Saturday Essay: The Founder's Guide To Business ExitsThe small business exit guide.
Startup to sell up: the new business movement fuelling an exit generation. Luke Davis, CEO of IW Capital, discusses why founders must have a strong exit strategy and the main routes to consider
Image by Gerd Altmann
In 2020, millions of employees across the nation suddenly found themselves on furlough. With novel amounts of spare time on their hands, Brits took the opportunity to develop projects and side hustles to their ultimate potential, leading to the creation of more than 800,000 businesses during last year’s series of lockdowns.
At the other end of the spectrum, 2021 has turned out to be a bumper year for IPOs, mergers, acquisitions and private equity, as larger businesses are taking advantage of buoyant investor sentiment and deflated company values.
Both emerging as direct results of the particular social and economic conditions that the pandemic has instigated, these two developments are increasingly combining to give rise to what is being referred to as the “start-up to sell up” economy.
The term defines the trend in which a company is created purely with the goal to sell, fuelled by either the founder’s desire for financial independence or the ability to fund another (often more ambitious) project.
The trend first started sprouting up a few years ago and has been accelerating ever since the start of the pandemic, while the spree of acquisitions over the last twelve months from tech giants such as Amazon (who has acquired a myriad of start-ups including Selz, Wickr, Art19 and Perpule, to name but a few) has only added fuel to the fire.
Successful business models at any stage of development are likely to contain a strong exit strategy, whether it be a sale, merger or - if the business is very successful - an eventual IPO. While it can be difficult for founders to contemplate the end of their involvement in a business they’ve grown from the ground up, this new trend underscores just how crucial of an element the exit strategy is, and why it deserves prominence in any business plan.
Preparing your exit strategy
When starting a business, it might seem a little counter-intuitive to begin by thinking about the end (or at least the end for you). However, the value of a viable, well thought exit plan cannot be understated. The ability to envisage how you might one day leave your business is not only incredibly important for yourself and your entrepreneurial goals, but also for your potential investors, who will be looking for their own exit options in order to feel confident that they will one day achieve a return on their investment.
The process of designing an exit strategy will also help you to identify and analyse potential rivals - or buyers - as well as previously employed routes to success. If you have no plan to leave, you may not ever need to exit - but it still pays to have a plan.
Here are the most common exit strategies available to entrepreneurs:
An acquisition is the strategic exit plan that is perhaps one of the simplest to understand, occurring when one company buys most or all of another company’s shares. The acquisition of a private company is normally completed on friendly terms and will often come from a larger rival in the industry of the acquired business.
An acquisition can be a good exit route for many types of entrepreneurs, including those who are not looking for much continued involvement in the company in the long term.
A very well-known example of an acquisition is Facebook's purchase of Instagram in 2012. At the time, Instagram was an independent company with just 13 employees. But after having been identified as a viable threat to the prominence of Mark Zuckerberg’s own social network, it was acquired by Facebook for $1 billion, just two years after having been founded in 2010.
Photo by Scott Graham on Unsplash
The scale of this story is dramatic, but its demonstration of the key goal of an acquisition strategy is exemplary: try to identify rivals in your sector who could be potential buyers and devote serious time to considering what it would take to sell-up to them. You may find that thinking about this exit strategy evolves your entire business plan.
Merging with a rival company or a firm in a different industry to form one new company can be a great ‘exit’ strategy for business owners who are perhaps not ready to completely step away from their business, but understand that an outsider company could present benefits or opportunities they may not otherwise have access to.
By consolidating resources, the two companies often mutually benefit by being able to broaden their reach, expand into new segments or gain market share. It is also a very effective method of reducing costs of operations as well as growing revenues and profits, and so can be popular with investors.
There is a range of merger types, depending on the goals of the companies involved, but broadly speaking mergers and acquisitions are a great way to raise capital to pay investors or fund a future venture for an entrepreneur, and tend to result in less involvement going forward for the founder. Again, it’s worth considering in this exit strategy who your potential targets would be, and what value they might be looking to gain from a merger with your company.
An IPO, or Initial Public Offering, is a way for a private business to go public whereby it will offer shares to be purchased on the stock market, allowing a company to raise capital from public investors. At this point, founders will often sell a portion of their shares, while existing private investors usually have the option of selling their holding to achieve a return, or holding on to them in the hopes of higher returns in the future.
The founder will play a pivotal role in the process and will have the crucial responsibility of deciding a valuation for the company. The founder will also be likely to continue to play a big role in the company's future and investors may also insist on their continued involvement, which can require some complex management of your various stakeholders. It does, however, also offer a way to cash-in on the success of the company by selling shares on the stock exchange.
An exceptional recent example of this is Airbnb’s debut on the public market late last year. The company’s shares were originally priced at $68, but upon closing its first day of trading, the shares were at $144.71. In less than 24 hours, Airbnb’s IPO increased by more than 112%, giving the company a market cap of about $86.5 billion – more than double what it had sought in valuation just a day before.
An IPO can be a good strategy for companies that can demonstrate a unique or ‘first-mover’ competitive advantage, as well as a strong top-line revenue growth and significant, sustainable projected revenue growth.
A private sale
Image by Pete Linforth
A private sale, or sale to a friendly buyer, involves selling the business to someone you know personally, whether that be a family member (often the founder’s children), a friend or a co-founder. This exit strategy can be beneficial to smaller firms and is a great way to “cash out” in order to be able to pay investors, pay yourself, and start preparing for your next business project. It also has the added advantage of potentially keeping the business in the family or within your circle of friends.
It does, however, mean that the sale price can be less objective - it's difficult to play hardball with family or friends when negotiating a price.
Ultimately, exiting a business is a complicated process that differs for every founder and investor, but it is key to make plans and have open and frank discussions with all of your key stakeholders, especially shareholders or early backers who are looking for a return on their risk.
On a grander scale, maintaining a clear vision of your exit strategy will allow you to optimise your business to bring out the aspects that make it more unique and compelling to your shortlist of potential buyers or investors. Ensure that the way you manage your business and direct its growth is aligned with your exit strategy, and you’ll be more likely to enjoy a successful departure when the time comes.
About IW Capital:
IW Capital focuses on originating, structuring, leading and managing investment opportunities for our expansive network of high net-worth individuals, ultra-high net-worth individuals, family offices, wealth managers and IFAs. With an executive team boasting over 100 years of collective experience in SME investment, IW Capital is renowned for its leading expertise in structuring and delivering growth funding to SMEs. Our investment portfolio is actively managed, providing investors with regular in-depth reports on progress of the investee companies.