How to Build a Startup Exit Strategy - Step-by-Step Process

Startup founders often focus only on turning their startups into thriving, sustainable businesses. However, they rarely think about exit planning until the company is desperate to sell.

As a result, 70% of these businesses miss out on buyer and strategic exit opportunities or sell significantly less than their market value.

The solution? Work backward and create an exit strategy early to safeguard your business's future and secure the best outcome.

Our blog explores the diverse exit options and real-world examples of successful startup exits. We’ll also guide you through creating a well-thought-out startup exit strategy.

‍

TL;DR - Startup Exit Strategy

Planning an exit strategy?  

Here are the four steps to a successful exit. Later in the blog, we will explore each step in greater depth.

1. Define your goals
2. Research your exit options
3. Evaluate your financial performance
4. Seek professional advice

If establishing a strategy seems complex, consult M&A professionals such as accountants, attorneys, and investment bankers.

At Exitwise, we can help you hire these M&A professionals and negotiate their fees.

We have 15+ years of extensive experience in multimillion-dollar company sales and can connect you to a network of M&A experts.

Get in touch with us today to maximize your startup value and strategically plan your business exit!

‍

What is a Startup Exit Strategy?

A startup exit strategy is an approach to ending your business and transferring its ownership to another party. Although executing the exit might take years, a plan will allow for a smooth transition.

But why bother with exit planning?

An exit strategy has the necessary steps to:

• Sell your company.
• Transfer ownership of a business or give up control.
• Close down a company when the market changes or if it’s non-profitable.

‍

Examples of Successful Startup Exits

Check out the top 2 successful startup exits:

1. Facebook Acquired Instagram

In 2012, Facebook acquired Instagram for about $1 billion. At the time, Instagram had over 30 million users, and Facebook aimed to enhance the user experience.

The integration allowed the seamless sharing and syncing of both platforms.

2. BankOns Acquired by Capital Ones

In 2012, after one year of operation, BankOns, a San Francisco mobile startup company, was acquired by Capital One at an undisclosed amount.

Capital One Labs acquired the intellectual property and leveraged BankOn's talent, including that of its founder, Joshua Greenough.

‍

How Strategic Exit Planning Secures Future Success

An exit strategy isn’t about ending operations but a strategic plan toward sustainability and profitability.

Check out the reasons why a strategic exit strategy is essential:

• Prepares Your Business for the Future: An exit strategy prepares you for unforeseen circumstances and demonstrates your vision for your company.
• Direction to Stakeholders: It communicates your vision to stakeholders and investors.
• Offers Clarity: It provides a clear roadmap in the business journey and for managing uncertainty.
• Maximizes Your Return: You need a clear exit strategy to maximize your business value and financial gains for your investors.
• Minimizes Losses: A well-planned exit strategy mitigates financial risks if your company doesn’t perform as expected.
• Enhances a Seamless Transition: With an exit strategy, you can ensure your startup will continue to succeed under new ownership.
• Protects Your Business Legacy: An exit approach preserves your business's legacy and protects the stakeholders' investment, ensuring business continuity and success.
• Appeals to Investors: A proper exit strategy assures investors how and when they’ll get their return on investment (ROI).

‍

The Role of Timing in Startup Exit Strategies

When should you sell your business?

A well-planned exit plan depends on strategic timing:

• Market Conditions: The timing of an exit should align with the current market conditions and industry trends. For example, an AI tech solution might find many acquisition opportunities with the current technology boom.
• Company Growth Stage: Your company's maturity and growth can influence the choice and timing of your exit. An early-stage startup might opt for an acquisition, while more mature startups might consider an IPO.
• Competition and Market Saturation: A saturated market and presence of competitors can accelerate the timing of your startup exit. Let’s say your direct competitor joins forces with a major player. That could trigger your startup to exit or find a strategic acquisition to maintain its relevance in the market.

‍

Types of Exit Strategies for Startups

Let’s explore the different exit strategies for a startup—highlighting the pros and cons of each option:

Exit Strategy

Definition

Best For

Pros

Cons

Mergers and Acquisitions (M&As)

Startups can merge with another company to create a larger, competitive business.

Alternatively, a startup can be acquired by a major player.

A mature startup

Allows you to negotiate the price and terms of the deal

Provides investors with quick ROI

Issues with cultural fit

Management Buyouts (MBO)

Existing management and key employees (while collaborating with external investors) buy out your business's operations and assets.

A startup with a strong foundation

Preserves your vision and culture

The team might lack capital

Family Succession

Handoff and transition your startup to a child or a relative at a certain point.

Family-owned startup

Allows you to groom the successors

Transition to an advisory role

Family members might not effectively handle the stress of taking care of a business

Initial Public Offerings (IPOs)

Listing shares on the stock exchange

A fast-growing startup

IPOs can be lucrative

Allows your startup business to access capital

Increase in visibility unlocks your business value in the public market

Can be complex and attract lots of regulations and hurdles

Requires extensive compliance

Attracts high costs

Liquidation and Closure

Cut your losses, liquidate, and close an unsuccessful business

A struggling businesses

Sell assets to settle your debts

Yields the least returns

‍

How to Build a Startup Exit Strategy

Although there is no one-size-fits-all approach to building an exit strategy, a few common steps exist when transitioning a company’s ownership.

Check them out below:

Steps to Create an Effective Exit Plan for Investors

How does an investor transition out of a startup venture?

