Why startup founders should plan for a profitable exit? Founder exit strategies are indispensable for the long-term growth and sustainability of any new venture.
As entrepreneurs exit their businesses and move on to ideating new concepts, they sustain the startup ecosystem. Statistics indicate that 30% of founders who have built successful companies are likely to be equally successful with their next projects.
Even as you draw up a business plan, include exit strategies and milestones to map out a profitable future sale. Executing this move at the opportune moment eliminates the risk of legal issues, financial problems, losses, and even failure.
Investors going through your pitch deck are also interested in knowing the practical approach you have for selling the company eventually.
How profitable are exits? Is that your next question? Let’s answer that with these statistics. Moving forward from 2007, startups raised an average of $41M in venture capital, later making an exit for $242.9M.
Startups that were acquired by larger companies earned their founders $155.5M on average. Those that went public sold for $162M at the time of their exits.
If you’re looking for information about why startup founders should plan for a profitable exit, you’ve come to the right place. Read ahead for some of the best exit strategies you can adopt.
The Ultimate Guide To Pitch Decks
Understanding Founder Exit Strategies
Exit strategies are typically about selling out or liquidating an unprofitable business or an asset that isn’t performing per expectations.
In startups, an exit strategy is like a contingency plan to prep for both eventualities–that the venture is successful or a failure. This strategy is your plan for managing the risk associated with the new business.
The plan should include a due process you’ll follow to reduce or liquidate your stake in the company gradually. If the startup is raking in good revenues, the plan outlines the potential profits you’ll make from the sale. Here are some of the reasons why entrepreneurs pull out:
- Founders typically sell their startups once the company is stable and has a robust growth trajectory. And it’s the right time for an IPO.
- You may choose to sell the business if there are drastic changes in market conditions that the company cannot sustain.
- You wish to cash out and retire.
- Entrepreneurs may exit their ventures when they are ready with a new business concept they want to explore.
- The venture’s cash flows are inconsistent and have slowed down to the point where it’s no longer sustainable.
- If the company is running losses and needs a significant cash injection that funding cannot support, the next option is to exit. That could be the best option to minimize your losses and consolidate the remaining assets.
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Exit Strategies – Some Viable Options
You can choose from different exit plans, depending on different factors like the industry, gross profits, revenues, and more.
- The best option is to launch the company further on its growth trajectory with an IPO. Exiting with an IPO is a prestigious move and adds to the founder’s credibility and trustworthiness. Investors are more likely to trust in their business acumen.
- A management buyout is another viable option to consider. That’s when the professional managers or team members purchase the owner’s stake in the venture. The company’s assets, operations, and all control pass on to the management.
- If the startup isn’t doing so well, you’ll consider selling the company assets and/or the founder’s shares.
- Merging with another complementary business or acquiring a smaller venture are other options your financial advisor may suggest.
- Ventures that have valuable IPs can consider licensing or franchising their expertise instead of going out of business. Franchisees can capitalize on an established and trusted brand name and continue to build on its success. Founders can set up recurring earnings sourced from royalties and licensing fees that the franchisees will pay them.
Founders choose the optimum approach depending on their long-term goals and objectives for the venture. The final decision revolves around the degree of involvement and decision-making control they intend to retain in the business operations. And the future growth potential they anticipate.
Bankruptcy should be the last and unavoidable option because an entrepreneur declaring insolvency is likely to lose credibility with investors. Raising funding for any future venture becomes all the more challenging.
Why Startup Founders Should Plan for a Profitable Exit
A well-planned exit strategy is essentially the founder’s plan for how to minimize risks and potential losses if the venture fails. It also outlines how to sell the business at a great price when they’re ready. These fundamental reasons aside, there are several other reasons to have a clearly-defined plan.
Setting Clear, Achievable Goals
Having an exit strategy involves setting milestones that will guide the future decision-making process. For instance, an estimated valuation or sell-out price based on the revenue the startup will earn within an interval. Or a specific turnover figure the company might achieve in a pre-determined time frame.
Or the owner may plan an exit for the time when the startup has scaled to a point when it’s ready to capture bigger statewide or nationwide markets.
Having set these milestones, you’ll make strategic decisions on how to achieve them. Like, say, invest in promoting sales with more aggressive advertising and marketing approaches.
Planning for Unforeseen Conditions
Business landscapes can be volatile, with several factors influencing market conditions. As a rule, 90% of new ventures eventually fail. But the pandemic was one example that led to the startup failure rate rising to 10 out of 12 fails. Further, many established businesses also closed shop.
