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Business strategy

Why startup founders should already have an exit plan before they launch

- May 18, 2023 4 MIN READ
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Photo: AdobeStock
Plenty of entrepreneurs have grand plans for the launch of their business, but too few think about an exit strategy before they begin.

This is a fatal mistake. With 90% of startups doomed to failure, founders can’t afford to overlook this most important element to their business’ long-term viability.

An exit strategy will not only help founders and investors get a return on the money they invested in the business, it will also lay the groundwork for the business’ future success. Without an end point in mind, founders will struggle to formulate a clear enough strategy to grow their business.

Smart founders know all things must eventually come to an end, and plan for this eventuality by appointing the right people to take over when their knowledge and skills no longer serve the business they worked so hard to build.

In the event of a buy-out or acquisition, planning an exit means founders have time to get their financial house in order, properly assess the business’ value, find the right buyer and negotiate the sale at the time of their choosing rather than have the sale foisted on them under less favourable circumstances.

Why are founders so reluctant to consider their exit plan?

It should come as no surprise founders are notoriously reluctant to consider the terms of their exit from the startup they toiled for so long to get off the ground. According to a UBS Investor Watch report, 48% of business owners who want to sell have no exit strategy, perceiving the exit point to be so far off in the future it doesn’t even warrant thinking about.

Most alarmingly, the UBS report points out that most business owners don’t have a full understanding of what takes place in the selling of a business, with 75% of owners believing they can sell their business in a year or less on top of the 58% who have never even had their business formally appraised.

Then there is the perception founders are less committed to the startup’s success if they are planning their exit. As it requires close collaboration with key stakeholders including senior leadership, board members, and major investors, planning an exit strategy often gets thrown in the ‘too hard’ basket to the detriment of everyone involved.

Exit plans as a business strategy

Clearly a business’ strategy is informed by the exit strategy the founder chooses. Acquisitions can take years to come to fruition and likewise with other exit plans. Only by factoring in a realistic exit plan can founders hope to establish a reasonable timeline for what they hope to achieve during their time at the helm of their startup.

Research shows that 20% of small businesses fail in their first year, 50% within five years, and around 60% within ten years. With such a varied timeline, planning an exit strategy also creates more stability and certainty for the business and gives it the best chance of survival.

Factors that affect how the startup is run in the present time can further include:

  • Deciding who will run and grow the business after a certain milestone

    • The understanding that the product that is launched on day 1 will likely be different from the product a few years down the line

    • An assessment of all available funding options such as personal funding, venture capital, friends and family etc.

  • Setting a threshold for potential mergers or acquisitions from other companies

Contrary to popular belief, creating an exit plan doesn’t equate to a lack of commitment to the business’ success.

Planning for unforeseeable circumstances and establishing what type of goals founders want the business to achieve will imbue the startup with the ability to cleave to the founder’s original vision. Exit planning also provides contingencies and milestones for the founder to phase themselves out of the startup and enable it to be run by designated personnel.

Establishing the business’ autonomy makes it attractive to investors and strengthens its capacity for resilience. Founders must leave in place processes that enable the business to be run as smoothly as possible and delegate functions to those in the best position to perform them.

Whether they’re preparing for acquisition, an IPO, management buyout, family succession or merger, key systems are essential to retaining the character and purpose of the business.

If founders plan on being acquired from the start, they may spend time on ensuring they remain attractive to companies at all times. On the other hand, founders who are focused on building a legacy may invest more time on enshrining the company’s culture, goals, and vision in a lasting way.

Success by planning backwards

In the interests of transparency and stability, it’s critical that entrepreneurs have a plan in place for every single eventuality.

Founders must ask themselves if their exit strategy adequately reflects their goals and company values.

They must consider how their exit strategy affects the short-term and long-term future of their business. Finally it doesn’t hurt to think about what sale amount the founder would be happy to walk away with when the time comes.

The bottom line is it’s never too early or too late for founders to start planning their exit strategy. Though they may not be achieved according to an exact timeline, milestones are an important marker of progress which will serve founders well when seeking to maximise value within the company.

Only by understanding who can create the most value for the end user and bringing them into the fold at key moments can entrepreneurs help their startups reach their full potential.

 

  • Iain Salteri is the founder of KttiPay

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