Types Of Startup Exits For Investors- Other Business Exit Plans

Learn about the types of startup exits for investors and other business exit plans. Read on with me.

While the term “business exit” may conjure up negative connotations, a well-thought-out business exit strategy simply means you are ready for a smooth transition, whatever that means to you and your company. 

The most common exit method for a startup to leave is to sell it to a larger company for a profit. Investors are in the same boat. The most frequent business succession and exit plans are discussed here.

8 Types of Startup Exits Plans 

There are eight popular exits plans, but the one you choose will ultimately be determined by your financial, personal, and commercial objectives. 

Below, we go over some ‌advantages and disadvantages of each business departure approach. 

1. Exit strategy for mergers and acquisitions (M&A deals)
2. Selling a portion of your company to a partner or investor 
3. Succession in the family 
4. The Acquihires 
5. Employee and management buyouts (MBO) 
6. IPO (Initial Public Offering) 
7. Liquidation 
8. Bankruptcy

1. Mergers and acquisitions 

Mergers and acquisitions are one of the types of startup exit for investors. A merger or acquisition is a solid exit strategy for any firm looking to sell their business, but it’s especially appealing to startups and entrepreneurs. 

You will be selling your company to another firm that may be looking to expand its geographic presence, reduce competition, or gain your personnel, infrastructure, or product. 

Pros and Cons of Merger and acquisition

Pros 

1. This is one of the most powerful exit methods for business owners since they keep control of pricing discussions and can set their own terms. 
2. You may be able to increase the price even more if you’re selling to a competition or accepting multiple bids.

Cons

1. M&A transactions can be time-consuming and expensive, and they frequently fail. 

2. Selling a portion of your business to a partner or investor 

You can sell your stake to a partner or venture capital investor while the business continues to operate normally as long as you are not the sole owner. 

This form of an exit plan is characterized as a ‘friendly buyer,’ because you’re likely to sell your interest to someone you know and trust.

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Pros 

1. The company can continue to operate normally with minimal disturbance, ensuring consistent income streams.
2. It is likely that this person already has a stake in the company and is dedicated to its long-term success. 

Cons 

1. It can be tough to find a buyer or investor for your company’s stock. 
2. If the buyer is someone close to you, the sale may be less objective and hence less profitable; you may drop the asking price. 

3. Succession in the family 

The goal of a family succession departure (also known as a legacy exit) is to keep a profitable firm ‘in the family.’ It’s worth remembering that company exit planning is just as crucial as any other sort of exit for a family succession. 

This is an intriguing choice for individuals who wish to pass on their company’s heritage to an offspring or family member, but it’s critical to make sure the person is qualified for the position. 

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Pros 

1. As a family member, this person is likely to have extensive familiarity with the company and a thorough understanding of how it operates.
2. This person can be trained to take on a leadership role over a long period. 
3. When you keep a family business in the family, you keep close ties to it and may choose to stay on as an advisor or consultant.

Cons

1. Although the thought of running a multigenerational family business may be appealing, there may not be anyone capable of doing so. 
2. The blurring of professional and personal barriers may cause the family unnecessary financial or emotional stress. 

4. Acquihires 

Acquihires is one of the types of startup exits for investors. It is a corporate exit strategy in which someone purchase purely a firm for the purpose of acquiring its skill. 

This type of acquisition can be highly advantageous to competent personnel because you can rest assured that they will be well cared for once the company is sold.

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Pros

1. If someone is actively pursuing your skills, you will be able to negotiate more favorable acquisition terms.
2. Your employees will have a more secure and prosperous future. 

Cons

1. You can have a hard time finding a buyer who is interested in an acquisition. 
2. This, like other acquisitions, can be a difficult and expensive process.

5. Buyouts of management and employees 

Those already employed by the company can migrate into more senior positions to fill leadership voids in management buyouts. Because the management team is already familiar with your company, they should be well prepared to run it. 

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Pros

1. You will be able to trust that the company is being managed by someone who knows what they’re doing. 
2. In comparison to a sale to a third party, the handover process is likely to be simpler.

Cons

1. It is possible that no management or employee is willing or able to step in.
2. Significant management changes could have a negative impact on the company. 

6. Initial Public Offering (IPO)

The initial public offering is one of the types of startup exits for investors. An IPO exit involves bringing your company to the public eye and selling stock to investors. While an initial public offering (IPO) has the potential to be enormously profitable, it is also extremely difficult. 

While private investors may see tremendous promise in your company, the rest of the industry may not. Many companies want to remain private due to high regulatory costs and increased pressure and scrutiny from shareholders.

Read- 10 African Unicorn: The Most Valuable Startups by Africans you Should Know.

Pros

1. More than any other exit plan, this one has the potential to make a significant profit. 
2. Use Ansarada DealsTM to gain complete control and oversight while avoiding the hazards that come with this approach.

Cons

1. Stockholders, regulatory authorities, and the general public should expect intensive and ongoing examination.
2. Mandatory progress and performance reports are also part of an IPO’s obligations.
3. Due diligence for an initial public offering (IPO) is complex, expensive, and time-consuming. 

7. Liquidation 

Liquidation is one of the types of startup exits for investors. For failed enterprises, this is a frequent exit option. Liquidation is one of the most extreme exit methods, in which the company is shut down and all assets are sold. 

Any money gained must be used to pay down debts and dividends to shareholders (if there are any). 

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Pros

1. This is the place to go if you’re looking for a solid conclusion. After liquidation, the company is effectively dead. 
2. This strategy is potentially easier and faster to implement than others, such as an acquisition. 

Cons 

1. Liquidation is unlikely to be a lucrative exit strategy.
2. You can be severing ties with your coworkers, partners, and customers.

8. Insolvency 

Insolvency is one of the types of startup exit for investors. This last form of exit strategy, unlike the others, does not require much of a business plan. 

Bankruptcy will result in the seizure of your possessions and a negative influence on your credit, but it will also relieve you of financial debts. 

Learn What is a Unicorn Startup: Origin and How To Be One.

Pros

1. You will be free of your company’s debts and responsibilities. 

Cons 

1. In the future, you may find it difficult to obtain credit.

When is it appropriate to leave? 

This is a question that comes up frequently at investor and startup conferences and private meetings.

‘When is the best time to sell my business?’ ‘When should you start looking for buyers?’ ‘When should I start hoping for a return on my investment as an investor?’

And the truth is that there is no one-size-fits-all solution to all of these issues. Startups (and investors) want to sell for as much as feasible, while buyers want to spend as little as possible, therefore both parties must strike a balance. Instead of looking for an exit while their growth rates are high. 

Common sense dictates that companies should seek an exit when their growth rates are strong rather than when they are very profitable in order to maximize their selling price. 

Read- What You Need To Know About Carbon Paylater Loan.

Conclusion 

According to Business Insider, “lower-valued startups take less time to scale and require less VC funding, implying that founders will probably keep larger percentages of their companies when they sell.” 

This indicates that, rather than waiting for a €200 million price tag, these founders could be better off selling for €20 million now, while they still own a significant piece of the company, rather than waiting for a €200 million price tag when they own a small percentage of the stock.

Each entrepreneur and investor should think about the circumstances of their businesses before making a decision. There is no magic recipe, but one thing is certain: entrepreneurs and investors will want an exit sooner or later.