The exit strategy of a company is by definition, how the owners will exit from their ownership. Some entrepreneurs would prefer a very fast and safe acquisition for a larger firm, but there has to be buyers in the market that make sense. Others may prefer to hold out for an IPO, but the company has to have the scalability to generate a share price to cover the expenses associated with registration and requirements for a NASDAQ listing. Therefore, the exit strategy of a company is not a quick witted and common sense response, but a well thought out and quantitatively demonstrated strategy that manages feasibility with risk and reward. If investors as for a business plan exit strategy, they are likely doing to ensure that you have the same goals that they do and conflicts to not emerge at a later time when it is time to sell the business. This article covers what type of exit strategies are popular for companies and in what context they are the best option for your company.
Understand the Business Plan Exit Strategy
There are generally three types of exit strategies that you may consider to include in your business plan. The first is a private sale to an individual investor or investment group. An example of this may be a private equity company or venture capital group. The second is a strategic acquisition from a larger company, such as a large bank acquiring a small online banking start-up because it is cheaper than building their own online banking system or relying on a third-party. The most profitable and risky exit strategy is an initial public offering (IPO), which may include both listing on a major index such as the NASDAQ or over the counter markets (OTC).
Private Finance Buyer
In many instances, a private buyer will purchase an early stage company to continue with it for a larger exit later on, or to hold the company privately into maturity. This is generally the least profitable, but most readily available exit strategy. It is not something that is sought after because as Warren Buffet said, nobody sells a profitable business but only sells in a period of declining profitability. Nonetheless, it can be used as a contingent safety net if there are not companies interested in a strategic acquisition and a public offering is simply not in the cards.
Private Strategic Buyer
A strategic buyer can be the most profitable if you are looking for a fast sale, but holding out for an IPO if it is scalable enough can multiply the profitability. However, few companies are actually scalable and manageable enough to reach and initial public offering. Even with a successful beginning, they collapse at some point and turning back to private strategic buyers could mean that you lose all leverage in the deal to negotiate a high price. Therefore, it is important to gauge your own risk and reward to find investors that meet your goals. While it may appear to make sense to package it in way that they want to see, such as going sky high for an IPO, this will only lead to conflict later on if you only want to cash out fast and conservatively to comfortably retire or move onto your next venture.
Initial Public Offering
An IPO is historically and undoubtedly the most profitable potential exit strategy for a start-up company. The millions of shares issued to management, investors, and the team are worth far more than their valuation from even a generous strategic buyer in successful cases. However, this exit strategy is also the most challenging and riskiest and not all investors will want to ride the way with you to this path if it means they have the opportunity to generate their target return on investment at an earlier phase. The goal of the fund must meet your personal goals and if you sincerely want to launch a public company on the NASDAQ or OTC exchange, be transparent about your goals so that there are no conflicting interests later on. However, it has never been easier for investors to sell their shares on the secondary market, so conflicting interests in the exit strategy are having increasingly lower importance than they did in the past.