Get The Cart Before The Horse - The Exit Strategy For Start-Ups

In addition to dealing with all of the issues associated with starting a company, entrepreneurs should devote a significant amount of time crafting an exit strategy.  One way to ensure that all of the founders and principal investors are on the same page is to go ahead and memorialize an exit strategy on the front end.  The exit strategy should be as integral a part to business planning as financial forecasting, pricing products and services and marketing.  The exit is the monetization of the entrepreneurs work and effort.

Many times, a clearly defined exit strategy is a prerequisite to financing.  Investors are going to want their money back plus the negotiated return.  Start-ups need to demonstrate a clear exit strategy in order to attract the right investors.

Exit strategies do not have to be complicated.  Exit strategies can take many forms, from liquidation to acquisition to initial public offering.

One often-overlooked exit strategy is simply to call it quits, close the business doors, and take it to the house.  If you liquidate, however, any proceeds from the assets must be used to repay creditors.  While you will derive no premium from simply milking down the company, liquidation is a very easy way to exit the market.

The business marriage is the manifestation of the acquisition.  You negotiate a purchase price with a ready, willing and hopefully able buyer.  Because the purchase price is often times a multiple of earnings, the entrepreneur (and all of those venture capitalists the start-up has to answer to) can, to a certain degree, dictate the sales price. After countless months of negotiation and due diligence, a closing can yield a life changing payday, or enough seed capital to move onto the next start-up (of course, outside the parameters of the non-compete you are going to have to execute).

Finally, some start-ups mature to an initial public offering.  Images of ringing the bell at the New York Stock Exchange often dance in the heads of all entrepreneurs, but this exit strategy is the exception to the rule.  There are millions of companies in the United States, but only about 7,000 are publicly traded on a stock exchange.  While the odds of gracing the cover of Fortune are slim to none, an initial public offering should still make the list of viable exit strategies.

In conclusion, think about the exit strategy early and modify it as often as necessary.  The exit strategy, by no means, should be a static concept.  As the business grows (or fails), the exit strategy may need to be tweaked to accommodate the natural life cycle of the business.