An exit strategy is a plan every founder should have. Exit strategies allow founders to smoothly transition into the next phase, or simply end the business. There are many types of startup exit strategies and it is up to the founder and investors to decide which is the best exit strategy. This decision could be made based on the type of industry or the prevailing economic situation at the time.

Why Do Startups Need an Exit in Business?  

Imagine that there’s a very successful business that is solving customers' problems, expanding on its service offering, hiring new staff, and just ticking all the boxes in terms of its operational and financial goals. However, one day, you wake up to the news that the founder has exited the company and you are left to wonder why. Many different reasons exist for why this could have happened and each of these reasons also answers the question of why startups need an exit strategy. 

For Profit:

In many cases, an exit strategy is simply a way by which an entrepreneur or a company makes a profit, especially when the entrepreneur wants to retire and move on to other things. 

To Achieve Growth and Expansion: 

A company might reach a point in its growth or expansion journey in which it is unable to gather the resources necessary to continue such growth. At this point, an exit strategy of being acquired by a larger and more profitable or resourceful company can be put into play. The acquiring company will use its resources to implement the next phase of growth in the acquired company.  

To Transfer Ownership:

Founders who are advanced in age may decide to exit the company with an assignee taking over their role, responsibility, and position within the company. This is a simple transfer of ownership exit strategy and the assignee could be a relative, a close friend of the founder, an employee within the company, or just about anybody. 

To Bail Out of a Potentially Failing Business: 

Even the most experienced entrepreneurs would tell you that market trends and activities are largely unpredictable. Being so, it is possible for a perfectly thriving business to suddenly switch directions and begin a nose dive. Entrepreneurs who encounter such dilemmas will be happy that they have an exit strategy in place - if they have an exit strategy in place. 

Bailing out of a failing or potentially failing business usually involves selling it or handing it over to an entrepreneur or business who believes that they can properly manage the business back to profitability. 

To make a Routine:

The single fact that market fluctuations and trends could have sudden and tremendous impacts even on already successful businesses could make an entrepreneur create a routine of exiting their businesses.  Of course, the idea behind this is that exiting after a predetermined time or at a certain level of business success will keep the entrepreneur safe from losses that could come with time or from unforeseen market twists. 

Types of Startup Exit Strategies 

With the above explanations, it is easy to understand the different reasons why entrepreneurs may exit their businesses. Similarly, we believe that you have also gotten some idea of the different types of startup exit strategies that exist. If you didn’t, there are well-laid-out descriptions for you below: 

Acquihire Strategy: 

Acquiring as an exit strategy is unique because it goes beyond just having one company buy another. You may notice that the spelling looks like a combination of two words, Acquire + Hire, and that correctly explains what the strategy is all about. Entrepreneurs that apply the acquihire exit strategy do so by searching for special acquiring companies. Once found, these special companies assess and acquire the entrepreneur’s business and also hire their management or regular staff, or access their products, services, trademarks, and other properties all in one go. 

The acquiring trend has been going on for a while now. It is even gaining popularity among top companies and has been employed by the likes of Google and Microsoft over and over and over again. And what are the pros and cons of this? The pros include the fact that “acquiring” lets companies hire without having to go through the regular and time-consuming process of doing so. On the other hand, however, the process of acquiring companies creates the possibility of ending up with employees who are not an exact fit for the new company. 

M&A Strategy:

Merger and Acquisition deals or strategy which is also referred to as M&A, give businesses the option of bundling their services together. With this, two or more business entities can merge either horizontally or vertically to present themselves as one entity. The benefit of this is having to share a common interest and enjoy financial and market benefits, as well as the fact that the merged business is in a better position to attract investors. A good example of this M&A strategy was implemented by Steve Jobs when he created NEXT and mentioned that “the technology we developed is at the heart of Apple’s current renaissance.”

When talking of M&As, some of the best things about it are that;

• A buyer has an immediate need for your product or service.
• Multiple buyers may bid against one other, increasing the value of your business.
• When you sell to a competitor, you are more likely to negotiate a higher price than if you sell to a third party.

The disadvantages of this strategy are that it demands a lot of legal and financial documentation. In addition, trying the merger and acquisitions strategy can be a huge loss to any or both parties if such merging or acquisitions fail. 

IPO Strategy:

IPO or Initial Public Offering is one of the most popularly used exit strategies. It involves offering out company shares with the public through sales. By doing this, management staff have a lesser hold on the company. However, the company will also be acquiring capital which makes it attractive to potential investors. Facebook, which is now known as Meta, is one of the biggest tech companies to ever be involved in an Initial Public Offering. However, despite having a record-breaking IPO at the time, the company is proof that IPOs are not always a good option as the tech company made $16 billion in profits from the sale of its shares but also made a loss of $50 billion a few months later. 

You may be wondering what the benefits of going public are. Well, the biggest one is that for small companies, this strategy is a good way to earn some capital and cover investment costs. Another outstanding thing about an IPO is that entire teams can stay intact and operate the same way they used to before going public. Some drawbacks associated with the strategy include a lockup period that keeps individuals from selling their shares for a specified time. Moreover, these companies also go through a lot of regulatory pressure.

MBO or MEBO Strategy: 

MBO stands for Management Buyouts. In this strategy, management staff are allowed to purchase ownership of a business from its original owners. The second instance of a buyout strategy is referred to as the Management Employee Buyout. It involves allowing employees to buy most of the company’s shares, offering them higher control over the company. However, it doesn’t end there. After employees have acquired as much as they can, the business proceeds to create a public offering or a merger with another company. 

Some of the biggest companies that have made use of Management and Employee Buyouts are Helwett-Packard, Xerox, and Intel. Many of these MBO companies took advantage of benefits such as:

• Confidentiality can be maintained:

Since an MBO relates to management staff buying ownership of a company, it becomes relatively easy to maintain confidentiality about the shares. 

• Relatively higher chance of success:

Having management staff take over the ownership of a company (by buying its shares) will mean giving control to people who are already well-versed in the company in question. This presents an opportunity to make better decisions (compared to when having external stakeholders) and by doing so, position the company for success. 

The downside to this, however, is that there might be a struggle to get external funding when stakeholders are majorly from within a particular company. Think of it this way; a company is almost totally owned by its management staff and that same company goes out to request and try to get funding and support. 

How to Know Which Exit Strategy Is Right for Your Startup

As a founder or business owner, you may want to ask what exit strategy is right for your startup. The truth is that there is no predetermined answer to that. So what do you do? The right thing is to make on-site considerations, taking into account the type of business you’re operating, the company size, what it will take to perform each strategy, and how much an exit goal will be achieved by employing any particular strategy.

As we’ve come to find out, there are several exit strategies available to businesses and entrepreneurs. It is now left to every exit-ready entrepreneur to make their considerations, weighing the advantages and disadvantages of each strategy, and looking at the present position or condition of their company.

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