Why Your Startup Needs an Exit Strategy.
Table of contents.
A business success plan.
As the owner of a startup or small business, your day is overflowing with decisions you have to make about building and growing your business. You focus on development and expansion, not an exit strategy. So, why did I write this article on the fact that your business needs an exit strategy when you’re at the beginning of your journey?
An exit strategy is exactly what you should be thinking about. It is a critical yet often overlooked element of business development and strategic planning that you should include in your initial business plan.
What is an exit strategy?
An exit strategy is a predetermined plan outlining how an individual or business intends to withdraw from a particular situation or investment. It typically involves strategies for minimizing losses, maximizing returns, and ensuring a smooth transition out of the venture, whether it's a business venture, investment, or project.
In the case of an entrepreneur or small business owner, a business exit strategy is your plan on how you will, at some point in the future, sell your stake in the business, sell the entire business, or liquidate assets.
An exit strategy can be straightforward. For example, you decide to run the business until you retire and then sell it to your children. Or, you may enter into a merger agreement at a predetermined point in the company’s development to further speed its growth.
The exit strategy may also be a bit more complicated. For instance, you may sell off pieces of the business individually should they no longer be suitable or fit within your evolving product portfolio.
Does your startup need an exit strategy?
I hear you saying,
“I just started my business. I’m trying to perfect my marketing strategy, find customers, and build a sales channel. I don't have time to or want to think about leaving. Do I need an exit strategy now when everything is so new?”
The short answer is yes.
An exit strategy is not about the actual exit or endpoint but the journey you take to get there. Knowing what your endpoint is guides your startup’s strategic decisions. The startup decisions and endpoint must align, or you will not achieve your goals.
For example, if your goal is to be acquired by a large, well-known corporation, deploy industry-leading and easily scalable technology across your organization. The easier and more cost-effective it is for the corporation to integrate your technology with theirs, the more likely they are to complete the acquisition.
If, on the other hand, your focus on your competitors causes you to build proprietary technology, you may be less attractive to acquisition by a large corporation because they will need to spend extra time and money converting your technology to their systems.
In addition, it is essential to remember that establishing an exit strategy doesn’t mean you have to walk away from the business at a predetermined point. Some business owners stay in a management or advisory role once they sell the company.
I understand you have no intention of leaving when you’re just starting, and that's why you’re perplexed about the need for an exit strategy.
Think of it this way. What happens to your business if you are hit by a bus tomorrow? While this may be a bit extreme, it helps put you in the mindset that, at some point, you may relinquish your ownership position.
Thinking about it this way makes an exit strategy more about wanting the best for the business in the long run rather than simply throwing everything down and walking away.
What are the benefits of an exit strategy for a new business?
Having an exit strategy from the beginning has several benefits.
It helps hedge your bets.
While you have a vision of where you would like your business to be in two, five, eight, or more years from now, things happen. Markets shift, customer tastes change, and new competitors appear. Your exit strategy acts as almost a safety net, an optional plan B you can employ as something to fall back on if things don’t go as planned.
It increases business value.
A well-considered exit strategy demonstrates that you have thought about your business's future and have a roadmap to help you get there. It gives the executive management team, staff employees, customers, potential investors, and other stakeholders confidence in your vision. It enhances the overall value of the business.
It improves access to capital.
A well-thought-out exit strategy makes your business more attractive to investors and the funds you need to grow. They want to ensure a clear plan and path to get an expected return on their investment.
Easier strategic decision-making.
Establishing your exit strategy from the beginning enables you to stay focused with a clear direction and put strategic growth and resource management plans in place that will set you up for success in meeting your long-term goals.
What are the dangers of not having an exit strategy?
Not implementing an exit strategy can expose your business to various risks and uncertainties, potentially jeopardizing a successful future.
You may struggle to attract investors.
Just as you can attract investors if you have a well-thought-out exit strategy, investors can ignore you if you don't have one. Investors don't simply hand over money. They want to know that you have a plan for them to get an attractive return.
Unprepared for market fluctuations and new opportunities.
