Expert Tips for Choosing an Exit Strategy

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September 2, 2021 Startups

When it comes to selling a business, choosing the right exit strategy is vital to financial success. While all business owners hope to sell their company for top dollar, they need to think about the type of exit strategy that best aligns with where they are in their business journey and what will be best for everyone involved. As a result, it is important to develop an exit strategy from day one that sets your business up for success when the time comes to cash out. Here are expert tips for choosing your ideal exit strategy.

Know The Types of Exists

There are three main types of exits that business owners can pursue: M&A, IPO, and a “self-deal.” An M&A exit happens when your company is purchased by another firm. There are also different types of mergers to consider including private mergers and acquisitions, reverse mergers (privately held companies merging with public ones), forward mergers (public companies merging with private ones), and sell-side or buy-side M&As. An IPO or initial public offering occurs when you take the company public through selling shares on an open market.

Lastly, a self-deal is what it sounds like – selling the business to yourself. This could be through offers from multiple other businesses or in certain cases, sales within the same family tree.

Consider Your Company’s Assets

Your company’s assets are also an important factor when choosing an exit strategy – think about where your business excels and who would be interested in those areas (or complementary ones). For example, if your company has a great product but terrible management, selling to another firm may be better than going public or attempting an M&A deal with a well-run company that lacks vision.

Even if your company has promising assets, you should consider what makes your business unique if you are looking for an M&A or IPO deal. A lot of companies can be considered “comparable” but it is the differences that will attract investors and make a company more attractive.

Know Your Competition

Before deciding on an exit strategy, know your competition as well as possible including who they are selling to and when. Being aware of other companies’ transactions can not only help you determine which approach would be best for your own company but also how much others with similar properties are valued at to give you a better idea of what price range to shoot for when determining your own value before choosing an exit strategy.

It is also important in relation to taxes and any investment gains to know what others are selling for as that can give you an idea of how much your company could get.

Understand Your Personal Level of Risk Tolerance

There is a wide range in the levels of risk associated with each exit strategy, so it is important to consider yours. If you already have a stable job and don’t want to deal with the stress of public pressure, going public may be too risky while choosing an M&As deal or self-deals may not be enough. On the opposite side, if you live for adventure and don’t mind the volatility that goes along with being a public company CEO or other high-stakes lifestyle choices, picking an IPO might fit you perfectly even though it carries more risk than a sale to another company.

While knowing your own level of risk tolerance is important, it can also be advantageous as you are able to determine what type of risks would be worth taking and which ones should be avoided.

Understand the Practical Considerations

This includes internal factors like who will run the business post-sale and whether there will still be control between founders if they choose an M&A or self-deal over an IPO – and external ones like how much time it takes for companies to go public after being bought in order to find out how quickly your business’ cash flow could turn positive once an exit is chosen.

Other practical considerations include the costs associated with each option so that you know exactly what sort of budget you will have to work with.

Know What’s Best for Your Business

Ultimately, the right exit strategy is the one that best fits your business’ needs – if you are a growth-oriented business with an eye on international expansion and a strong management team, going public may be the best fit. If your company thrives in one niche market that can’t easily be replicated or growing at your current rate will put it out of reach of other companies, acquiring another firm might make more sense.

The most important thing is to do your research before deciding on which approach is right for you so that you can truly feel confident knowing what type of deal would benefit both you and your company.

Know Your Needs

As with most important decisions in life, it is vital to consider your personal needs when choosing the right exit strategy for you and your business. If you are nearing retirement, you likely have a different timetable than someone who doesn’t want to leave their job anytime soon – or ever if possible.

As a result of this, those near retirement should think about an early exit option like selling to another firm before going public. This will get cash into the company’s bank account while also giving founders some much-needed extra time to enjoy other things in life. On the opposite end of the spectrum, younger business owners may prefer going public sooner than later as an IPO can help build one’s reputation and lead to further opportunities.

Another personal consideration is being prepared for the tax implications of the sale. Selling a business can be expensive as you have to pay taxes on your profits and any investment gains, so it is important that you know what your companies’ valuation will mean in relation to taxes.

The right exit strategy can make or break your business, so it is vital that you choose one which works best for you and your company. If you keep the above considerations in mind while researching your options and weighing the pros and cons of each, you will be able to find a deal that truly works well for everybody involved. After considering personal needs and the implications of each option, it is time to do your research. Know which companies are public and who might be interested in purchasing your company to determine a range for your business’ sale price. Once all this is done, you can decide on what exit strategy is best for you and your company.