“Businesses come in all shapes and sizes, but at some point, they will either need to grow or exit. When business owners decide that it is time for their business to stop growing, then they must develop an exit strategy.”
It’s inevitable that you will want to sell your business at some point. Maybe it’ll be after five years, maybe ten or more than likely it’ll be somewhere in between. You might not even think about selling until something happens as someone comes along with an offer too good to refuse (or until the business starts doing well). The important thing is knowing what exit strategy is best for your startup before you start building it so you can set yourself up for success when the time comes.
We will discuss five different strategies in this blog post – how they differ from each other and what you should know about them before committing to one.
Jump Ahead To :
What is the Startup Exit strategy?
Startup exit strategy is the process through which a business owner can sell their company. There are several ways to do this, including an initial public offering (IPO), selling to another private buyer or company, or transferring ownership of shares in exchange for cash. A key component of any startup’s success is planning and knowing your path forward if you plan on taking your venture out of its growing stage at some point in time.
This will not only help prepare yourself but also empower you to make decisions that may seem overwhelming otherwise, like whether it’s best to take outside investment or remain independent until later down the road when growth has plateaued. As long as there are clear goals set by both parties and a well-thought-out exit strategy, it can be one of the most rewarding parts of any startup.
An example of this would be if Google bought Samsung, which means that they buy their mobile division for billions of dollars. This guarantees them all data and clients from Samsung phones but also gives Google the chance to make smaller devices like smartwatches because now they can use some components without paying a contract fee with other companies who own these patents (Samsung).
A good way to think about it is like real estate; why buy one house at full price when you can get four houses in different locations for half the price? That’s what happens in most exits strategies. The company buying gets more than they bargained for, and the startup company only wants to sell when it’s time.
Different types of startup exit strategies
Startup exit strategy is one of many different types of startup strategies that startups consider when thinking about their long term goals and how to achieve them. There are five main types: acquisition, merger/acquisition, IPO, bankruptcy and management buyout (MBO). Each type can be used when a business or company either wants to sell the business as a whole unit or parts of it for financial gain. After deciding which option best suits your needs, there are several things you should think about before taking action.
First thing’s first, – what does an “exit” even mean? An exit strategy is all the actions taken by founders after they’ve started the company to make money. There are five types of exit strategies: Acquisition, merger/acqui-hire, IPO (Initial Public Offering), bankruptcy and management buyout (MBO).
Next, we’ll explore each type in more detail.
The last thing I want to mention is timing – it’s important to consider your options carefully before deciding which path you should take because there might only be a few opportunities every year for companies looking to get acquired. In some cases, IPOs can also delay exits, so think things through properly! Now let’s move on.
Acquisition
Acquisitions happen when a larger company buys out or acquires one of the smaller companies. This is considered an exit strategy because founders can get money for their business while maintaining some control over it instead of shutting down completely.
There are many ways to choose an Acquisition type of startup exit strategy for your business venture. One example was Facebook’s acquisition of Whatsapp and Oculus VR at $19 billion each for these companies to join their team back in 2014-2015. There are many more examples, but this shows how you could decide which company would be best suited for your dynamic vision! It also depends on what kind of investor you have backed up your efforts to. Meaning if investors like the deal that they have a stake in your company, they can choose to join the deal, making it more attractive for other companies.
Acquisition startup exit strategies are not only reserved for large corporations, though! In fact, there have been many acquisitions done by smaller startup ventures that you might never even expect! One example is AOL’s acquisition of Bebo at $850 million back in 2008, which was considered a smart decision on their behalf. This allowed them access to an audience base outside of America and helped build up the social media market worldwide. Especially given how popular social media platforms such as Facebook and Whatsapp became after this.
Merger/acqui-hire
Mergers and acqui-hire can happen when two startup teams join forces to work on new ideas together. The advantage for startups that merge is that they benefit from each other’s resources which help them grow faster than before.
Merger/acqui-hire is a startup exit strategy in which a startup merges with another startup, company or organization. There are different types of merger and acquisition strategies used by startups to exit the startup ecosystem.
Startups usually use these methods when they lack money for expansion, need funds for further research & development (R&D), have new ideas but can’t implement them due to limited resources etc., merge with other companies that hold complementary assets needed by a startup, lack business expertise or management skills required to grow business rapidly etc.
Mergers/acqui-hire offer benefits like increasing market share, gaining economies of scale, creating value-added products/services more efficiently before reducing costs simultaneously. A startup can become a market leader and gain a competitive advantage over its peers.
