What Types of Exit Strategies to consider for Startups?

What types of exit strategies should you consider for your digital business? Join us as we look at what exit planning is and the best exit strategy examples for your startup.

It’s essential to plan ahead for the future when you run a startup. When will you launch your MVP? When will you start applying for funding rounds? Will you sell your business, and if so, when and how will you do it?

Knowing what you want to do with your business when it’s running at an optimum profit means you can reap the rewards of running a startup. However, many founders don’t know what options are available.

Research shows that 70% of startups have spent little or no time creating an exit strategy. 

The good news is that it’s not too late to prepare for your eventual exit! Here is our guide to the different types of exit strategies to consider, and which is the right choice for you and your startup.

Want to know more about exit strategies for startups? Here is our comprehensive guide to what founders should know.

What is an exit strategy for a startup? You are launched

What is an exit strategy for a startup?

From a business perspective, an exit strategy is when a founder leaves a startup, sells their shares, and hands control over to another stakeholder. In most scenarios, the business continues to exist, although it may do so under a different name.

An exit strategy can be carried out for positive and negative reasons. For example, a startup may grow and grow, and a founder wants to capitalize on this. Alternatively, a startup may be failing, and the founder wants to offload it to someone else.

Why do startups need an exit strategy sample? You are launched

Why do startups need an exit strategy?

An exit strategy helps you chart the course of your business, make the right decisions, and plan ahead for the future. After all, when you prepare for a journey, you need a destination in mind!

It’s also a sensible idea to have an exit strategy ready when you apply for investment. A future investor, whether an angel investor or venture capital company, is going to want to know when (or if) you plan to leave the business. They might not want to invest in someone whose plans for the future don’t align with theirs.

Quite often, you might need an exit strategy as a result of facing Startup Myths. It’s always better to plan ahead when it comes to an exit strategy. You don’t want to panic and rush into a decision if another company comes up to you and makes you an offer!

What types of exit strategies are there? www.urlaunched.com

What types of exit strategies are there?

There are a number of different types of exit strategies available. While they all involve you surrendering control of your business to various degrees, they are appropriate in very different circumstances. Here are some of the most common exit strategies examples.

1. Acquisition

An acquisition is when a larger business in a similar industry to yours takes over your business. Your startup is then absorbed into the larger company. 

Acquisitions can be friendly (where the businesses agree to the acquisition) and hostile (where the smaller company does not agree to the acquisition).

While this can be an excellent way to get money as well as a clean break from your business, your startup may cease to exist. If you want to ensure a long-lasting legacy, then it might not be the right option for you.

A great exit strategy example is a story about Amazon & Whole Foods Inc. Amazon acquired Whole Foods Inc. for $13.7 billion in 2017. The supermarket chain still operates in its original name and is run by the original CEOs, but it is controlled by the parent company Amazon.

2. Merger

A merger is similar to an acquisition; however, rather than a larger business taking over a smaller one, two similar-sized companies agree to join forces. 

Let’s say startup A and startup B decide to merge. They may agree to rebrand as a brand new company, startup C. Alternatively, they may agree to continue on as startup A, as more people are aware of it.

A merger can be:

  • Horizontal (both in the same industry)
  • Vertical (not necessarily in the same industry but part of the same supply chain)
  • Conglomerate (both in entirely different sectors)
  • The market extension (both sell the same products but in different industries)
  • Product extension (both sell different products that complement each other)

Many startups like this exit option as a merger give them the opportunity to expand their market share and move into new markets with minimal effort. However, it’s crucial for both businesses to have synergy with each other; otherwise, this can cause issues in the long term.

You’ll also likely have to stay on to ensure things run smoothly, so it might not be ideal if you want to leave entirely.

A great exit strategy example is the story of appearing GlaxoSmithKline Enterprise. It was formed by the merger of two pharmaceutical companies, Glaxo Wellcome and SmithKline Beecham, in 2000.

3. Friendly sale

A more informal option is to sell your shares in the business to someone else. This can be a friend, family member, your management team, or a partner/co-founder.

The benefit of this is that you know the person who will continue to run your company, and you may even be able to carry on in some kind of advisory role. However, choosing a friend or family member to run your business can be stressful and could potentially even damage your relationship if things go wrong.

4. Acquihire

An acquihire is when your startup is taken over, not for your product or service, but for the employees behind it. This exit strategy is commonly found in the tech industry. One of the great startup exit strategies examples is the story of when Apple bought out a company called Authentec so it could take advantage of its TouchID technology.

Many acquihires happen at the early stage of a startup, so they’re fantastic if you want to exit your business early. However, they usually lead to the closure of the startup, meaning they’re not a good option if you dream of becoming a household name.

Another good exit strategy example could be Facebook when they purchased FriendFeed. This company brought several high-profile Google alumni in, including Bret Taylor — who became Facebook’s CTO shortly after the purchase.

