As a startup, if you’re borrowing money or seeking investment you need some ideas or evidence of what you want to achieve with the business. Even if you’re just looking for advice or some coaching a sense of what you want to achieve will inform the advice and input from other agents.
If you put cash flow forecasts and growth strategy together, the exit strategy starts at that point because you are already mapping a pathway for the business.
Paul Dodgshon at sell-side brokers Uscita, says: “A five-year plan is often the first kernels of an exit strategy in that it’s a roadmap. If you plan to build and sell a business with plenty of recurring revenue, long-term contracts with customers and a senior team that runs the business without you, that’s building a business with an end in mind.”
Importantly, exit strategies aren’t just relevant to the founders. Potential investors and venture capitalists will want to understand your long-term plans and foresee when they will get their return on investment. They will also want to consider what their exit plans might be.
There are plenty of different exits for a business to aim for.
Voluntary liquidation
Not so much a strategy founders tend to set out for from the outset, voluntary liquidation is effectively an exit where the company assets are sold off. If the business is profitable and in sound health, with substantial reserves it can be a fast and tax efficient exit route but not the most lucrative.
Family succession
It is common for business owners to pass on their share of the company to a family member. Likewise, they may also sell to an existing partner or known investor. The advantage is that the buyer will likely know the business well. The downside is you may not have a willing buyer available in the first place; if you do, there is a risk of personal tensions and underselling your stake in the business.
Employee ownership sale
You could sell to managers or employees if you’ve built up a successful business based on top talent and motivated employees. An Employee Ownership Trust can provide full financial value to the founder, the ongoing business, and its employees. The process tends to be vendor-led, requires less due diligence and currently attracts zero Capital Gains Tax. There is also the option to remain in the business as an employee/manager post-sale.
Mergers and acquisitions
M&A can be among the most profitable exits, and selling to a competitor or multiple parties can command a higher price. Founders and investors can retain a degree of control over the exit, including the price and terms of the sale. However, sales can be a time-consuming and expensive process, and there is a risk you could put considerable resources into an acquisition that fails to complete.
Initial public offering (IPO)
Going public can raise significant capital and help the business grow and expand. The effect is that the company goes from being investor and founder backed to being part-owned by public shareholders. It’s not necessarily a direct exit for the founders and original investors; the founders and the management team will likely remain for a handover period. IPOs can be slow, expensive and challenging to manage; there are high regulatory costs and significant reporting requirements.
It is never too early to start planning your exit strategy; it will inform many of your business decisions.
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