Your Business Exit Strategy

So you’ve put in the time and built an awesome company that is popular, profitable and now saleable. Many entrepreneurs in the later stages of business growth find themselves at this crossroad. You may find that you want to sell the business, take the company public by doing an IPO, or sell a majority share but still keep an interest in the company beyond your term as the CEO. Often times the exit strategy you decide upon in your initial business planning is, and this is true for many businesses, your financing strategy. The exit strategy for a founder is the method by which you plan to leave the business. Selling a business can be an excellent way to transition the business to a new leadership team, but along the way you may need to consider multiple tiers or levels of financing to reach a point in which your business can be sold.

One way to answer how To decide on the right exit or financing strategy would be to analyze industry trends. Determine what is happening in today’s market and does it make sense to sell an interest to a venture capital firm or do a public offering. Or maybe you may consider taking on private shareholders? Look at what similar companies in your industry are doing to fund their businesses at this stage?

One potential pitfall that can happen might be that entrepreneurs in startup mode tend to be cash-poor and look for equity opportunities to bring on top-tier talent and advisors. A startup business must be careful how much equity is given up in the early stages of a company. It is therefore very important to limit how much equity you are paying out to build and develop the business. This can make the difference of millions of dollars in later stages of the business.

Some advise new businesses to limit initial equity payments to no more than 15% of the business. This may sound like a small number given the many demands of a startup, but bootstrapping the first stage of the business and protecting the equity that may be available for significantly greater value in later stages can be extremely profitable. It’s a delicate balance though because you don’t want to hinder the businesses growth by avoiding spending equity in the right places. If you do decide to spend equity, it is a good idea to attach specific and measurable deliverables to ensure the business owner doesn’t give up equity for no return on investment.

More often than not the decisions you make in the beginning when the business is formed will likely change as you develop and grow over time. Your goal when you start a business may be to do an IPO or to sell the business to a larger company, but as your company grows, you may find that you have other financing opportunities that must come first or replace your original exit strategy.  There are many unique ways of structuring your financing which must be considered to ensure your company’s value is protected.