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Best startup exit strategies: what every founder needs to know?

Originally published here

What is a startup exit, and what should your best startup exit strategy be? In this article, we’ll look at the best exit strategy for startups and how to ensure your business sells for the right price.

While building a startup is fun and exciting, you’ll probably not want to do it forever.

It might be that you want to move on and create an entirely new startup idea, or just take the money and live your best life.

If this is the case, you’ll want to start thinking about your best startup exit strategy.

It may seem a little strange to work out how you’ll leave your business as soon as you’ve launched it. However, in our experience of working with startups, it’s always good to be prepared!

In this article, we’re going to look at what a startup exit is, the different ways you can sell your startup, and how to prepare for selling your startup to a big company.

And, of course, if you want some more support and advice about ensuring you sell your startup at a decent valuation, we can help.

Want to find out more about the different funding rounds for your startup? Check out our guide to startup funding.

  • What is a startup exit?
  • What different ways can you sell your startup?
  • What happens if my cofounder wants to exit the startup?
  • When is the best time to exit a startup?
  • How to sell your business successfully — top hints and tips
  • In summary: plan your exit as soon as you can

What is a startup exit?

A startup exit is when a founder leaves a startup. While the startup may keep going in some shape or form, the founder takes their money, sells their shares, and exits the business.

This is a lot more common than you think. For example, Travis Kalanick exited Uber in 2019, receiving a cool $5.2 billion for his efforts. In 2018, Daniel Elk and Martin Lorentzon left Spotify, gaining $6.5 and $3.1 billion respectively.

Founders leave their startups for several reasons. Some get bored and want to move on to a new project. Some want to spend more time with their families. Others want to receive a huge payday and become financially secure.

Many founders might not plan to exit their businesses but get an offer that is too tempting to pass up.

What different ways can you sell your startup?

There are many different ways you can build your best startup exit strategy, which is also known as ‘exit strategies.’ The three main ones are:

1. IPO

An Initial Public Offering, or IPO, is when your startup launches on the stock exchange and goes public. A wide range of businesses including Apple, Alphabet (Google’s holding company), Microsoft, and Tesla have all gone down this route.

With this exit strategy, you can sell all your existing shares and effectively leave your business. However, you’re typically restricted to doing this a set time after the IPO takes place, normally six months. This is known as a ‘lock-up agreement’

The thing to consider with IPOs is the valuation is based on the value of your company in the industry, not how much another company thinks you’re worth. This can work in or against your favor.

2. Acquisition

An acquisition is when a larger business takes over your smaller startup, with your assets becoming part of the bigger company.

Acquisitions happen for varied reasons. It may be because the larger company likes your business model or, alternatively, because they see you as a threat. This is what happened when Meta (than Facebook) acquired Instagram in 2012 for $1 billion. They saw Instagram as a potential competitor, so the best thing to do was to buy them out.

Another reason why acquisitions happen is that businesses want to take advantage of the technologies smaller companies have. For example, Disney paid $7.4 billion to acquire Pixar in 2006, doing this to obtain Pixar’s staff as well as the company’s bespoke animation software.

3. Merger

A merger is when two similar-sized and valued companies join together to create a brand-new company.

The most prominent example of a merger is Exxon and Mobil, which were the first and second-largest oil producers in the US. They announced a $75.3 billion merger in 1998 and became ExxonMobil, which is now the third largest company in the world.

IPO, merger, or acquisition: which startup exit strategy is right for you?

There isn’t a perfect answer. The right choice for your startup will depend on how much money you want, how much competition you have and how much time you need.

According to Deloitte, 32% of startups said they would prefer to exit via acquisition, with 26% opting for a merger and 24% going through an IPO. Many startups see an acquisition as a good option because founders can get a decent valuation and, as the business is taken over, can cut ties and move on quickly.

With a merger or IPO, they may need to stay on a little longer to oversee the deal.

Are there any other options?

If you don’t think an IPO, acquisition, or merger is right for you, there are a few other ways you can exit your business. Here are another three ways to do this.

You can ask your employees or the rest of the management team to buy your shares. This happened with Dell in 2013 when the shareholders of the company were bought out.

You can also pass your startup on to members of your family. For example, Tim Berry, founder of Paulo Alto Software, made his daughter Sabrina CEO of the company so he could focus on other interests.

