What Are The Best Exit Strategies For Startups And Investors?

What Are The Best Exit Strategies For Startups And Investors?

Introduction

As an entrepreneur, whenever you decide to sell a stake or a part of your investment in your own company, you need the most efficient business exit strategy. The kind of exit strategy that you choose influences the decisions that you can make with regards to business development.

A business exit strategy makes it possible for you to sell your business ownership to investors or even to a different company. There are, however, conditions that could warrant implementing an exit strategy. If you are looking to reduce your stake in the business or you want to minimize losses, you can opt for an exit strategy. On the other hand, if the business is quite successful, you can also use the exit strategy to substantiate your profit in the business.

We have offered you the best tips and tricks that will ensure that you employ the right exit strategies in this article. The foremost tip is that it is advisable to have an exit strategy before going into the business. This will help you plan effectively, regardless of what happens along the line.

How to choose an Exit strategy

Since you have decided to opt for a business exit strategy, you need to be aware of the types of exit strategies that exist and the processes that are involved.

To know the most suitable strategy for your business, you will need to consider the size of your business as well as the type of business. For example, it might be much better to sell off your business to an existing partner whereas the suitable exit strategy as a sole proprietor may be to make enough profit and close down the business in another business type.

The exit strategies that are commonly known include private offerings (PO), initial public offerings (IPO), intellectual property, mergers and acquisitions (M&A) amongst others.

Below are some of the tips and tricks that you need to know before choosing an exit strategy that will be suitable for your business.

1. Mergers and Acquisitions (M&A)

This exit strategy is often adopted by small companies who are interested in transferring ownership of their business to bigger and established businesses. Mergers and Acquisitions do happen mostly when another company thinks it does not possess certain abilities that you have. It usually happens with the help of M&A virtual data room or specific M&A software like DealRoom, Intralinks, Merrill, Securedocs, and others. In this strategy, you are selling out your control over the business to the merging partners. There will be terms involved in reaching an agreement that will determine the decisions that each party makes. It allows for the original business owner to still be involved in some activities within the business but he no longer has the outright say over decisions to be made.

Mergers and Acquisitions are most suitable during periods when your business is in a critical condition and a capable party shows up with the remedy. The disadvantage, however, is that the original owner may be dissatisfied with some policies taken by the new owner if he thinks they are not in the best interest of the business.

2. Initial Public Offering (IPO)

Initial public offering (IPO) is another effective exit strategy whereby you sell a certain share of your business to the society or interested individuals. This strategy is known to yield a huge amount of cash in a short time from the public and it is an effective way to end a business.  The major setback involved in using this exit strategy is that the expenses of reaching the public are very high. IPOs are considered prestigious and it is most commonly used by entrepreneurs as it also gives the most reward. A characteristic of IPO is that it allows you and your team to operate for years but will be under certain regulations and scrutiny that comes with being a public business.

3. Intellectual Property (IP)

Intellectual property is a kind of property owned by a company but that is intangible as it exists as a creation from the human mind. The commonly regarded IP portfolios of any business include trademarks, patents, copyrights, logo, trade secrets and generally inventions of the mind. Each company has the peculiar IP that makes it stand out among others.

 

The valuation of a company’s Intellectual Property is often very high and valuable. A lot of businesses unknowingly overlook this valuation by having an incomplete IP positioning which ends up having a huge effect on them. A useful tip for all entrepreneurs and business owners is to have a strong Intellectual Property portfolio as this would make them get noticed by the bigger competitors. You should have a proper valuation of your intellectual properties even as a startup entrepreneur.

4. Private Offerings (PO)

As a startup entrepreneur, one of the most effective tricks to exit a business is to make your shares available to certain individuals or investors to raise funds. This strategy does not involve much procedure as the services of brokers are not essentially needed. Private offerings allow businesses to raise a substantial amount of money by offering shares to the public or particular investors. Employing this exit strategy, however, demands that the investing party is aware of the risks involved as well as the technical know-how of the transaction.

How Specific to be about Returns

After you have made contacts with interested investors, you have to be specific about the returns that they should expect from the business. An essential tip in being specific about the returns is the time frame, that is, the duration within which there would be returns. You should be specific about how and when investing parties will earn their reward while presenting your exit plan to them.

Likewise, you should be able to predict the likely trend of what would happen in the next few years from when the new investors take over. You do not have to spill out a particular estimated figure.

Conclusion

Depending on your business type and size, you are supposed to factor in some important elements of an exit strategy which have been discussed. The bottom line is that you should know which plan to use at each stage of your business. Also, you must keep your investors abreast of the terms that are involved in the strategies. Once you have done the necessary, you can be sure to minimize loss and reduce liquidity.

Author’s Bio: Lori Wade is a writer who is interested in a wide range of spheres from business to entrepreneurship and new technologies. If you are interested in M&A or virtual data room industry, you can find her on Twitter & LinkedIn or find her on other social media. Read and take over Lori’s useful insights!

 

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