“Begin with the end in mind,”
says Stephen Covey in his book, “The Seven Habits of Successful Living.” Those who have created a successful business know it does not happen without planning, hard work, and a little luck. Yet most have no exit plan for leaving their business. The truth is that most business relationships do not have happy endings. To have a successful business, you must plan for a business exit strategy. An exit strategy is a plan to leave the business and to make a profit in doing so. There are different exit strategies open to a global business, so you should be aware of all of your options before choosing the one that best suits your company.
But, the Question is-
If your start-up is your dream, why would you want to think about an exit? It’s going to be so successful and so much fun that you don’t need to think about what comes after.
There are two very real and practical reasons why you need to plan an exit:
Outside investors want to collect their return: Remember that equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold. Even three years is a long time to wait for any pay check.
Entrepreneurs love the art of the start: Assuming your start-up takes off, you will probably find that the fun is gone by the time you reach 50 employees, or a few million in revenue. The job changes from creating a “work of art” to operating a “cookie cutter.”
Here are some of the well-known and trusted exit strategies used over the years by entrepreneurs-
Exit Strategies for Long-Term Involvement
Let it run dry: This can work especially well in small businesses. Before you plan to exit, increase your personal salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply bid adieu to your company. But, remember with the larger income, naturally, comes a larger tax liability.
Sell your shares: This works particularly well in partnerships such as law and medical practices. When you are ready to retire, you can sell your equity to the existing partners, or to a new employee who is eligible for partnership. You leave the firm cleanly, plus you gain the earnings from the sale.
Liquidate: Sell everything at market value and use the revenue to pay off any remaining debt. Quite simple an approach, but also likely to generate the least revenue. Since you are simply matching your assets with buyers, you probably will be eager to sell and therefore at a disadvantage when negotiating.
Exit Strategies for Short-Term Involvement
Go public: The dot-com boom and bust reminded everyone of the potential hazards of the stock market. While you may be sitting on the next Google, IPOs take much time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. However, the costs can often be covered by intermediate funding rounds.
Merge: Sometimes, two businesses can create more value as one company. If you believe such an opportunity exists for your firm, then a merger may be your ticket to exit. If you’re looking to leave entirely, then the merger would likely call for the head of the other involved company to stay on. If you don’t want to relinquish all involvement, consider staying on in an advisory role.
Be acquired: Other companies might want to acquire your business and keep its value for themselves. Make sure the offered sale price meshes with your business valuation. You may even seek to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.
Sell: Selling outright can also allow for an easy exit. If you wish, you can take the money from the sale and sever yourself from the company. You may also negotiate for equity in the buying company, allowing you to earn dividends afterwards — it clearly is in your interest to ensure your firm is a good fit for the buyer and therefore more likely to prosper.
For some, an exit strategy may sound negative. Actually, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. This allows you to run your start-up and focus your efforts on things that make it more appealing and compelling to the short list of acquirers or buyers you target. Don’t wait until you are in trouble to think about an exit, rather think of it as a succession plan, or a successful transition.