Another option is to liquidate your startup, although this is more of a last resort. This is when you sell your assets and close your business. This may be another best startup exit strategy option if you want to go back to the drawing board and start again with a new startup idea.

What happens if my cofounder wants to exit the startup?

If you have a cofounder, there may come a point in time when they want to sell their shares and leave the business, but you want to stay put.

While it’s important to choose a cofounder that has the same values and ideals as you, things can change. For example, your cofounder might want to focus on another business idea, spend time with their family, or just want to leave the startup world altogether.

You can power up your best startup strategy by having a legal contract in place at the start of your partnership will make things easier. That way, your cofounder will know how much money they’ll receive and what their notice period is. You can then decide whether you want to introduce another cofounder to the business or go it alone.

When is the best time to exit a startup?

Many founders think it’s best to sell later on when they have gone through Series A funding. However, according to CB insights, one in four founders exit at the Seed or Angel level.

Why is this the case? If you have a new and exciting product or service, you’re likely to attract potential buyers. It’s also easier and lower risk for a larger business to buy out a smaller startup with less capital. So, we should say that this is the best startup exit strategy for the founder.

Ultimately, it’s up to you if you want to exit early or wait around a little while to see if you can maximize your valuation.

How to sell your startup business successfully — top hints and tips

It’s important to plan for your eventual exit sooner rather than later. It’s definitely not something you can arrange at the last minute!

In fact, you might be asked about your plans to exit the business by a prospective investor. This is so they can see if you’re serious about your startup idea and how long you plan to stick around. You can provide this information in your business plan or pitch deck.

Here are some of our top tips for organizing a successful exit from your startup.

1. Know which type of exit you’d prefer

Earlier on we talked about IPOs, acquisitions, and mergers, as well as some of the other ways you can exit your business. It’s good to have a solid idea about which type of exit you’d prefer.

Of course, plans change over time. For example, it might be that your initial proposal is to go public with an IPO, but then you get an acquisition offer from a competitor that you just can’t say no to. However, by having an idea of the exit you want, you’re more likely to be able to work towards it.

2. Understand your value

Imagine you want to sell your car or your house. You’ll have spent time working out how much you’d be willing to sell it for. The same logic applies to your business.

Look at your finances and determine how much you’d be happy to take for a successful exit, and if you’re willing to reduce this figure. This will give you the upper hand in any negotiations.

It’s only natural that you think your business is worth more than it is. However, it’s important to go into any negotiations with a sensible valuation; otherwise, you might be disappointed.

3. Hire a good lawyer

Exiting your business is a complex process, especially when it’s worth a lot of money. So it’s a good idea to take advice from a specialist.

Hiring a lawyer with the right expertise means they will be able to make sure you get the right price for your startup. Not only this, but they’ll ensure everything goes through the proper legal channels.

4. Get your stats in order

If you’re looking to be acquired or find a company to merge with, they’ll have a lot of questions. You’ll need to be able to provide a quick response to anything they ask.

Some things they may ask you include:

  • What is your unique selling point?
  • Do you have a true product market fit?
  • Who are your key competitors?
  • What opportunities for growth do you see in the short-term and long-term?
  • Why do you want to sell your startup? Are there any issues we should know about?
  • Do you still want to be involved in this business? If not, are you willing to stick around and ensure a smooth handover?

They are also likely to want to do some due diligence, for example, making sure you own your intellectual property. Having all the documents and certificates they need ready, and will mean any negotiations move more quickly.

5. Continue to develop your business

While it’s good to have an exit plan in place, it’s still important to focus on growing and scaling your business.

After all, if your business stagnates, the chances of another company buying it reduce significantly.

Keep putting the effort in, even while you are entertaining offers.

In summary: plan your best startup exit strategy as soon as you can

The amount of time a founder takes to exit the business they created typically varies by industry.

According to Crunchbase, payment companies take about four years, while hardware companies take an average of eleven years.

While selling your business might not be on your agenda just yet, it pays to get organized. That way when the time comes, you can not only ensure you get the valuation you deserve, but your startup’s legacy will be well-remembered.

Our final tip? Remember that an exit plan takes time. It’s unlikely that you’ll have a deal on the table in the space of a month. Keep pushing, and you’ll have that money in your hand before you know it!

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