If you are looking for a way from an unexpected term sheet and the startup’s exit strategy, follow along to find the perfect strategic moves to be made.
An exit plan is something that every start-up owner should have before even searching and approaching potential buyers. Emerging businesses get funding from an investor at a point, which signifies that a liquidity event will occur very soon. Generally, traditional venture funds only last for ten years. When the fund is matured, the startup CEO will be pressured to look for an exit for their startup. With the help of professional advisors, lawyers, accountants, and brokers, you can get hold of the proper documents when you need a business exit. This article will walk you through what to do if faced with an unexpected term sheet and the startup’s exit strategy.
What is a Business Exit Strategy?
A start-up exit strategy chalks out the plan, including necessary steps that a start-up owner must take to generate the highest value from selling the company. A perfectly designed business exit strategy is flexible enough to enable unforeseen contingencies. It should specify that start-up owners don’t decide on their terms on the exact time to exit. Creating an advanced strategy helps the owners ensure they can maximise value in case of an unplanned exit.
Motives for Developing Exit Strategies
Business equity owners should know what a business exit will look like. Some common motives of exit strategy are-
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Retirement:
The most common motive is retirement. Since business owners will retire someday, it is better to have an exit strategy planned.
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Investment return:
It poses a broader investment opportunity. For example, the VC business planning to turn into IPO within five years ensures the exit valuation becomes a component of the initial investment in that particular business.
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Loss Limit:
If a business fails to generate enough money, it is best to exit as soon as possible to cut the losses in the industry.
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Force Majeure:
Sometimes grave circumstances like Covid-19 or invasion of countries can force companies or investors to prepare an exit strategy.
Exit Strategy for Startups
Startups which look for VC investments can develop an exit strategy in their initial pitch. Even though it is not mandatory, it can work well when a founder of a start-up knows the industry well and has a 5-year forecast. Exit strategy for start-ups depend on the following factors-
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Market timing:
What is the performance of the IPOs for the business ventures in the last year? If public marketplaces show enthusiasm for businesses similar to the recently pitched one, the exit procedure will become easier.
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Comparable transactions:
Comparable transactions such as private equity or industry-related sales can be used to show the investors how they can come up with an exit strategy. The competitive firms must function in the identical competitive space.
How to Develop a Business Exit Plan
The exit plan aims to ensure a straightforward transition to the new business owner. The business owner should weigh all possible options, such as family situation, personal finances and career opportunities. The points mentioned below will facilitate the business to be sold the fastest way possible with a maximum selling price.
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Know Your Business:
A business can easily and quickly lose focus if it aims for diversification. Even though it can be helpful in the short-term for generating revenue streams, your business has to have focus. This will ensure that you find the right kind of buyers in future and explain to them the type of market your company occupies.
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Keep the Finances in Order:
Finances are of the highest priority for secured business plans in future. But if you try selling your company on short notice, you might want to have a well-maintained, clear set of economic statements for the last three years.
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Pay Off the Creditors:
Potential buyers love start-ups that have less debt left on the balance sheet. Credit card debts can be a red flag for many potential buyers and should be cleared the fastest.
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Remove Yourself:
You can test if your business depends on you for daily operations. If it is to lose around 10% of the revenue without you meaning revenue generation is directly tied to the entrepreneur, buyers might not want to buy the company if the owner wants to leave. Try minimising your direct impact on the start-up and making it marketable.
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Create SOPs:
Make sure your business owns a set of SOPs or Standard Operating Procedures. It is a list of pre-set written instructions strictly followed to maintain the company in working order.
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Train Your Management Team:
You need to assess if your existing managers can take over and run the business successfully. If not, they should be trained more, or you might consider having a different group of managers. A capable team can prove valuable when you want to exit the business.
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Create a List of Buyers:
Draw up a new list of potential buyers and refresh them regularly to know the possible criteria for buying any business and if your business falls under the same. You will be able to reach out to these buyers immediately if needed. You can add your suppliers and managers to this list as well.
Conclusion :
Sometimes, startups choose to merge as a part of their exit plan. It can create a larger business entity with a broader service offering to compete with larger businesses effectively. However, since evaluating each business’s valuation is hard, it becomes harder to decide who might lead the combined company. Therefore, the build-up of small businesses does not occur, and the industry prefers significant company acquisitions for a supportive ecosystem. A start-up CEO’s duty always is to stay connected to have a smooth future for the owned company.
An unexpected term sheet and the startup’s exit strategy is a matter that needs to be well figured out according to the legal terms; otherwise, it can give rise to a chaotic situation for both parties.
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