Five Smart Exit Strategies When you're ready to hand over the reigns, here are your options.

By Martin Zwilling

If you startup is your dream, why would you want to think about an exit? It's going to be so successful and so much fun that you don't need to think about what comes after. Wrong. There are two very real and practical reasons why you need to plan an exit:

  • Outside investors want to collect their return. Remember that equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold. Even three years is a long time to wait for any pay check.
  • Entrepreneurs love the art of the start. Assuming your startup takes off, you will probably find that the fun is gone by the time you reach 50 employees, or a few million in revenue. The job changes from creating a "work of art" to operating a "cookie cutter."

In three to five years, you will be anxious to start a new entity, with new ideas and spinoffs that have built up in your mind, and certainty that you can avoid all those potholes you hit the first time around. If your startup was less than a success, you'll definitely want to erase it from memory.

  1. Merger & Acquisition (M&A). This normally means merging with a similar company, or being bought by a larger company. This is a win-win situation when bordering companies have complementary skills, and can save resources by combining. For bigger companies, it's a more efficient and quicker way to grow their revenue than creating new products organically.
  2. Initial Public Offering (IPO). This used to be the preferred mode, and the quick way to riches. But since the Internet bubble burst in the year 2000, the IPO rate has declined every year until 2010, and is now at about 15 percent. I don't recommend this approach to startups these days. Shareholders are demanding, and liability concerns are high.
  3. Sell to a friendly individual. This is not an M&A, since it is not combining two entities into one. Yet it's a great way to "cash out" so you can pay investors, pay yourself, take some time off, and get ready to have some fun all over again. The ideal buyer is someone who has more skills and interest on the operational side of the business, and can scale it.
  4. Make it your cash cow. If you are in a stable, secure marketplace, with a business that has a steady revenue stream, pay off investors, find someone you trust to run it for you, while you use the remaining cash to develop your next great idea. You retain ownership and enjoy the annuity. But cash cows seem to need constant feeding to stay healthy.
  5. Liquidation and close. Even lifetime entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to shutdown, close the business doors, and liquidate.

    There may be a natural catastrophe, like 9/11, or the market you counted on could implode. Make rules up front so you don't end up going down with the ship.

To some, an exit strategy sounds negative. Actually, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. This allows you to run your startup and focus efforts on things that make it more appealing and compelling to the short list of acquirers or buyers you target.

The type of business you choose should depend on your goals, and the way you grow it should be aligned with your exit strategy. Don't wait until you are in trouble to think about an exit, rather think of it as a succession plan, or a successful transition.

See Also:
How Founders Should Decide When It's Time To Sell
Sell For More With These Alternative Exit Strategies
How to Sell Your Business During A Recession

Martin Zwilling

Veteran startup mentor, executive, blogger, author, tech professional, and Angel investor.

Martin Zwilling is the founder and CEO of Startup Professionals, a company that provides products and services to startup founders and small business owners. The author of Do You Have What It Takes to Be an Entrepreneur? and Attracting an Angel, he writes a daily blog for entrepreneurs and dispenses advice on the subject of startups.

Editor's Pick

Related Topics

Business Process

Employees Check Their Emails 36 Times An Hour — Here Are 5 Proven Tips to Get That Time Back.

The idea of "inbox zero" is much more than a myth — it's doable.

Growing a Business

What It Takes to Build a Best-In-Class Company — 3 Essential Elements

The journey to excellence is not a matter of chance but a deliberate pursuit to shape the future and raise the bar for all who follow.

Business News

A Judge Blocked a U.S. State's Attempt to Ban TikTok for All Residents — Here's Why

Montana residents would have faced $10,000 fines for using the app.

Leadership

Why Overcoming the Shadows of Your Past Will Lead to Your Brightest Future

How to face and overcome the voices holding you back to propel yourself forward

Business Ideas

This Teacher Sells Digital Downloads for $10. Her Side Hustle Now Makes Six Figures a Month: 'It Seems Too Good to Be True, But It's Not.'

When one middle school teacher needed to make some extra income, she started a remote side hustle with no physical products and incredibly low overhead. Now she brings in six figures each month, and offers courses teaching others how to do the same.

Growing a Business

Queen Latifah Says Female Leaders Need to Do These 4 Things to Succeed

The celebrated actress, entertainer and entrepreneur has strong advice for women in business.