5. Initial Public Offering (IPO)

With an IPO, your startup launches on the stock exchange. It’s often referred to as ‘going public.’ During an IPO, a startup gives up some of its equity so that members of the public can buy shares in the business.

While the process can take some time, it can lead to a very sizable profit when done correctly.

One of the critical disadvantages of IPOs compared to the other exit strategies on this list is that your valuation is based on your value relating to the industry. Tonnes of startups get to IPO any of them can be presented in terms of exit strategy example. Unfortunately, you don’t get a say in how much money your startup is worth.

6. Liquidation

The last item in our types of exit strategies list isn’t the ideal option, but it might be the right choice if you want to end your startup entirely.

With liquidation, you sell off your company assets, pay your creditors, and ensure investors get a payout. Your startup then ceases to exist, and you can move on to the next venture. However, bear in mind that liquidating your business might mean severing relationships with previous employees, suppliers, and clients.

Liquidation can be voluntary (i.e. you choose to do it) or compulsory (i.e. you’re forced to do it).

A list of companies could be presented in terms of this exit strategy example. Many previously successful businesses like J.C Penney, Enron, and Lehman Brothers have all ended up being liquidated.

What is the best exit strategy example for my startup? www.urlaunched.com

What is the best type of exit strategy for my startup?

So we’ve looked at the six different types of startup exit strategies. The next question… which is the right option for your startup?

There are a couple of factors to take into consideration.

How much do you want to be involved in the business?

Some options involve you cutting ties with your startup entirely, while others mean you continue to have a role in the day-to-day operations. 

If you still want to be involved in your business, but still be involved to a degree, a merger or IPO may be right for you.

When do you need the money?

Some types of exit strategies, like liquidation and acquisition, mean you get money straight away. On the other hand, IPOs take longer to action, meaning you might not see a payout for some time.

Do you want your brand to still exist?

When you’ve invested time and money in building a business from the ground up, it’s only natural that you want people to remember your business name and brand. Some exit strategies mean your legacy continues to live on, while others (like acquihires and acquisitions) may mean it is erased from existence.

Bear in mind that there may be scope for some negotiation. Depending on how keen someone is to take your business on, you might be able to insist that they keep your startup name and brand operational.

What do you want to do after you’ve exited?

It’s important to think about what you want to do after you’ve left the business. Do you plan to take the money and live a life of leisure? Or do you want to get stuck and start creating a brand-new business idea?

Given that 90% of startups eventually close down, it’s only natural to want to get back into the swing of things and create a new business!

If you want to launch a new business idea, you will want to avoid liquidation unless it’s absolutely necessary. This is because you may frustrate customers, clients, and investors, making it harder to gain trust and be successful. If you’re planning on being acquired, you’ll want to make sure there are no no-compete clauses in place, as this may mean you can’t work in that industry for a set amount of time.

Top tips for planning your startup exit strategy example after custom MVP app development.

Top tips for planning your startup exit strategy

All startups, no matter how niche or where they are in the startup life cycle, have to have some idea of what their exit strategy needs to be. This means creating an exit plan for your business is not just something that is nice to do; it’s essential.

Here are our recommendations when it comes to preparing for your business exit.

Get your startup exit strategy in writing

It’s important to get your exit strategy down on paper. That way, you not only have something tangible to show to investors, but you have something you can refer back to.

Your exit strategy doesn’t have to be massive; a paragraph will do. For example, you could say:

‘My preferred exit strategy is to merge with a similar-sized business in a similar industry – a horizontal merger. This means we can increase market share and use our collective experience to scale and increase revenue. If this isn’t an option, I would consider merging with a business that sells complementary products to us, as long as the evidence shows this would grow the business substantially.’

Include your exit strategy in your business plan and revisit it regularly to make sure it’s still accurate and in line with your needs.

Be flexible

While it’s great to know what you want to do when it comes to an exit strategy, it’s also essential to be adaptable.

External changes in the marketplace and internal changes to your business may make your original exit strategy less appealing. For example, a global recession or a brand new competitor could mean your exit strategy needs to change. Alternatively, you might receive an offer out of the blue that you can’t say no to!

Think about a ‘plan B.’ If your first choice of exit strategy falls through, what would you be willing to agree to? It might be that you stay on a little longer while you wait for the situation to improve.

Don’t compare yourself to other startups

You might read about the latest startup receiving millions of dollars for a successful exit, or ringing the bell when Nasdaq opens. However, it’s always best to focus on your own business needs and not anyone else’s. So, concentrate on your own Soft Launch or Hard Launch or both, and let the force be with you.

Make the decision that’s right for you, your business, and your team. It’s okay to exit early and receive a modest amount for your startup; you don’t have to hang on to the end and launch on the stock market.

We hope you enjoyed this guide to exit strategies as well as exit strategy examples. Why not check out our blog for all the latest news about developing and launching a startup business?

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