Are you finally ready to take the plunge and begin your start up? If you’ve got a great idea, you might be motivated to create a startup so you can eventually cash out one day, whether that be completely or partially.
Having an exit strategy will help you get there, and planning is crucial, especially if you’re very ambitious (think: Whatsapp was bought by Facebook in 2014 for $19 billion).
Exit strategies are not exclusive to co-founders. If you are a sole founder, part owner, investor or entrepreneur, having an exit strategy is important. Being on top of your exit strategy and implementing it early will help ensure an optimal outcome.
Not sure where to start? Don’t stress, we’ve got you covered.
What Is An Exit Strategy?
An exit strategy is a strategy that enables you to cash out on your business, on your terms, when and if the time comes.
The purpose of an exit strategy is to allow you to to sell the ownership of your company either entirely or partially to investors or another company.
If your business is successful, an exit strategy can allow you to cash out, making a substantial profit. Alternatively, if your business is not successful, an exit strategy can help limit your losses.
An exit strategy does not need to be set in stone. Exit strategies should be flexible, accounting for the market and changes that your business may encounter.
There is a lot involved in an exit strategy, and planning from the very beginning is vital.
To start with, have you looked at similar startups in your industry, and how much they are worth? Have you had a discussion with your co-founders to find out where you see yourselves in 5 or 10 years. Do you see this as a side hustle or your full time job?
A lot of business owners and entrepreneurs begin their business with the idea that they will eventually move on from it. Others aren’t too sure if they will eventually move on or not. Either way, it is beneficial to have an exit strategy in place.
Having an exit strategy helps you have a say in:
- How you will get out of your business
- How much money you will get when you leave the business
A good first step would be a Founders Term Sheet to have an in principle, legally non-binding discussion in writing. In order to make it legally binding, and to have more details around the exit, you should eventually have a binding Shareholders Agreement.
By having an exit strategy in place, you increase the likelihood that you will receive a return on the amount of time and effort you have placed into your business.
Types Of Exit Strategies
The type of exit strategy you choose to implement is dependent on your unique circumstances and expectations.
The most common exit strategies are outlined below.
- Sell Your Business
Selling your business can result in a good return. Having a well thought out exit strategy in place can help ensure this.
The first step is to identify potential buyers. Perhaps it might be a bigger company in your industry or a competitor. It may be a business in an adjacent industry trying to diversify their business. It may even be private equity funds or similar players looking for good businesses to buy.
This will depend on the industry you’re in and it’s essential you do your homework around the potential avenues!
At the end of the day, your exit strategy will outline terms that are best suitable to your unique circumstances and expectations.
- Merge Your Business With Another Business
You might have heard of a merger as a type of an ‘exit’ because it is a specific legal concept in the US. However, in Australia, things are a bit different: a merger is the result of a business sale or a share sale, and may involve some share swaps too.
Essentially, a merger is when two companies join forces to create a combined company.
- Go Public
Depending on the size of the business, going public can bring in decent profits.
An Initial Public Offering (IPO) is how you would do this. An IPO provides your company with the opportunity to obtain capital by offering its shares to the public through a stock exchange, such as the ASX. An IPO will take your company from being a privately held company to a public company.
Going public is a big step, and it gives your company a greater ability to grow and expand its capital. IPOs can be an effective exit strategy for you if your company has been successful enough to consider going public.
Going public is usually an expensive and long term process, however, it can allow for the continuing growth of your company. This may be the most effective exit strategy for you, adequately honouring the efforts you have placed into the business.
Whatever exit strategy applies to you, it is important it is thought about and planned for earlier rather than later. This will help ensure the greatest possible outcome in your favour.
What Are The Benefits Of Having An Exit Strategy?
Having an effective and uniquely tailored exit strategy in place increases the likelihood that a positive outcome will eventuate.
Some benefits of having an exit strategy include:
- Choosing when and on what terms you leave your business
- Generating a potential income for retirement once you exit your business
- Creating a smooth transition for others to take over your business
- Protecting the value of the business you have built
- Enhancing the future worth of your business
These benefits are, of course, dependent on the type of exit strategy you choose to implement.
Having an exit strategy in place is highly beneficial to both you and the business you have created.
So, How Do I Form An Exit Strategy?
An exit strategy isn’t something usually contained in one legal document. Rather, it should be a plan that gives you flexibility to read the market and change due to demands.
A Founders Term Sheet or Shareholders Agreement can help you be on the same page, so it’s a good part of your exit strategy. But the more important part of your strategy is preparing for the market, understanding how your co-founders will contribute and what share they will get, and getting your company’s legals right.
If you’re thinking of exiting some day, you need to bear in mind that a potential acquirer – or the public market – will scrutinise your business and its foundations vigorously. This means you need to be set up in the right way, and have proper legal documents in place. Part of your exit strategy should be preparing for this eventual scrutiny.
This is where it might be a good idea to get help from a lawyer. An experienced lawyer can help startups with their legals and can ensure you have thought of everything you need from a legal perspective for smooth sailing down the track.
As well as legals for setting up, if you have key contracts, and key suppliers or some intellectual property that is crucial to the value of your business, and it is not legally protected, you might have to pay a price for it down the track, and this could very well be at the point of exit.
Need More Help?
We’ve got you covered! Our team can help you set up your startup properly, so that when the time comes for you to exit, you’ve done everything right.
Reach out to us via email at email@example.com or by phone on 1800 730 617 for a free, no-obligations chat.
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