A global economic crisis, stock market crash, industry disruptions, and unforeseen conditions can add to the risk factor. In situations like these, it may be preferable to minimize losses and capitalize the company’s assets.
That’s one of the reasons why startup founders should plan for a profitable exit–while the going is good.
Eliminating the Possibility of Hasty Decisions
Changing conditions, personal situations, and other factors can prompt founders to make decisions without thinking them through. Having an exit plan ensures direction and focus when discussing the terms of the sale.
You’ll eliminate issues like panic selling or decision driven by emotion rather than rational thinking. This will ensure you walk away with a profit that you can invest in the next startup.
Minimizing Business Risks
Setting up a business in any industry comes with a multitude of risks. Changes in federal policies and regulations may result in products becoming redundant.
Or, market shifts and changing customer buying trends may lead to sales dropping without warning. Losing a key source of inventory could also make it hard to sustain the startup. Your exit strategy should be designed around market patterns, competitor activities, and industry cycles.
Savvy entrepreneurs should be able to anticipate trends and determine the appropriate time to sell the company. That’s when the industry is at its peak boom time.
Improving the Business Plan
Potential investors viewing your business plan and pitch deck focus on the exit strategy it has mapped out. That’s because the prospect of eventually selling the company has entrepreneurs take a realistic view of their business. Particularly the areas where the company can do better.
As a result, they are likely to make better decisions for improving efficiency in operations, sustainable growth, and enhanced sales. Their efforts lead to a higher valuation and more funding.
The exit strategy is only one of the elements of a robust business plan. Are you ready for more information about how to design a business plan? Check out this video I have created.
Coordinating Stakeholder Interests
Whatever may be the exit strategy you choose, whether an IPO or merger, you’ll account for the interests of the stakeholders. These entities include investors, employees, and founders.
The plan for selling the company will outline the terms and conditions clearly. All stakeholders coordinate their activities and commit to working toward achieving the venture’s mission and vision. Having everyone on the same page is always beneficial for success.
Grabbing Strategic Opportunities
The prospect of a company sale presents several options such as a strategic partnership, merger, or acquisition. When presented with opportunities, founders are likely to weigh their long-term objectives and then grab the best option.
Accepting the most attractive proposition can have the venture poised for long-term scalability. For instance, the startup could merge with a competing business and eliminate a strong market share. You’ll acquire not only their customers, but also Intellectual Property (IP), resources, technology, and expertise.
On the flip side, if your startup captures a substantial market share, it could sell at premium prices to acquiring companies. As the founder, you’ll have the option to sell the company outright and cede complete control.
Or, you can sell a substantial ownership stake to the acquiring company while retaining autonomy in the decision-making.
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Planning for Succession
The team is the lifeblood of any venture and drives its success and growth. Exit strategies account for the possibility of core talent leaving the company. The plans have contingencies for hiring and replacing key team members. And, reorganizing the stock options given to them.
In case the startup is a family-run business, you’ll plan for the possibility of the ownership changing hands. Or transfer to the next generation. Also, outline a continuity plan for what happens if one of the members sells their stake to non-family owners.
Maintaining the family legacy should be high on your list of priorities. That’s how you’ll avoid the possibility of conflict that can adversely affect the brand name and shake investor and customer confidence.
Offering employees stock options by way of ESOPs has always been a great strategy for retaining top talent. And, rewarding them for their dedication to the startup.
When crafting an exit strategy, you’ll also consider the possibility of a steady shift of ownership to the team. You can award personnel stock options and shares in lieu of high salaries, which is one of the top ways to compensate them–especially when the company is not generating adequate revenue.
The stake employees acquire motivates them to work for the long-term success of the venture.
The Takeaway – A Well-Crafted Exit Strategy Secures the Company’s Stability
The most critical reason why startup founders should plan for a profitable exit is to secure the venture. If it is generating profits, is stable, and is on a rapid growth trajectory, the optimum exit plan should ensure its stability.
Even after the founder transfers decision-making and control to new owners, the company should continue to perform well. If the company is on shaky ground, the right exit plan should secure its footing with strategic partnerships.
Most importantly, if the venture is doomed to fail, the right exit plan should prepare to minimize its losses. Selling assets and securing the interests of the stakeholders are contingencies the plan is ready for.
To sum up, exit strategies are as crucial as business plans which is why investors review it in detail. That’s also why it should be one of the 16 to 20 slides of your pitch deck.
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