Neil Patel

I hope you enjoy reading this blog post.

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How to know the best exit strategy for your business?

There is more than one method of exiting a business. With so much on the line, financially and otherwise, it certainly pays to know your options.

What is the optimal exit can be very different for each company, and depending on their stage, condition, environment, and personal objectives.

Explore these various options for exiting your company, when they make sense, and the cons that are often overlooked in the excitement.

And how to prepare and position for your preferred path.

Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.

You Are Always Heading For An Exit

From the moment you start a company you are headed for an exit.

Many entrepreneurs don’t get this. This is why so many find the exit is so difficult and sometimes an anti-climax.

Others of course design and build for the exit even before they start. It certainly at least pays to begin with the end in mind and position for it.

Unless you know what type of exit you are looking for, you may end up appealing to none of them. Just like failing to target your customers.

Once you take some outside money, you are almost certainly going to exit. It is just a matter of how and when.

Be sure you are the one in control, versus being forced to react to the forces around you. And to have to try and play catch up in the middle of the mayhem.

Let’s take a look at the different types of exits, and which may be the best move for you. As well as how to achieve it.

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Asset Sale

What Is It?

Any business acquisition can be structured as an asset sale. There may be financial and tax advantages of doing this in some circumstances.

As the term suggests, this type of exit involves selling off the tangible assets of a business instead of selling stock.

Why Do It?

An asset sale as an exit strategy may work best when your company has significant physical assets.

Even if stock prices are suppressed for some reason, some assets may be in high demand, and be able to fetch a premium.

As a seller, this may be more commonly chosen if you are in financial trouble, have run out of runway, or want to fold the business to do something else.

It is a way to liquidate the company, repay creditors, exit liabilities, and hopefully walk away with some seed capital for a new venture.

The Potential Cons

An asset sale is typically considered preferred by the buyer versus the seller of a business.

This is seen as a way for the buyer to eliminate liabilities associated with the existing company.

They are not acquiring the entity which may be subject to lawsuits or have bad debt.

Even if the acquirer will rehire some of the employees, they are all officially terminated by the seller by the closing.

This can obviously be unnerving for many team members.

Any licenses will also have to be figured out. With new ones likely needed by the new operator.

How To Optimize & Prepare For It

The most obvious factor you need to be prepared for in an asset sale is to know the value of the assets being sold.

You may wish to obtain a new independent appraisal on assets like real estate.

Be sure you know the details of any financing and debt you have linked to your assets.

This will need to be settled at closing. Look out for prepayment penalties, which could mean they cost a lot more to pay off than expected.

Explore all your options when figuring out the best exit strategy for your business.

The most critical aspect of a well-planned exit strategy is working out how to value your company. If you would more detailed information on how to do that, check out this video I have created. You’re sure to find it helpful.

Sell Your Personal Shares

What Is It?

If you want to know the best exit strategy for your business, you may choose to sell your personal shares and ownership stake instead of the company itself.

This may specifically apply when you already have other shareholders, partners, and cofounders.

They may want to continue to run the business as is.

In this scenario, you would just privately sell your stake in the company, unless you are already a publicly-traded company.

Though many public company CEOs and founders also do this over a period of time. Like Elon Musk and Jeff Bezos.

Why Do It?

You may choose to exit your company in this fashion because you no longer like the way the company is being run and the direction it is going in.

This can especially be a problem when you have multiple cofounders with a different vision, or you fail to choose the right investors.

And they now have majority control over your decision-making.

In other cases, you may just be ready to move on to the next project, and want to be free to do so.

If you can walk away with a little seed money, that’s even better.

The Potential Cons

If you completely sell out your shares, then you may miss out on any gains if the company is a success.

Your name also may still be attached to it as a founder, even if you don’t agree with how it is run, and are not involved in the ultimate outcome.

Selling large chunks of your shares suggests that you no longer believe in the company, and can send negative signals to the markets.

You may miss out on far more value than if you all sold the company to a strategic acquirer.

How To Optimize & Prepare For It

You first want to make sure that you have the ability to sell all of your shares. Be sure they are fully vested and available to sell.

Understand any restrictions on who you can sell or transfer them to. It may only be other partners or investors.

Or they may at least have the first right of refusal.

Understand how much your shares are worth, and how they must be valued according to any legal documents in place.

If possible, you want to prepare other partners to make this a smooth transaction and transition.

Mergers

What Is It?

There are various types of mergers. For our purposes here, we will focus on true mergers in contrast to acquisitions.

These transactions meld the majority of the two wholes together. They may or may not maintain separate branding.

A merger can be arranged between equals and smaller or larger companies. You may want to consider these options when working out the best exit strategy for your business.

Why Do It?

A merger may be financial or strategic.

You may choose a merger to gain more financial and other resources to enable your company to reach its full potential, more efficiently and sooner.

