Friday, April 22, 2011

Exit Strategies - Time to Cash in the Chips.

Congratulations! You are starting a company, now you have to think about how to end it before getting started. In the following I discuss a high level overview of why exit strategies are important, who the players are, and what the options for exit are.

What is an Exit Strategy?

Let's start with a definition of Exit Strategy. It's the method either the owner, investor or both plans to extract their investment out of the business. There's several traditional ways to exit a business, and below we'll discuss the conventional methods utlized. Exits can also be referred to as a "liquidating event" if you want to be a bit more fancy about it.

Why would I plan on how to get out of business when I'm just starting this business?

We all know the excitement of starting a business. Thinking the idea through, calculating all the money you will make, planning on being a leader to many, demonstrating to your peers your entprereneurial chops. The last thing on your mind is ending this amazing venture you are about to embark on. Why on earth would someone go through the effort, the emotional roller coaster ride, and the sleepless nights starting a company only to give up their brainchild to someone else?

Well, there's several situations to consider depending on who you are and your goals.

Owner Operator

You as an owner have a choice to make. If you are building a company which will be your life long passion, your work until you die, then by all means, don't exit. No one can force you to sell (unless you give up majority control). A good example would be the baker who worked for others their whole life and decides it's high time to open their own bakery. The "Be Your Own Boss" mentality fits in nicely here. You might not have to worry about exit, but if you have investors, they'll be worried about it... which means you have to worry about it. See how that works?

Serial Entrepreneur

The term Serial Entrepreneur comes to mind though for high flying, dot com start ups. The entrepreneur who has more ideas than time. This is the person who wants to start their company, grow it, and sell it. Repeat the process. It's not that it makes it easy to sell off a company they've built, but they have bigger aspirations than to create a company only to become a day to day employee of the company. They are looking to liquidate themselves primarily, and the investors if need be.

Investors - Angel, Venture Capital, or otherwise

Obviously, your financial backers aren't going to be hanging around forever. These are the most interested in the exit strategy. While you may have several exit possibilities in mind for yourself, the investors will want a bit more concise direction on what to expect. Investing in startups is a risky business (1 in 10 makes money on average, the other 9 fail), so if you succeed and become the 1 in 10, you have a lot of losers to more than make up for in the investors eyes.

Common Exit Strategies


Selling a business can be as straight forward as selling your car. Well with more paper work and tax implications. But in theory it's the same. Put the business up for sale, potential buyers will kick the tires, make offers, and it's your choice to let it go to them or hold out. Value of the business is always the trickiest part of the sale. You think your company is worth $100K, the buyer thinks it's worth $50K. Let the negotiations begin! See below for more information on valuation.


A solid way to liquidate investors and make large steps in progressing the business. Mergering with another company is usually a strategic move on both parts, not only to create value, but to form a synergy that can be springboarded in future years. While you can't count on a merger (you have to assume there's another company out there willing to merge with you), some industries lend themselves well to mergers. When in doubt, sell to Google.


Ah the sexy IPO (Initial Public Offering). Easier said than done of course. The most expensive way to sell your business, although with the potential biggest reward. For a company to consider themself IPO ready, they should have a decent track record, outstanding growth, and have sustainable growth. Definitely not for the short run successes. Try not to pull a rookie move of telling investors you'll go IPO in year 2, they'll only laugh behind your back.


A buyout is more or less like a sale, except in a sale the owner is actively trying to find buyers. In a buyout, typically the buyers find the seller. There are several methods to making a buyout easier to facilitiate for the cash strapped, would be new owners (leveraged buyout). A buyout puts the owner in a stronger position than selling, as there is apparent demand for the company you've built.

A buyout can also come from the inside. You as the entrepreneur may want to hang onto your business, and the investors want out. Looks like you have a management buyout situation on your hands.


While an option, most likely you aren't going to write "Liquidation" as your exit strategy when writing a business plan. Liquidiation of course is fairly straight forward - sell off all the assets of the company, pay off any debts, and split what is left amongst the owners. Definitely would be an easy way out, although you'll get the least amount of money this way most likely. Try to keep Liquidation as a Plan D if all else fails.

How Much Do I Sell/Merge/IPO/Buyout at? Valuation tells the tale.

Once you've got a plan of action, you'll want to get an idea of what the market values your company at. While placing a valuation on the business early on is tricky, there are methods utilized. I encourage you to read my Valuation - What's Your Company Worth article to learn more.

Create your own future.

I've always liked the saying "Visualize the win." It can be said in lot's of ways, but basically what you focus on is where you will go. Knowing where you want your business to go will be a driving factor in taking all the steps necessary to get there.

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