Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
It may sound foolish to focus on the finish line when you’re just gearing up for the race, but having an exit strategy can be a vital element of startup success. While famed investor Mark Cuban has denigrated the importance of having an exit strategy, I believe that his statement (“Don’t start a company unless it’s an obsession and something you love. If you have an exit strategy, it’s not an obsession.”) is a bit naive. Yes, you must be dedicated to your startup, but failing to articulate some sort of an exit strategy is not commitment, it’s shortsightedness.
An exit strategy is the method by which a startup intends to repay its investors. It’s more about the investors’ exit than anything to do with the entrepreneurs themselves. While some exit strategies will lead to founders exiting or assuming different roles, others will leave the founders in control.
Why You Should Focus on Your Exit Strategy
So, why should you focus on an exit strategy while you’re still writing your business plan? Well, the exit strategy is big-picture stuff and it can help to inform the specific steps you take toward your goal. It can also be a great way to test a business model’s viability.
If you plan to seek investors, you absolutely require an exit strategy. While investors will evaluate a number of factors, including your team and your business model, their primary motivation is to earn a return on their investment. They want to determine the likelihood (and timeframe) of their being repaid. A well-formulated exit strategy will project that timeframe, as well as detail how that return will be generated. It’s not enough to say that the business will be profitable – you’ll need to share your plans for making it profitable.
As previously mentioned, having an exit strategy helps you to create the stepping stones that will lead to your ideal exit. It’s a great way to help you set goals and measure progress. If you’re hitting your benchmarks, great! If not, you’ll be aware that readjustment is required and you’ll be able to keep any investors informed.
Having an exit strategy in mind can help you to evaluate the effectiveness of your business model. For example, if you’re working on a subscription model (e.g. for toothbrushes and toothpaste) and plan to sell it to a larger company, you must determine the composition of your market and whether it aligns with the market of those companies which might be interested in your business. Will your business model be able to reach a sufficient number of people? Is it the best way to sell your product? If the numbers don’t work, it’s time to revisit the model or alter the exit strategy.
Possible Exit Strategies for Startups (and What to Consider With Each)
Here are some of the most popular exit strategies and a few considerations for each:
Going public is a popular exit strategy for many companies. It’s also rarely successful, especially for smaller endeavors. Those looking to celebrate their IPO should take a look at their predecessors and study the elements that made them successful. You should also speak with a business lawyer and an accountant who have experience with companies which have gone public in order to ensure that you understand the myriad paperwork and bookkeeping requirements. A knowledge that going public is your goal should inform the day-to-day details of how you run your business, which data you track, and your level of transparency. Make sure that you fully understand the process before choosing an IPO as your goal.
Merger or Acquisition
Although idealistic entrepreneurs may view being acquired by a competitor or other company as “selling out,” for many, it’s a wise move. Depending on your own goals, being acquired by a bigger company may be the best way to ensure that your brand survives. Those who plan to exit via an M&A will likely require the assistance of a mergers and acquisition specialist. It’s useful to have good relationships with both a business lawyer and an accountant in order to ensure that all of your paperwork is in order. Also, be certain to document all of your processes. The details of how your business runs, who’s responsible for which task, and the specific expectations for each member of your team will comprise an important part of the transition during an M&A.
Selling to an Individual or Entity
Building a business and establishing it as a turn-key opportunity for a third party is another legitimate exit strategy. This possibility is usually a better fit for smaller businesses. Essentially, the founder sells the company in order to earn a return for the investors and, hopefully, themselves. The third party purchasing the company may have expertise in the company’s field or may be able to grow the company. When selling, it’s important to have accurate data and paperwork so that a buyer may acquire a full understanding of the property they’re purchasing.
Evolving your business into a franchise opportunity can help you to spread your company’s reach. A franchise consultant can provide information on the scope of work necessary in order to become a franchise. As with other exit strategies, you must commit all of your business processes and procedures to paper so that anyone operating the business under your established name will continue to represent your brand in a positive manner.
If your goal is to remain a private company, you have the most flexibility in terms of running your business. Naturally, it’s still important to repay any investors. A profitable company should be able to provide dividends to investors and reinvest any remaining profits into the company to foster continued growth.
In it For the Long Term? Plan Anyway
If you can’t fathom the thought of someone else at the helm of your startup, that’s still not an excuse for failing to plan. If you want your startup to weather the early storms that all startups inevitably confront, you must plan not only for success, but for facilitating both growth and evolution under your guidance. In this scenario, you should still repay any investors or other loans taken along the way. While “exit” is a bit of a misnomer in this case, planning for the future and articulating measurable goals will always be important.
Your exit strategy matters. Make sure that it’s part of your planning process and that all of the steps you take within your business move you a step closer to a successful exit.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.