Talking about an eventual wind-down or sale may feel awkward for entrepreneurs, but these discussions are crucial and can help startups avoid issues in the future. They also help establish strong organizational cultures while potentially increasing long-term profit potential.
At its core, finding an optimal exit strategy depends on an individual’s goals and vision for the company. There are various available strategies, including:
Mergers and Acquisitions
If you want to ensure the company continues the way you wish, merging or acquiring could be the ideal way to do it. This involves selling it to another entity such as a competitor or management firm for an exchange of cash and/or equity for ownership rights – providing an effective solution that still maintains control of your company in an orderly way.
Mergers and acquisitions can be complex processes, so legal advice should always be sought when considering mergers or acquisitions as a strategy for your startup business. One key advantage is maintaining control over how your business is run after you leave; as well as using this method to acquire technology or talent that’s unavailable or expanding into new markets.
One key part of your succession strategy should include selecting and training an able successor when it’s time for you to leave the business. Doing this allows you to prepare them for their role while assuring buyers of its continuation in their eyes.
As it can often be impossible to anticipate how the market will respond when making a sale, a good plan should include various scenarios and give you the greatest chance of reaching an acceptable price and an easy exit strategy.
Based on your financial goals, selling to an outside party rather than current employees may be preferable. This could include family, management teams or investment groups as buyers. However, keep in mind that this approach usually yields lower returns due to the increased risks involved.
Keep in mind that post-merger or post-acquisition there may be internal issues with management changes. That is an area that Asaf Nevo, Chief Business Officer of Coach-AI has dealt with numerous times throughout his career. “Usually, when a bigger company acquires a smaller business, it’s tough for the big organization to integrate with the infrastructure of a small startup. He observes that it’s an emotionally draining process, and that’s why most CEOs don’t survive mergers and leave.” [1]
Selecting an effective strategy for your startup depends on both long-term goals and employee needs. While issues related to monetizing shares or accounting concerns should be taken into consideration, they shouldn’t dictate decisions about its future direction.
IPO
An initial public offering (IPO) is a popular means by which a startup can exit. An IPO offers more transparency for investors who become full owners of the firm – making this option especially suitable for fast-growing tech startups valued over $1 billion, also known as “unicorns.”
Before going public, startups must ensure their finances and valuation match market conditions. Companies without an obvious path to profitability or scalability could struggle on IPO day and their shares could decrease substantially after becoming publicly traded; for this reason, it’s essential that startups maintain an up-to-date profitability model focused on long-term margin expansion.
Preparing for an IPO should also involve considering how it might impact employee retention. Going public can make it more challenging to attract and keep top talent as employees can look elsewhere for better pay and benefits. There are ways around this impact though; such as setting up a 1042 exchange which permits certain types of employees to defer capital gains taxes indefinitely.
Startups must keep an exit strategy in mind when raising capital. While it may seem counterintuitive to consider an exit strategy so soon after starting up a business, having the proper plan in place can help founders avoid difficulties or stress caused by unexpected events such as illness or death.
Idealab founder Bill Gross provides his insights on how best to prepare a company for an eventual exit at this First Round CEO Summit talk. Drawing upon his years of advising and funding over 100 startups – as well as those 40 that failed during his career – Bill details several ways startups can set themselves up for a smooth exit including setting a timeline for ownership transfer, empowering team members, sharing equity among team members, and sharing credit/equity among all.
Acquihire
Acquihiring is when a company buys out another company for the main purpose of capturing the talent at the company. Acquihires have quickly become an attractive strategy for startups to quickly secure top talent at a reduced cost. While acquihires may appear appealing as an exit strategy for owners looking to step away, founders should carefully consider all factors before embarking on such an acquisition strategy.
At the forefront of any acquisition is making sure that the company can pay back any loans used to fund it. Debt can be expensive and restrict a company from being able to reinvest back in itself after purchasing, potentially decreasing overall company value in the process.
Another essential aspect is making sure the new team fits seamlessly into your company’s current organizational structure. To do this effectively, it is vitally important that after acquisition it will be staff in line with its expected purpose – especially if key roles may have been created to position the company for sale down the line.
Acquihires may cause additional discord among existing employees, as these newcomers often arrive with significant cash and guaranteed contracts that put them in competition with more loyal, long-term members who were part of the founding team. This can have serious ramifications on morale and employee retention efforts.
One of the main advantages of an acquihire is its fast and cost-effective completion; additionally, its process may be less burdensome since no regulatory approvals need to be obtained as with a traditional acquisition.
There are distinct strategies a company can employ when departing or retiring, each providing unique advantages and risks for business owners and investors alike. To successfully navigate a departure strategy, it’s critical for both the company and investors to align personal financial goals with business strategies early on so the right options can be pursued.
Management Buyout
Management buyouts provide business owners with an effective means to transition the ownership of their company to existing management teams. A management buyout often proves successful as current staff likely possess in-depth knowledge about your company and interest in continuing its growth post-takeover. Furthermore, this strategy enables business owners to retain minority shares and ease the transition for all involved. It is common practice for managers themselves to fund this purchase using some of their own capital as part of an incentive for the success of the venture.
Assuming leadership of your business can be risky; new leaders may lack the experience or skills to run it successfully. You can mitigate those risks by setting up a mentorship program to guide and assist your successor over time, as well as setting milestones they should reach during their mentorship with you so they’re better prepared to assume control when the time comes.
At the core of every successful management buyout lies clarity around both parties’ objectives for the transaction, from its inception. This helps frame negotiations and can determine a fair valuation at an agreeable price for both sides, and find an equilibrium between fair compensation for existing owners and avoidance of unsustainable levels of debt burden on new ownership.
There are multiple exit opportunities for startups, whether from a straightforward merger to a more complicated acquihire initiative. Startups can operate flexibly due to company equity not being publicly traded. Ultimately, it is important to align personal financial goals with business strategies and plan early to pursue the most suitable exit strategy for your startup’s success.
[1] Rathore, A. (2023). Mergers, Acquisitions, and the AI Sphere: Asaf Nevo Speaks His Mind. Retrieved from https://www.horizonsearch.co/post/mergers-acquisitions-and-the-ai-sphere-asaf-nevo-speaks-his-mind