In Short
- An exit strategy is vital for maximising the value of your startup.
- Consider timing, valuation, and potential buyers when planning.
- Engage experts to guide you through the process for a smooth transition.
Tips for Businesses
Planning your exit strategy early can help maximise your business's value and avoid pitfalls. Focus on building a robust financial foundation, understanding your valuation, and identifying potential buyers. Consult legal and financial experts to ensure you're well-prepared for a smooth transition.
An exit strategy is an important part of any startup's business plan. It outlines how founders and investors can realise the value of their investment, such as by selling the business, merging with another company, or taking other pathways. This article will provide six practical tips for developing an effective exit strategy for your New Zealand startup.
1. Understand the Importance of an Exit Strategy
An exit strategy is not just about planning for the end of the business. Instead, it is about setting up your business for a successful transition that benefits all stakeholders.
An exit plan ensures minimal disruption to business operations and provides clarity to investors on their return on investment.
2. Know the Exit Options
Your startup has a range of exit options. As business owners, knowing these options will allow you to adequately prepare, including:
- Business Sale: This means selling the business to another company. The major benefit is that it often means immediate liquidity;
- Initial Public Offering (IPO): This refers to listing the company on a stock exchange (being the NZX in New Zealand). It is a complex process but can have significant financial potential;
- Merger: This is where the business combines with another company to achieve shared goals and enhance its value; and
- Liquidation: This occurs when you close the business and sell all assets. It is considered a last resort.
3. Know How to Time Your Exit
Timing is everything when it comes to maximising the value of your exit. Some of the major considerations when it comes to timing include:
- Market Conditions: You should aim to sell during strong market conditions to increase the valuation of the business;
- Business Performance: You will ideally sell the business when it is performing well financially and has good growth prospects; and
- Emotional Preparedness: As a founder, you must be personally prepared to exit the business or understand the ramifications of being acquired if you opt to stay on with it for a period of time.
4. Consider the Legal and Regulatory Requirements
Complying with the legal and regulatory requirements is important for a successful exit.
As a new business owner, you should ensure that you have a good understanding of your company's governing documents and the provisions that apply to an exit event. This may include the types of shareholder and director approvals necessary to achieve an exit and any preference rights held by certain shareholders.
Any potential buyer will also want to conduct thorough due diligence to assess the value of the business. You should prepare for this by:
- ensuring all financial statements up-to-date;
- verifying that all legal documents and intellectual property rights are in order; and
- providing detailed information about the business's operations, including collating material contracts of the business for review.
In some cases, an exit event can have tax implications for the company and/or its shareholders. For this reason, tax advice should also be sought.
5. Prepare the Business for Exit
You should try to prepare the business for an exit by making it as attractive as possible to prospective buyers. Some key steps are outlined in detail below.
1. Strengthen the financials
You must ensure that the business demonstrates strong financial performance. This includes:
- focusing on growing sales and diversifying income streams where possible;
- managing expenses to improve profitability; and
- ensuring a healthy cash flow to demonstrate financial stability.
2. Increase efficiency
Where possible, you should try to streamline your operations to make the business more appealing. This might include:
- implementing standardised processes for smooth operations;
- adopting new technologies to improve efficiency and scalability; and
- fostering a strong, motivated team that can continue running the business beyond your exit.
6. Communicate the Exit Strategy
Clear communication is highly important for ensuring all stakeholders are supportive of the exit strategy you prepare.
You should provide regular updates about the exit strategy and its progress to key internal stakeholders, such as management and more general employees. Where possible, you should work with stakeholders on the planning process to ensure you have their support.
You should communicate effectively with external stakeholders, such as investors and customers, as well as with internal stakeholders. Investors should be informed about the exit strategy and how it will affect their investment. In some cases, it may lead to investors forming their own exit strategy.
On the other hand, customers need to be reassured about the business continuity and what the exit might mean for your startup's ongoing delivery of goods or services. This is important to ensure ongoing support during and beyond the transition.
Key Takeaways
A well-thought-out exit strategy provides a roadmap for the future and ensures that all stakeholders are prepared for such a transition. Some key tips for developing an exit strategy for your startup include:
- understanding the importance of an exit strategy;
- knowing the exit options available to you;
- knowing how to time your exit;
- considering the legal and regulatory requirements;
- preparing the business for exit; and
- communicating the exit strategy to all relevant parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
