One critical aspect of every business plan that few entrepreneurs and business owners consider in advance is an exit strategy.
It may seem counterintuitive to focus on your exit strategy while running a business, but without it, you don’t have a path for transfer of ownership. That means no plan for how you’ll achieve your return on your investment — at least the financial investments you’ve made in your startup or small business.
As an entrepreneur, small business owner, or startup founder, what are your options?
Most startup founders and small business owners are well aware of some of the flashier ways to sell a business: the initial public offering (IPO) and the acquisition get a lot of attention. But those aren’t the only business exit strategies, and they may not be good options for every entrepreneur.
Here, we’ll take a look at startup exit strategy examples from multiple perspectives and consider six options, including:
- Friendly buyout (friends or family)
- Management buyout
- Third-party sale
- Initial public offering
- Employee stock ownership plan
What Are the Best Exit Strategies for Startups?
The best type of exit strategy for a startup is unique to the company and the owner. The exit strategy you choose should be a reflection of your values, since the company you leave behind (or don’t if you liquidate) is part of your professional legacy.
So ask yourself, what’s most important to you? Is it the pride of a big-ticket third-party offer to purchase? Is it seeing your own family members at the helm? Is it leaving a healthy business that continues to provide jobs, and contributing to the financial stability of your community?
There’s no one right answer, but it’s important to face these questions honestly, so that you can choose the best exit strategy for your startup or small business.
And when you’ve had time to reflect, you can compare options based on how well they fit your answers.
Plenty of small business owners choose liquidation as their “glide path” out of ownership. It enables owners to avoid making difficult choices and slowly unwind the business, living off revenues instead of reinvesting them, and closing down when the business no longer turns a profit. Assets are then sold, debts are paid, and if anything’s left, it goes to the former owner.
An obvious downside to liquidation is the potential loss to employees, vendors, customers, and communities.
2. Friendly Buyout
Family succession often involves selling the business to children, and it’s not an uncommon choice among small business owners. The same can go for close friends. But things can get messy combining those relationships with conversations about price, timelines, management succession, and more. When not all siblings are interested in a business, further complications can arise. And it’s not unheard of for family members to take over, just to mismanage a business into ruin.
3. Management Buyout
Sometimes, a rising generation of company leaders successfully takes over the business — but this exit strategy requires a great deal of careful succession planning, and can be complicated by employees’ ability to front the money or secure the credit for the purchase. There are certain advantages to structuring the sale over time, but if one of the involved parties wants to back out, financing can be fraught.
Mergers and acquisitions are two very different transactions that are often mentioned together. In a merger, two or more companies combine to become a single entity — which can be just as complex as it sounds, and can even involve conditions such as requiring leadership to stay in place for a specified period.
In an acquisition, an outside company (e.g., a competitor, an investor, a previous vendor partner) buys your company. You negotiate the sale, take your money, and walk away. That can sound good to a lot of entrepreneurs, but if the future vision of your company is important to you, acquisition can be a bitter pill to swallow.
5. Third-Party Sale
Selling your company to a third party on the open market is, for many owners, the dream. After all, it results in an instant successor with a keen interest in succeeding, a potentially lucrative selling price, and negotiated terms. That said, the current business market is in a state of generational transition as baby boomers head toward retirement. That can mean lower prices.
The other major complication of third-party sales is the time factor. It can take years to find a buyer — and when you do, that’s when negotiations begin.
6. Initial Public Offering (IPO)
Maybe it’s the dream of so many startup founders, but the IPO is not necessarily the best fit for every business. They’re usually reserved for bigger companies that can attract institutional investors; that involves exposing your business to significant outside scrutiny and meeting regulatory requirements under the Sarbanes-Oxley Act.
It also makes all those shareholders the new bosses the company has to answer to.
7. Employee Stock Ownership Plan (ESOP)
An ESOP offers a unique path that allows a business owner to sell, transferring ownership of all or part of a company by setting up an ESOP trust, which becomes the legal entity that holds shares of company stock on employees’ behalf. The sale can be structured using borrowed funds, or it can be seller-financed, or some combination.
An ESOP offers the seller liquidity, a significant tax advantage, and the flexibility and choice to remain involved in the business as a leadership employee, ensuring a smooth transition and succession plan can be executed.
Setting up an ESOP can be complex, and because they’re a qualified retirement benefit, ESOPs are subject to specific regulatory oversight, so they call for specialized guidance from experienced advisors, a designated fiduciary ESOP trustee, and long-term, expert third-party management.
But selling your business to an ESOP also helps ensure a predictable timeline for the sale and control over your exit and succession planning preferences. Besides that, ESOP sales have mechanisms in place to ensure that you’ll get a fair price for your company.
Learn more about all of these startup exit strategy options, and get some help deciding which might be the best fit for you and your company, when you download our free eBook, Your Ultimate Guide to Business Exit Strategies: Top Succession Plans for Owners. Click the link below to claim your own copy.