You may merge companies for growth and to increase market share.

Sometimes as a part of a larger consolidation or a prelude to a larger exit.

As an exit strategy, this may position you for a much larger payout once the integration is successful.

Or when a second, larger sale or IPO is achieved, and your stock becomes far more valuable.

You may continue to play a leading executive role for several years. Remaining involved, and helping to grow your company.

The Potential Cons

Most mergers fail because integrating two companies is very complex and difficult.

Especially when team members have different perspectives, come from different company cultures, and have different value systems.

Very few really have experience in this arena. Far fewer have successfully done it. Never mind having a system for repeating it.

If your payout is dependent on successful integration, then this can be a risky bet.

Many sellers end up buying back their companies, or even taking them from public to private again to put them back on the right track. And to live out the original mission.

How To Optimize & Prepare For It

The key to a successful merger is being very selective in who you choose to merge with.

Not just the company, but the individuals you will be working with and who will be in charge too.

There should be a clear integration plan in place in advance. Any tests that can be done to prove fit in advance and smooth out the transition are smart.

A clear framework for operating your company within another company is critical too.

Who will make decisions? How will accounting be done? What finances and resources will be available?

What team will be available? Keep these aspects in mind when identifying the best exit strategy for your business.

Strategic Acquisition

What Is It?

Mergers and strategic acquisitions can be very similar with some lines blurring between the two.

Consider Facebook’s acquisitions of Instagram and Whatsapp. These were very strategic business purchases.

While there is integration in the technology in the background and in the advertising business model, they still maintain their independent branding for now.

For the buyer, a strategic acquisition is about what combined value can be achieved with the companies together.

This may be user base, efficiencies of scale, acquiring talent and specific technology, or certain metrics.

Why Do It?

As the seller of a business, a strategic acquisition can often unlock the most value.

Strategic acquirers are considering the future value, as well as the cost of allowing their competition to buy you instead.

They may be willing to pay far more than other buyers. Especially if you market, pitch, and sell it right.

If you are looking for the biggest payday and some great news headlines, this may be your preferred method of exit.

The Potential Cons

Even if you stay on for a couple of years as a part of the deal, your ability to control the destiny of what you’ve created is going to be greatly diminished.

You may have no decision-making power at all. Not only can this mean your business starts going in the wrong direction financially, but it may mean sacrificing all of your values as well.

You may end up walking away from billions in earn-out dollars because you want to start from scratch again.

How To Optimize & Prepare For It

The two key parts to a successful exit to a strategic acquirer are firstly making sure you pick the right buyer.

And secondly taking full advantage of the opportunity to position and market your company for the maximum sales price and best terms.

Take your time to filter and screen buyers. Invest in creating a winning pitch book and pitch, with all of the data and substance to fly through the due diligence.

Financial Acquisition

What Is It?

For the buyer, financial acquisition is about acquiring your numbers and finances. Typically the financial performance, returns, and yields it is already producing.

Financial buyers are looking hard at the accounting, profitability, and track record.

Why Do It?

If your business is profitable and has at least two years of a strong track record of consistently producing revenues, then this may be an exit option available to you.

Financial buyers are normally large funds or corporations with plenty of capital and access to it.

They will be less concerned with future growth and innovation. If your venture may have peaked and matured, this may be the best exit.

The Potential Cons

Financial buyers are looking for consistency in performance after the acquisition.

If you stay on, don’t anticipate much support in swinging for the fences with new innovations, technology, and product.

It is likely you will be replaced by CEOs and executives with a different approach and mindset.

How To Optimize & Prepare For It

The chief factors in a financial acquisition are having the right financial metrics, and being able to prove it.

All of your paperwork and accounting needs to be clean, organized, and polished.

Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Going Public

What Is It?

You can either exit by taking your company public with a traditional IPO, or through a more modern SPAC deal.

Both involve bringing in new money from public investors. Through selling shares you are able to better capitalize the business and take your share of that.

Why Do It?

For many, this seems like the ultimate goal and validation of their product, business model, and work building a business.

It can create great liquidity, add credibility, and look good on your resume.

If your business has peaked, and you are ready to set it free out in the world and get paid well for all you’ve put in, this could be your exit strategy.

The Potential Cons

Running a public company is much different from launching a startup.

Not very many entrepreneurs enjoy continuing to lead a public company after the IPO.

SPACs may be a streamlined way to this exit. Though so far almost all SPAC stock prices have crashed back to their baseline pretty quickly.

If you cannot cash out before that your big gains will be very short-lived.

How To Optimize & Prepare For It

Going public is a complex process that is going to require a lot of professional help from bankers, accountants, and lawyers.

Enroll the best possible help that you can. It can make a huge difference when you’re working out the best exit strategy for your business.

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.

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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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