Here are 3 steps to creating an exit plan to minimize losses and maximize profits:

1. Set Specific Goals

As an investor, you should define the target goal, like reaching a certain profit level, or determine when to minimize loss if the startup loses value.

2. Decide on The Exit Option

As a venture capital investor, you have these exit options:

• Sell 1% of your stake in a startup yearly until they entirely exit an investment.
• Sell your equity stake in a startup to another investor or family member.
• Exit once you’ve attained a specific ROI percentage.
• Exit after a predetermined timeline.

3. Decide When to Execute the Strategy

If you’re an investor, you can exit a startup when market conditions signal a good time to sell.

For example, you might decide to sell a stock if it decreases by 10% from its original price to avoid further losses or choose to exit after attaining a specific ROI.

Exit Strategies for Entrepreneurs

As an entrepreneur, how do you create your exit plan?

Here are some steps to follow:

1. Define Your Goals

Define your personal and professional goals to retire or start a new venture. Know what you want to earn from your exit and how much you’ll be involved after the exit.

2. Research Your Exit Options

Each exit strategy we’ve discussed, from the IPO and management buyout to acquisition, has its merits and considerations.

So, decide which is best and how it aligns with your business goals.

3. Evaluate Your Financial Performance

Assess your financial performance by analyzing the cash flow, revenue growth, and debt obligations to determine the optimal time to exit.

4. Seek Professional Advice

Engage with experts, such as M&A advisors and legal professionals, to navigate the complexities of selling your business.

Exit Strategies for Entrepreneurs by Industry

Every business is different, and the exit strategy for a tech startup might look different from that of a healthcare business.

Depending on your industry, here are two examples of exit strategies:

• Technology-oriented startups prefer the IPO or the acquisition exit strategies. For example, Microsoft acquired LinkedIn.
• Smaller tech companies are often acquired or merged with major technology companies. Google's acquisition of Fitbit, a wearable technology company, is a great example.

‍

Exitwise Helps Your Hire Experts for a Tailored Exit Strategy

The challenges of creating an exit strategy are endless, from planning the perfect marketing timing to knowing your current business valuation.

That is why M&A experts are essential.

At Exitwise, we have over 15+ years of expertise in helping startups like yours maximize their business value.

Here are some of the steps in our exhaustive approach to M&A:

• We’ll introduce you to the right professionals—M&A accountants, attorneys, and investment bankers.
• We’ll help you interview, negotiate the fees, and hire your dream M&A team.

Partner with us, and let us help you hire your dream M&A professionals!

‍

Frequently Asked Questions (FAQs)

Have extra questions about planning an exit strategy?

Check some quick answers to commonly asked questions:

How Does an Initial Public Offering (IPO) Work as an Exit Strategy?

An IPO exit strategy helps companies raise funds for further growth or debt reduction.

It provides investors, venture capitalists (VCs), and founders an excellent opportunity to sell their shares and cash out.

What Is the Difference Between a Merger and an Acquisition in Startup Exits?

Acquisitions, also called takeovers, happen when a founder sells the entire (or majority) of the startup company for cash and stock. The smaller company seizes to exist, and its assets become part of the larger company.

Conversely, mergers involve two or more companies voluntarily consolidating into a new entity, often with a new identity, ownership, and management. Mergers aim to increase the customer base and expand into the market.

When Should a Startup Start Planning Its Exit Strategy?

You should prepare the exit strategy from inception, making it part of your business plan. This strategy would help you attract initial funding from investors and set a clear vision for the future.

However, you should adapt it based on your financial performance and market conditions.

How Do Venture Capitalists Influence a Startup's Exit Strategy?

Here are the top 3 ways venture capitalists (VCs) impact a startup exit strategy:

1. They have specific exit strategies, whether IPOs or M&As, anticipate potential scenarios with the chosen plan, and manage the investment risks.
2. Investors can help startups access potential customers and partners, spot exit opportunities, and help the startup position itself well to execute its exit strategy.

What Are the Pros and Cons of Selling a Startup to a Competitor?

Check an overview of the pros and cons of selling your startup business to a competitor:

Pros

Cons

• Can allow a quicker sales process
• Collaborating with a well-established competitor can help leverage the customer base and achieve expansion.
• This can result in higher valuation because competitors recognize the strategic advantages.
• Allows a smooth integration because they have expertise and processes to manage your business

• Creates a monopoly
• If the deal falls through, there might be concerns about confidentiality
• Potential for employees to face uncertainty or job losses

How Does Strategic Acquisition Differ from Other Exit Strategies?

Check out the two ways strategic acquisition differs from the other exit strategies:

• Unlike other strategies where the buyer might be interested in an acquisition for financial gain, the buyer is interested in a strategic acquisition to expand the market or diversify their product.
• The acquirer gains control of the startup company, while in other strategies, like a merger, the founder might retain some influence over the company.

‍

Conclusion

Building a strategic exit is a meticulous process that requires selecting the right strategy and understanding the right timing. Our guide can help you carefully plan your exit as an entrepreneur or an investor.

However, creating an exit strategy can be overwhelming.

Pro Tip! Exitwise works with you to hire the right M&A professionals and provide expert guidance through the complexities of exit planning.

We can help you manage risks and negotiate favorable expert fees, ensuring a successful transaction. We will also provide guidance throughout the sales process.

Talk to us today to select your dream M&A team, which will help you create your exit strategy.