An important but often overlooked part of planning a startup is deciding how you want it to end. In other words, knowing your exit strategy during the planning phase can strongly influence a number of decisions that you need to make. The top five exit strategies, which cover over 80% of entrepreneurs, are:
Strategy # 1 – Sell to outside investors
Some entrepreneurs are considering starting a niche business that can ultimately be sold to a larger company. Serial entrepreneurs tend to just take advantage of the start-up phase and have the intention of selling their businesses to new owners once the business is afloat. Either way, it is essential to set up and operate the business in order to sell. You need to understand how valuation (the value of a business) works and plan your financial and wealth management accordingly. You need to make sure all of the trade protections are in order (trademarks, etc.) and do the job to build brand goodwill within your market and industry. About two-thirds of all new startups see selling to outside investors as a likely exit strategy.
Strategy n ° 2 – Go public
Many startups, especially those in high-tech industries, hope to sell themselves and get rich through an IPO (IPO). If you are planning to go public with your company, you should hire a knowledgeable and experienced lawyer to work out your incorporation documents and protect your interests. While you need to understand everything that goes into registering and agreeing to your entity, you don't have to do it on your own. IPOs can be very complicated and are one of the few things entrepreneurs absolutely need to hire a lawyer. Again, your assets and books will need to be in great shape and the timing of your IPO will need to be specific. About a quarter of all startups start with the intention of going public, but the actual number of people launching an IPO is much smaller. In the current state of the economy, it will likely be harder than ever to get rich from an IPO.
Strategy # 3 – Sell to partners
Some start-up partnerships are established with the intention of one partner buying out the others once the business is up and running. In any partnership situation, it is essential that all members define the assumptions and include them in writing in the operating agreement. For example, discuss what will happen if one partner wants to sell their property – will the other partners have the first right to buy? How much notice must a partner give? If they sell to a foreigner, do the remaining partners have the right to approve the sale? How will the ownership share be valued? If your exit strategy is to sell your share to your partners, it is essential that you make a plan to do so before you launch the business.
Strategy n ° 4 – Pass it on to children
Although this is a less common exit strategy than in previous generations, around 20% of entrepreneurs intend to start a family business that can be left to the children. In these cases, it's important to build your business from the start with the intention of long-term growth. Building a solid foundation is essential, both in terms of marketing and financial management. Also, you should discuss the best way to set up business ownership with a knowledgeable and experienced lawyer. Leaving behind a thriving family business can be a great legacy, but only if the business is built to last.
Strategy # 5 – Transfer to employees
Another exit strategy that has grown in popularity over the past decade is to use an ESOP (Employee Stock Ownership Plan) to sell the business to employees. Typically, these plans are set up as trusts and the company makes tax-free contributions to the trust to purchase shares of the company. Employees are generally eligible to participate after one year of service, but do not receive any distributions until they leave the company, when the ESOP redeems their shares. Like any other strategy, ESOPs have advantages and disadvantages. Employees tend to be more productive and loyal, but having that many bosses can make decision making slower and more difficult. If you want to consider an ESOP as an exit strategy, you need to educate yourself about the process and options and you will need a knowledgeable and experienced lawyer to help you set it up properly.
The bottom line
Determining your exit strategy is an important part of startup planning. Whether you plan to run the business yourself for the long term or build and sell like a serial entrepreneur, the way you plan and run the business should be influenced by this goal. Consider your options and go over the details now so you don't run into any issues when you're ready to move on.