it's crucial to ensure the next generation is ready to inherit the company.
Selling a third-party your stake
This is the situation when another investor purchases a share of your startup's ownership. Selling your share might be a terrific approach to cash out of your investment or generate money.
Acquired
This is the process by which a bigger firm purchases a startup mostly for intellectual property and talent. Startups may use acquihires as a means of exiting and allowing their staff to discover fresh prospects.
Buy-out for management (MBO)
An MBO is a deal whereby a company's management team acquires it from current owners. Management teams may find MBOs a useful tool for gaining control over their own business and generating value for staff members and themselves.
Liquidation—also known as bankruptcy
Not all exits, however, are favorable. Liquidation is the sale of a company's assets followed by a stop to operations. Although it's usually a last alternative, liquidation might be required should a business find itself without enough income or money to survive. Comparably, bankruptcy is a legal procedure wherein a corporation is declared insolvent and its assets are sold. Anywhere feasible, one should avoid bankruptcy.
A startup's industry, stage of development, and financial situation will all affect its optimum exit plan among several other elements. Before deciding how to leave your company, give all of the alternatives great thought.
Practical illustrations of escape techniques
Investigating several exit plans provides a window into the several paths companies might follow to reach either additional expansion or liquidity. Reflecting a turning point in their separate paths, these stories show how exit strategies are customized to the particular situation and aspirations of every business.
Loom's purchase by Atlassian
Notable Australian software firm Atlassian paid over $975 million to buy Loom, a groundbreaking technology in asynchronous video chat. Aiming in line with the growing trend of hybrid work and virtual communication, this purchase was a calculated move meant to strengthen Atlassian's team collaboration capabilities. Using shared movies, Loom's video messaging technology facilitates quick communication—a capability Atlassian, one of Loom's first users, thought to be invaluable.
First public offering of Airbnb
In December 2020, amid the worldwide difficulties the COVID-19 epidemic presents, Airbnb started its IPO. Setting the IPO price at $68 each share, the business sought to generate around $2.44 billion from the sale of its Class A stock. Airbnb's share price skyrocketed on the day of its IPO, beginning at $146 and peaking at $165, then ending at $144.71, thus indicating a tremendous increase of 113% from its IPO pricing and so driving the company's worth above $100 billion.
FAQ's How to secure startup funding and plan an exit strategy
What is the best exit strategy for a startup?
Each of the common exit strategies—mergers and acquisitions (M&A), selling to a strategic acquirer, or initial public offerings (IPOs)—clearly points the route forward and guarantees financial security.
How to plan an exit strategy?
- Prepare your finances.
- Consider your options.
- Speak with your investors.
- Choose new leadership.
- Tell your employees.
How do investors exit from startups?
Investors might leave via an equity stake sale, in which case they sell their stock holdings to bidders. The investor can leave the firm and gets money for their ownership participation in return.
What are the three main exit strategies?
- Hand the company on to a successor. In this instance, the successor may be a management in the business or a family member.
- Using a management or employee buyout, assign ownership.
- Turn over the company to a third-party buyer.