From floating on the stock market to being acquired or going into liquidation, there are several start-up exit strategies. When it’s time for you, as a founder, to take a bow, it’s crucial to figure out what success looks like for your circumstances. Otherwise, deciding which exit strategy is right for your venture could leave you feeling overwhelmed or even cornered, especially if you haven’t previously given your exit strategy much thought. Let’s start by exploring what your options are when it comes to nailing a successful exit for you and your business.
What are start-up exit strategies?
When it comes to start-up exit strategies, two adages come to mind: knowledge is power, and failing to plan is planning to fail. Both statements are noteworthy for every start-up founder looking to move on from their current venture. Just as there is more than one way to skin a cat, there is more than one way to exit a start-up. While there are seven main paths you can follow to step away from your start-up, there’s no definitive answer on which exit is the right off-ramp. It all comes down to context.[1]
1. Initial Public Offering
In founder circles, an initial public offering (IPO) — selling shares in your business by floating on the stock market — is often seen as the most desirable of all exit strategies. Its positive perception lies in an IPO’s potential to deliver the largest return for founders and investors. While it can be incredibly lucrative, it’s not without its downsides. For starters, your business offering may lack public appeal, and your company’s share price may falter. The regulatory hoops listed businesses need to jump through, and the continual pressure to deliver shareholder returns can be enough to convince founders to remain privately held.
2. Mergers & Acquisitions and Acquihires
Mergers and acquisitions (M&As) occur when your start-up is bought by a larger company that’s similar or is operating in the same sector. The allure of an M&A with a start-up for the bigger company is the opportunity to buy in ready-made innovation or new products, without having to start from scratch. For business owners pursuing an M&A, there are options to court multiple bidders and drive up the price tag. However, whether you have multiple suitors for your business or not, M&As are time-consuming. And putting in the hard yards is no guarantee of success. Indeed, many M&A negotiations ultimately fail, returning the founder to square one or forcing them to pursue other exit options instead.
Acquihires also involve merging. But with an acquihire exit, the company doing the purchasing is solely focused on acquiring your team and their expertise. The products and services of acquihires are usually discontinued once the founder exits. Acquihires and their associated transfer of talent tend to happen when start-ups are at an early stage. As a result, they offer less of a return for founders and their backers such as Angel Investors or Venture Capital investors.
3. Third-party sale
A third-party sale is when you sell on the open market to a third party, and your venture is wholly acquired in the process. The potential advantage of third-party sales is that you have an instant successor for your business who is committed to making it succeed. You will also likely be able to negotiate favourable terms and make a tidy profit to boot. The disadvantage of the third-party sale is that it can take years to find the right buyer and sales negotiations can become protracted.
4. Succession
The family succession or legacy exit can be an appealing way for founders to bow out of a business they’ve built. But beware – it shouldn’t be seen as a last-minute solution. Succession – like other exit strategies – requires methodical planning to ensure success. Care should be taken to select a family member capable of taking the hot seat. The advantage of succession is that your heir apparent will already have an in-depth understanding of the business. And since you’re keeping the business in the family, you can stay connected with the start-up you’ve built and even stay on as an advisor or consultant. The dark side of having a business dynasty as your exit strategy is that you may not have a relative capable of taking on the top job. This could create financial and emotional stress that you could have avoided by pursuing an alternative exit strategy instead.
5. Management and employee buyout
In a management or employee buyout, your company’s existing management team and/or employees purchase your start-up. With this type of exit, your experienced senior managers transition to replace you and lead the company. The great thing about a management buyout (MBO) is that the new leadership team is already well-versed in how to run your business. So, the handover process will probably be a whole lot smoother than it would be if you simply sold your business to a third party. The challenge with the MBO strategy is that you might not have a manager or employee who can step up. And the considerable disruption an MBO entails could have a negative impact on your business.
6. Equity sale
Selling your stake in your business either to an investor or a business partner can be a neat exit option. But it’s not for everyone. Sole traders are excluded from the outset. However, if you do have a business partner or investor to sell your equity to, your business can run with minimal disruption. And you’re safe in the knowledge that you’ll be selling your business to someone with a vested interest in your business and its long-term success. If there’s no co-owner to sell to; finding a new partner or investor to take on your share can be challenging and time-consuming. The other downside is that selling your stake is unlikely to be as lucrative as an IPO, an M&A or a third-party sale.