This type of startup exit strategy also has downsides like startup may lose control, flexibility and creativity after merger or acquisition as it will be owned by other business entity now; founding members who were involved in company’s day-to-day activities might find their roles limited etc.
It is advised to startups that even though they use this method for making an exit from the startup ecosystem, before starting negotiations with potential acquirer(s), take professional advice on different aspects like intellectual property (IP), liabilities, tax implications and legal responsibilities for employees among others.
IPO (Initial Public Offering)
Going public through an IPO gives your startup access to much-needed capital by letting people buy shares in your company. It’s a risky move but one that could pay off in the end if you’re lucky enough to get picked up by major investors or companies with lots of capital to spare!
In this startup exit strategy, a startup would go public by offering shares of the company to investors on an exchange such as NASDAQ or the New York Stock Exchange.
This is one of the most common startup exit strategies, but it is not easy to achieve, and there are many risks involved. The IPO process itself can take several months from filing with regulators until going live for trading.
Suppose a startup has raised money through private funding rounds instead of equity crowdfunding. In that case, they will have significant restrictions on publicly disclosing their financials, impacting valuation and compliance requirements around registration and reporting rules. This type of startup exit strategy requires extensive legal assistance from experts before reaching fruition successfully!
Bankruptcy
This is probably not what most startup founders would want as an exit strategy – it means shutting down and giving up all hope for profit, which isn’t ideal at all. However, bankruptcy might be necessary sometimes, so don’t panic just yet – there can still be opportunities ahead even when your business fails.
Bankruptcy startup exit strategy is a much less common type of startup exit. Bankruptcy startup exits typically happen at the end of a startup’s lifecycle when it becomes obvious that there isn’t much left to salvage and no one wants to invest or buy out the company for any price. In some cases, bankruptcy might be preferable over selling off parts of your business as you’ll get more control over how everything plays out – even if this means taking on debt yourself to keep things afloat until this happens. If you do decide to sell off bits and pieces rather than go through Chapter 11 bankruptcy, then here are three main types:
- First Lien Sale Mergers – This occurs when you sell off all of your assets to a new company that then assumes control over them.
- Second Lien Sale Mergers – This happens when someone buys out the startup’s debt but doesn’t take on any other responsibilities.
- Assets-only Sales – These are “fire sale” deals where only the startup’s assets (the things they own) are bought rather than anything else, including liabilities or contracts.
Management buyout (MBO)
MBOs happen when only certain parts or divisions of a larger corporation are bought out by another smaller company instead of completely buying out the whole thing. Founders who choose this route maintain full control over their startup, but they don’t get any cash for it.
It’s also sometimes called “management-led” or management buy-in/buyout (MBI/MBO). Managing Directors and startup founders can agree before investing in it that they will be able to take over control of the startup if there comes a time when their shares lose value. Founders may also choose this option because MBOs give them more flexibility than other types of exits such as Initial public offerings (IPOs), mergers, or acquisitions. In some cases, entrepreneurs might have multiple motivations for choosing this type of startup exit strategies including ensuring personal job security, access to startup equity, and retaining control of startup decisions.
MBOs aren’t usually used when the startup is just taking its first steps in the world or has no profits made yet. This strategy can be applied when at least one financial year has passed with good results on growth levels, business development and profitability that set a clear path for future success.
In some cases, it might make sense not to use MBO strategies even though this would probably be considered an exit option by many entrepreneurs because they want more flexibility regarding where their shares will end up after all of the founders decide to sell them off. In these situations, it’s important to realize what type of deal each person wants from selling startup assets before making investments or buyout deals.
Why do startups exit?
Startups can exit for several reasons. One startup may seek acquisition by a larger firm to help the startup scale and become self-sustainable. Another startup may be going bankrupt or struggling with growth stagnation and looking to buy out before declaring bankruptcy quickly. Some startups are forced into selling when their business model becomes obsolete due to new technology entering the market that makes it unprofitable in comparison (i.e., Google’s entrance into advertising). It’s also common for startup founders to sell their startup when they have grown enough and are looking to retire (or at least take a break).
Wrap up
In the end, this is a decision that you will have to make. There are pros and cons to every option. For some people, it’s important to know their company can continue even if they were no longer in power (i.e., after death). Other entrepreneurs may want to make sure there is an opportunity for their employees or family members to buy them out of the company one day while still living. We would be happy to discuss your options with you further, so please get in touch!