Business across all industries constantly changes. Sales projections can collapse, but new market opportunities can unexpectedly present themselves. If you don’t have a vision for where you’re going from the start, you could incur financial losses and miss lucrative opportunities.
Lack of direction causes increased inefficiencies.
A formal exit strategy provides focus and the sense of direction the business needs. Not knowing the exit strategy can dramatically increase inefficiencies if the business leaders constantly move the goalposts or each department works toward a different outcome.
Co-founder conflict.
When co-founders or other key stakeholders are not on the same page from the beginning, conflicts arise, productivity and morale can decrease, and the future of the business can be in jeopardy. A cohesive team in agreement on the business's direction reduces the possibility of conflict. It increases the likelihood that everyone is working together toward the same goals.
How should you best position your startup for a successful exit?
So, how can you best position your business for a successful exit? Here are ten tips you should consider implementing from the beginning.
Build a respected business with strong brand recognition.
A well-respected business with strong brand recognition can considerably increase its value. Develop a brand that signifies honesty, prioritizes customer satisfaction, and cultivates a positive reputation.
Have healthy financial habits.
Financial health is critical to maximizing value in an acquisition. Beyond simply maintaining detailed and up-to-date financial records, effectively manage cash flow and improve profitability. A business with solid and well-managed financials will be more attractive to a potential buyer and can command a higher price.
Continuously innovate.
Continuous innovation demonstrates that your business is on the cutting edge of your industry, likely ahead of your competitors, and will make you more attractive to potential buyers. Nurture innovation across your business, empower employees, invest in new technology, and pay attention to market changes and new opportunities.
Build an effective team.
Whether you’re talking about your executive managers or junior staff, an effective team is one of your most valuable assets. They can make or break your business, so hire and invest in outstanding people and build a positive and supportive culture. Consider diverse skills and expertise, a proactive attitude, and the motivation to seek answers when they don't have them. They should also believe in your business's mission as much as you do.
Include the exit strategy in your business plan.
The goal of your business plan should always be to maximize the value of your business. By including an exit strategy in your business plan from the beginning, you can plan for and implement a business development and growth strategy that follows your journey to a successful exit.
Scale with growth in mind.
Scalability is a business's ability to manage increased demand while, at the same time, improving efficiencies for successful expansion and growth. Invest in economies of scale across all departments and teams including increased workloads, technology, infrastructure, lowering operating overhead, labor-saving initiatives, and more.
Leverage intellectual property.
The strategic use of intellectual property is often a hidden and overlooked asset. Common IP examples are patents, trademarks, and copyrights. While intellectual property gives you control and ownership over your business ideas, designs, inventions, and more, it also enables you to build a broad portfolio of assets that increase your value in an acquisition.
Diversify revenue streams.
Diversifying revenue streams helps ensure you don't have all your eggs in one basket. Consider opportunities to enhance your portfolio of products or services, evaluate additional distribution opportunities, and consider joint marketing or sales programs with a business that offers complementary goods.
Keep your finger on the pulse of your market.
Stay informed about changing market trends and market dynamics – those influences that affect how the market operates and how customers think and buy. Some examples include new competitors on the scene, changes in demand (either up or down), supply chain fluctuations, technical advances, regulatory adjustments, consumer behavior, and more.
Seek expert guidance.
Take any opportunity to get advice from attorneys, accountants, serial entrepreneurs, retired CEOs, and other business advisors with experience in exit strategy implementation and execution. They can help educate you on critical milestones you must hit throughout your business growth journey for a successful and profitable exit.
Plan for future success.
Starting and running a business is exciting and empowering, and, if we're being truthful, overwhelming and intimidating. Establishing an exit strategy is likely one of the last items on your to-do list, if it’s there at all.
But I hope I have demonstrated that neglecting to include an exit strategy as part of your business plan can expose your startup or small business to unnecessary risks, limited growth, and missed opportunities.
By positioning your business early on for a successful exit, you can considerably increase your company’s value, more easily navigate the challenges ahead, and successfully exploit opportunities that come your way.
To your success!
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