In this article, we'll unravel the essence of startup exit strategies, shedding light on what they entail, their significance, and the diverse avenues they can take.
What Is a Startup Exit Strategy?
An exit strategy is the overarching plan guiding the company toward a profitable sale of its stock. It is a comprehensive roadmap that founders develop to navigate potential scenarios, ensuring the company's sustainability and profitability in the long run. A startup exit occurs when the owner(s) of a company sells their ownership or stock, either for profit or at a loss.
Importance of Having an Exit Strategy
Founders face two paths: success or failure. Regardless of the outcome, having an exit strategy is crucial. For successful ventures, it helps founders capitalize on their achievements, whether through retirement, starting a new venture, or joining another company. In contrast, for struggling startups, it mitigates losses by facilitating the sale of assets to pay off debts.
Here are a few exit strategies that can be pondered upon while planning an exit:
Founder Loses Control
| Name of Strategy |
What Is It |
When to Use |
When Not to Use |
| Initial Public Offering (IPO) |
The company offers its shares to the public in a stock exchange |
When the company has strong financials, a solid growth story, and is ready for public scrutiny. |
If the company is not ready to handle regulatory requirements and public market pressures. |
| Merger & Acquisition (M&A) |
The startup is bought by or merged with another company. |
When there's strategic alignment or financial synergy with another company. |
If it compromises the startup's core values or mission, or if the deal undervalues the startup. |
| Private Equity Buyout |
A private equity firm buys the company. |
For companies needing capital for growth or restructuring, with founders ready to exit. |
If the private equity's vision doesn't align with the company's long-term goals. |
| Asset Sale |
The company sells its assets like technology, customer base. |
For companies with valuable assets but struggling operations, or in financial distress. |
If the company is viable as a going concern or if the assets are undervalued. |
| Liquidation and Close |
The business is closed, and its assets are sold off. |
When the company is insolvent or unable to continue operations. |
If there are viable alternatives to keep the business running or if it can be sold as a going concern. |
| Acquihire |
Acquisition primarily for the company's talented team rather than its products or services. |
When the startup's team is more valuable than its product or service. |
If the startup's product or service is successful and has significant market potential. |
Founder Retains Control
| Name of Strategy |
What Is It |
When to Use |
When Not to Use |
| Management Buyout (MBO) |
The company’s management team buys the business. |
When the management team is capable and eager to run the business independently. |
If the management lacks the skills or financial means to successfully run the company. |
| Employee Stock Ownership Plan (ESOP) |
Shares are given to employees, turning the company into an employee-owned entity increasing alignment |
To preserve the company's legacy while rewarding and motivating employees. |
If it doesn't align with the financial or strategic goals of the company. |
| Private Equity Buyout |
A private equity firm buys the company. |
For companies needing capital for growth or restructuring, with founders ready to exit.3 |
If the private equity's vision doesn't align with the company's long-term goals. |
| Asset Sale |
The company sells its assets like technology, customer base. |
For companies with valuable assets but struggling operations, or in financial distress. |
If the company is viable as a going concern or if the assets are undervalued. |
| Family Succession |
Ownership is passed to a family member. |
In family-owned businesses where the next generation is willing and able to take over. |
If there is no suitable or willing successor within the family. |
| Franchising |
Expanding through franchising, and eventually selling the franchise system. |
For businesses with a replicable, successful model looking to expand without significant capital expenditure. |
If the business model is not suitable for franchising or if there's a lack of market interest. |
Flexible
| Name of Strategy |
What Is It |
When to Use |
When Not to Use |
| Secondary Market Sale |
Shares are sold to private investors or other companies, not through public markets. |
For early investors or founders to liquidate shares without a public offering or company sale. |
If it leads to undesirable changes in company control or if better liquidity options are available. |
| Merger & Acquisition (M&A) |
The startup is bought by or merged with another company. |
When there's strategic alignment or financial synergy with another company. |
If it compromises the startup's core values or mission, or if the deal undervalues the startup. |
| Reverse Merger |
Merging with a company already listed on a stock exchange. |
As an alternative to IPO for quicker, less expensive public market access. |
If the partner company doesn't offer strategic advantages or if it complicates the business structure. |
| Recapitalization |
Restructuring the company’s debt and equity mixture. |
To adjust the debt-equity balance, often for taking out dividends or facilitating partial exits. |
If it leads to unsustainable debt levels or if it doesn't align with long-term strategic goals. |
| Earn-Out |
A portion of the purchase price is paid based on the company's post-acquisition performance. |
When there's a discrepancy in valuation expectations, and the company is expected to perform well post-acquisition. |
If the seller is not confident in the future performance under new ownership. |
| Joint Ventures/Strategic Alliances |
Forming a partnership with another company, which can lead to a full merger or acquisition. |
When synergies with another company can unlock value, but a full merger or acquisition is not desirable. |
If there are significant cultural or operational mismatches, or if strategic goals are not aligned. |
| Divestiture |
Selling off a portion of the company, such as a department or subsidiary. |
When a part of the company is not core to its business strategy or is underperforming. |
If the division is integral to the company's overall strategy or its sale would weaken the company. |
When Not to Exit: Managing Burnout and Temporary Setbacks
Experiencing burnout, characterized by consistent overwhelm, fatigue, or a diminishing passion for leading the business, may signal a need to consider an exit. However, deciding when not to exit is equally crucial. Exiting due to burnout prioritizes founder well-being and opens doors to alternative paths, prompting a thoughtful reflection on personal and professional goals. It becomes imperative to assess whether continued involvement aligns with aspirations.
In times of temporary setbacks, such as a few challenging weeks, founders need not immediately resort to an exit strategy. Not every setback warrants such a drastic move; instead, continuous assessment is crucial. Regularly evaluating alignment with broader business goals and the necessity for strategic adjustments allows founders to navigate challenges without prematurely opting for an exit, fostering resilience and strategic growth.
Knowing when to consider an exit involves a nuanced evaluation of various scenarios. It requires a balanced approach, addressing challenges proactively and strategically departing for better outcomes.
At Done Deal, we offer support to founders seeking optimal outcomes through strategic partnerships, investments, or exits. Visit www.done.deals/founders to initiate a well-planned exit journey.