Navigating Exit Strategies: A Guide for Entrepreneurs


Did you know that the last E in my EVOLVE methodology stands for EXIT? One of the things I love to focus on with my entrepreneurial clients is to understand how they plan to exit their business. Is being built of legacy, will it die with them, do they want to sell it? 

For some it is awkward to answer it during the early stages of their business building, but it helps us inform how to attract cash flow, how to scale the business, and how it is organized to be at ease when it is time to actually exit their role as the creator/owner of the business. 

Before you start answering this question for yourself, understanding exit strategies is crucial. It will also inform if you choose to bring in investors, take out a loan, or even distribute employee shares, how to ensure it is aligned with your exit strategy. 

Types of Exit Strategies

Exit strategies are plans for how an entrepreneur will sell their ownership in a company and eventually leave the business. A well-thought-out exit strategy helps maximize the value of the business and ensures a smooth transition. Here are some common exit strategies:

Types of Exit Strategies

  1. Merger and Acquisition (M&A):

    • Merger: Imagine you've built a successful tech startup. Another tech company, which offers complementary services, suggests merging. By combining resources and customer bases, both companies could achieve faster growth and increased market share.

    • Acquisition: Suppose your e-commerce business has become a leader in niche markets. A larger retailer sees potential in your brand and offers to buy your company. This acquisition can provide a lucrative payout and the opportunity to see your brand grow under a bigger umbrella.

  2. Initial Public Offering (IPO):

    • Taking your innovative biotech firm public could provide significant capital to fund future research and development. By selling shares on the stock exchange, you attract a broad base of investors, gain prestige, and have the resources to scale up operations.

  3. Selling to a Private Equity Firm:

    • If your manufacturing business has strong cash flows but needs capital for expansion, a private equity firm might buy a controlling stake. They could inject the needed funds, streamline operations, and plan to sell the company at a higher valuation in the future.

  4. Management Buyout (MBO):

    • Suppose you're looking to retire from your family-owned restaurant chain. Your trusted management team, who knows the business inside out, offers to buy you out. This ensures continuity and preserves the company culture you've built.

  5. Family Succession:

    • You've built a successful real estate business and want to keep it within the family. By grooming your children to take over, you ensure that the business remains a family legacy, benefitting from their fresh perspectives while maintaining your values and vision.

  6. Liquidation:

    • If your retail business is struggling and no viable buyers are interested, liquidation might be the best option. Selling off inventory, property, and other assets can help recoup some investment, allowing you to pay off debts and move on to new ventures.

  7. Legacy/Inheritance:

    • If you want your entity to be inherited by others and drive passive income to others after you die, you will need to build the business operationally to continue and distribute funds on your behalf. This would be outlined in your last will and testament, and estate planning. So in this case, you have exited but the business still exists and funds are distributed under your direction through a Trust.  

Attracting Stakeholders

Exit options 1 through 4 above require a strong understanding of shares, equity, EBITA, and your willingness to part with 100% ownership of your business. Before we dive into how to attract stakeholders, I thought I would break down the types of shares. 

Different Types of Shares

When looking to attract investors, partners, or reward employees, understanding the different types of shares you can offer is essential. Here's a breakdown:

  1. Common Shares:

    • Basic ownership stakes in a company.

    • Usually comes with voting rights.

    • Example: You launch a startup and issue common shares to early investors, giving them a voice in major business decisions and a stake in the company’s success.

  2. Preferred Shares:

    • Priority over common shares in dividends and asset distribution.

    • Often don’t have voting rights.

    • Example: Your established software company offers preferred shares to attract investors who want guaranteed dividends and less risk, making the investment more appealing.

  3. Convertible Shares:

    • Can be converted into a predetermined number of common shares.

    • Attractive to investors due to flexibility.

    • Example: To secure funding for your biotech startup, you issue convertible shares that convert to common shares if the company hits certain milestones, providing a potential upside to investors.

  4. Restricted Shares:

    • Typically given to employees as part of their compensation.

    • Subject to vesting periods.

    • Example: To retain key talent at your marketing firm, you offer restricted shares that vest over four years, ensuring employees are motivated to stay and contribute to long-term success.

  5. Non-Voting Shares:

    • No voting rights but may offer other benefits like dividends.

    • Example: You want to maintain control over your fashion brand while raising capital, so you issue non-voting shares that provide dividends to investors without diluting your decision-making power.

  6. Phantom Shares:

    • Provide the benefits of equity ownership without actually giving away any company shares.

    • Typically used as a form of employee compensation.

    • Example: To reward your top-performing employees without diluting ownership, you offer phantom shares. These mimic the value of real shares, providing payouts based on company valuation or profitability without issuing actual stock.

Using shares strategically can help you attract the right people to your business and increase its value. Here's how you can do it:

  1. Attracting Investors:

    • Offer Preferred Shares: Investors may prefer these for the added security and dividends. Example: Your fintech startup needs capital to expand. By offering preferred shares with fixed dividends, you attract investors looking for steady returns.

    • Convertible Shares: Provides flexibility and potential for higher returns. Example: To secure a major investment, you issue convertible shares that convert to common shares at a discount if your startup reaches its growth targets.

  2. Partnering with Other Businesses:

    • Equity Partnerships: Offer a stake in your business to form strategic alliances. Example: Your health food company partners with a fitness brand. By offering equity, you create a vested interest in each other's success, driving joint marketing and product development.

    • Joint Ventures: Share ownership in a new project or business venture. Example: You collaborate with a tech company to develop a new app. Forming a joint venture, you both invest equity, sharing profits and risks equally.

  3. Motivating Employees:

    • Stock Options: Allow employees to buy shares at a later date, often at a discounted price. Example: To attract top talent to your startup, you offer stock options, allowing employees to buy shares at today’s price in the future, potentially at a much lower rate than market value.

    • Restricted Shares: Provides a sense of ownership and loyalty as the company grows. Example: You grant restricted shares to key employees at your tech firm, with a four-year vesting period, ensuring they are invested in the company's long-term success.

    • Phantom Shares: Reward employees based on company performance without diluting ownership. Example: Your software company uses phantom shares to reward employees. These shares mimic the benefits of actual stock, providing payouts based on company valuation or profits without issuing real equity.

Navigating exit strategies is a crucial aspect of entrepreneurial success, and understanding your options early on can significantly impact your business's trajectory. Whether you aim to merge, sell, go public, or pass your business to family, each strategy has its unique benefits and considerations. By planning your exit strategy from the beginning, you can make informed decisions that align with your long-term goals and values.

Key points to consider include how you want your business to continue after your departure, the potential for attracting investors or partners, and the best ways to incentivize and retain employees. Understanding the various types of shares and how to use them strategically can help you maximize your business's value and ensure a smooth transition.

Ultimately, having a clear exit strategy not only prepares you for the future but also enhances your business's attractiveness to stakeholders, providing a roadmap for sustainable growth and success. By thoughtfully considering your exit plan, you can build a legacy that endures, whether through continued family ownership, a strategic sale, or other means.

 

If you would like to dialogue and strategize about your exit strategy with me, let’s set up a qualifying call and assess how one of my 1:1 strategy sessions can help you build your business with your exit in mind.