7. Liquidation
It’s a more favourable outcome than bankruptcy. However, liquidation is where you sell off all of your start-up’s assets. It tends to happen when founders and business owners decide the business has run its course, or when external factors compel you to shutter your operations. In many ways, liquidation is probably the most final of the exit strategies because your business will cease to operate or exist in any shape or form going forward. The advantages of liquidation are its finality, its speed and its simplicity compared with other exit modes such as an acquisition or merger. The disadvantage is that liquidation is unlikely to be lucrative for the founder, as assets are often sold off at fire sale rates. And depending on the circumstances of the liquidation, you could risk burning bridges with your employees, business partners, customers and suppliers.
Get your game plan in place early
A business exit strategy is your way to achieve a return on investment on the start-up you’ve built. If you want to maximise your chances of exiting on your terms, begin building your off-ramp as soon as possible. Some experts recommend investigating your start-up exit strategy options shortly after you launch.[2] While it may take time for you to work through all your exit options (we’ll get to that later), it’s worth developing an initial strategy. Even if it’s only what you would do if unforeseen circumstances occurred, for example, the sudden death of a business partner. That way, if things go south, you can target liquidation rather than face bankruptcy, which we purposefully haven’t included on this list because it’s not a strategy.
Know where the exits are and when to take them
Angel Investors and Venture Capitalists expect a return on their investment from your start-up. So after five to 10 years of investor support, you’ll need to pay the piper. Socrates’ philosophical maximum ‘know thyself’ can be helpful when eyeing your potential exit strategies.
Begin by reflecting on which exit options sit best with your values and the values of your start-up. It’s essential to hold a mirror up to your venture. Be realistic about its growth potential and the likelihood of taking it public successfully. Many start-up entrepreneurs harbour dreams of hitting the jackpot with a stratospheric IPO. Unfortunately, the statistics suggest a headline-grabbing IPO is likely to remain in the realms of fantasy for most founders. Of the 2% of start-ups that achieve a successful exit, acquisition, not IPO, is the most common pathway.[3]
So, don’t let the mirage of an IPO cause you to miss a golden opportunity to merge with another firm or sell your venture entirely as a going concern. Map out which exit opportunities you would consider for each business stage. Make sure you continually scan the environment so you’re ready to respond to threats and opportunities that might shape your exit plans. And don’t underestimate your own personal circumstances and those of your team. They are equally important when considering whether to hit the ejector seat button.
Fund your exit journey
Our articles, Seven ways founders build a start-up from the ground up and Moving from start-up to scale-up: five tips for success, cover the different ways to bankroll your venture from its launch to the scale-up stage and beyond. Just as it’s crucial to have a sound financial strategy for growth, it’s equally important to consider how your capital stack could impact your exit plans.
It’s advisable not to become overly diluted to avoid losing control of your business. But diluting your ownership also means reducing your return on investment when the time comes to merge, sell or go for an IPO. So that’s another reason to hold onto your equity. Radium Advances offer a reliable source of non-dilutionary capital if your business is eligible for the Federal Government’s R&D Tax Incentive refund. And Our expert team can help you discuss your options and how R&D financing can support your start-up exit strategy.
What do start-up founders do after they exit?
Is the fear of the unknown or of letting go of a business you’ve built from scratch holding you back from moving on? Doubts and fears often cross an entrepreneur’s mind before exiting, even if the moment marks the fulfilment of a long-held dream. So, what do founders do after they exit their start-ups?[4] Many former founders become serial entrepreneurs, and like many of our Radium Capital clients go on to launch multiple new start-ups.
Others will transition into leadership roles in the corporate world, where they add value to established businesses that are seeking a more innovative approach. Some founders, who become either resoundingly or even somewhat wealthy via a successful IPO or selling their start-up, become Angel Investors, Venture Capitalists or mentors for other founders. Then, there are former founders who follow a more introspective path and focus on self-improvement and education.
Whatever your business stage, sector and circumstances, it’s never too late or too early to begin strategising how you’ll ultimately exit your start-up. Remember, if you’ve already founded a start-up, you’ve already shown that the world is your oyster. And that’s something that won’t change, after you exit.
[1] Startupxplore Blog. 2023. What are the best exit strategies for startups and investors?. [ONLINE] Available at: https://startupxplore.com/en/blog/exit-strategies-for-startups-and-investors/
[2] Eqvista. 2023. Startup exit strategy – Everything you need to know | Eqvista. [ONLINE] Available at: https://eqvista.com/company-valuation/startup-exit-strategy/.
[3] B Capital. 2023. What is a Startup Exit? | B Capital. [ONLINE] Available at: https://www.bcapgroup.com/exit-how-startups-go-public-get-acquired/
[4] David Teten. 2021. 6 career options for ex-founders seeking their next adventure | TechCrunch. [ONLINE] Available at: https://techcrunch.com/2021/06/07/6-career-options-for-ex-founders-seeking-their-next-adventure