A great startup always has a great exit strategy. An exit strategy can be thought of as the lifeboats in a ship, which can be used to get out when the start-up is sinking although losses are not the only time when exit strategies are used. It is a part of the business plan which deals with getting out of a sticky situation without much loss. An exit strategy gives the investor a strong sense of assurance that no matter how the investment turns about, there is always an alternate route.
An exit strategy must not be understood as being a pessimistic option with respect to the company. In fact, there could be two broad reasons for employing one. One could be that the investors are asking for their return soon. Second, could be when the entrepreneur himself / herself decides to sell off the company to someone else to explore new ventures. In either case, going through an exit strategy is essential and it needs detailed formulation in the beginning. Startups and Investors usually employ these strategies:
- Merge: As the saying goes, ‘If you cannot beat them, join them’. Merger helps both the buyer and seller especially if they have services / features that can complement each other and thus create new products at a much faster rate at lower exertion of resources.
- Stocks: Startups, mostly in the earlier times, used to offer shares of their company to stock traders who would play the buy and sell game. The money raised through those transactions would then be used to revamp the company functioning. But this path has been looked down into in the recent times, thanks to lower IPO rates and more volatility in markets.
- Sell it: The buyer must be better in skill of operating the business. The money acquired through the transaction could clear all the debts between the investor and the business owner and might also give some return to the initial owner.
- Cash Cow: This strategy is for businesses that are running well in a stable market. Sales are increased, the money acquired through them are used to clear all financial holdings of the investor and someone who is capable of running the business is hired while the founder continues to get the share of profit he / she has opted for.
- Shutdown: Many businesses are often forced to take this path. It may not be as negative as it may sound; in fact, sometimes these seem to be the best option. The asset as a whole is liquidate and is used to complete all the pending transactions.
The nature of the business and the market it goes through determines the best exit strategy. One positive approach to an exit strategy is thinking of it as a tool helping in reducing the negative impact on the firm by boosting up its positive potentials.